2016 (5) TMI 1488 - AT - Income Tax

Disallowance of loss on forfeiture of earnest money(forfeiture of shop) - in-genuine transaction - Held that - AO has elaborately quoted the relevant portion of the agreement of the assessee with the other company. There was nothing on record to show that the transaction was not a genuine transaction. Merely by saying that the transaction is not genuine cannot result in a just and proper transaction in the eyes of law being held as not a genuine transaction. When the parties agreed to certain terms and conditions in a contract the same are binding on the parties and it is not for the A.O. to say otherwise. One has to look into the aspect that under certain circumstances if the parties cannot fulfill the terms of the agreement the agreement provides certain mechanism to save the party who will suffer from the monetary loss. The genuineness of the agreement cannot be doubted by the AO by simply giving one general statement to that effect. AO has to make out through the terms and conditions of the contract between the parties and the circumstantial evidences that the agreement was deliberately not fulfilled by any of the parties. There was nothing to show on record to that effect in this particular case. All these aspect was taken into account by CIT (A) therefore the CIT (A) has rightly given a finding in favour of the assessee

Summary

Issues Involved:
1. Deletion of addition made on account of disallowance of loss on forfeiture of earnest money.
2. Justification of the assessee's capacity to arrange funds.
3. Efforts made by the assessee to recover the forfeited amount.
4. Comparison of the agreement terms with other similar transactions.

Detailed Analysis:

1. Deletion of Addition Made on Account of Disallowance of Loss on Forfeiture of Earnest Money:
The Revenue appealed against the CIT (A)'s order that deleted the addition of Rs. 50,00,000/- made by the Assessing Officer (A.O) on account of disallowance of loss due to forfeiture of earnest money. The A.O disallowed this loss, suspecting the genuineness of the transaction and citing irregularities such as the abnormal nature of the transaction series and the assessee's failure to justify its financial capacity. The CIT (A) held that the A.O's disallowance was based on suspicion without concrete evidence and declared the transaction genuine, allowing the loss as revenue expenditure. The Tribunal upheld the CIT (A)'s decision, stating there was no evidence to prove the transaction was not genuine.

2. Justification of the Assessee's Capacity to Arrange Funds:
The A.O questioned the assessee's capacity to arrange Rs. 4 Crore within a short period, given its meager capital base of Rs. 1,00,000/-. The assessee claimed it planned to use unsecured loans, but the A.O found no such loans were received within the required period. The Tribunal noted that the A.O's doubts were based on presumptions and assumptions without concrete evidence. The CIT (A) had considered the assessee's financial difficulties and efforts to arrange funds, ultimately finding the transaction genuine.

3. Efforts Made by the Assessee to Recover the Forfeited Amount:
The A.O highlighted the assessee's failure to produce evidence of efforts made to recover the forfeited amount. The Tribunal observed that the agreement clearly stated the forfeiture clause and that the assessee had agreed to it. The Tribunal found no basis to doubt the genuineness of the agreement or the forfeiture, as the terms were binding and there was no evidence suggesting the agreement was not fulfilled deliberately.

4. Comparison of the Agreement Terms with Other Similar Transactions:
The A.O noted the vendor's failure to produce examples of similar agreements. The vendor provided an application form with a forfeiture clause for residential plots, but the A.O found it insufficient. The Tribunal emphasized that the genuineness of the agreement could not be doubted merely because similar terms were not produced. The CIT (A) had already considered all relevant factors and found the transaction genuine.

Conclusion:
The Tribunal upheld the CIT (A)'s order, dismissing the Revenue's appeal. It concluded that the A.O's disallowance was based on suspicion without concrete evidence, and the transaction was genuine. The Tribunal affirmed that the CIT (A) had rightly allowed the assessee's claim of loss on forfeiture of earnest money as revenue expenditure.