2016 (5) TMI 30 - AT - Income Tax

Capital loss V/S business loss - nature of loss - Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land - Held that - The assessee, for the reasons best known to it, decided not to proceeded with the project and accordingly abandoned the project which resulted in forfeiture of the advance amount of ₹ 50 lakhs by the vendors of the land. It is for the assessee to decide whether it intend to proceed with the project or not. The Assessing Officer cannot comment upon the decision of the assessee. When the assessee decided not to proceed with the project, whatever may be the reason, it was the decision taken by the assessee in the course of the business activity, therefore, the forfeited amount is a loss in the business. It is not in dispute that the advance paid by the assessee to acquire stock-in-trade in the course of the business was forfeited. Therefore, this Tribunal is of the considered opinion that the assessee has suffered the loss in the regular course of business. The Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land. The Assessing Officer has also found that if the land was retained and sold, the assessee would have earned more gain than incurring loss. We are unable to uphold the reasoning of the authorities below. As discussed earlier, it is for the assessee to decide whether to proceed with the project or not. The assessee can also decide to sell the land as such by keeping the same. The Assessing Officer cannot step into the shoes of the assessee and suggest what should be for the best interest of the assessee. The assessee being a businessman knows well how to arrange its affairs for earning maximum profit. This Tribunal is of the considered opinion that merely because the assessee abandoned the project after paying advance of ₹ 50 laks, that cannot be a reason for treating the loss claimed by the assessee as capital loss. An asset may be a capital asset in the hands of the seller and it may be a stock-in-trade in the hands of the purchaser. It all depends upon the transaction. For example, when a manufacturing industry purchases a machinery for its manufacturing activity from the industry which manufactures the machinery, the machinery purchased by the manufacturing industry may be a stock-in-trade in the hands of the company which manufactures machinery. However, it is a capital asset in the hands of the company which purchases the machinery for using the same in its manufacturing activity. Similarly, when the land owners sell the land to a real estate dealer, the land is a capital asset in the hands of the land owner. However, the same land purchased by the real estate dealer becomes a stock-in-trade. Therefore, the treatment in the hands of the vendors of the land cannot be a determining factor to allow the claim of the assessee either as revenue loss or as capital loss. It has to be decided whether the loss has occurred in the course of the business activity for acquiring a stock-in-trade in the hands of the assessee. In this case, admittedly, the assessee acquired a stock-in-trade for construction of residential flats at Ambattur in Madhavaram Vilalge. Therefore, the loss, if any, suffered in the course of the acquisition of the stock-in-trade has to be necessarily allowed a revenue loss, hence, it has to be allowed as business loss while computing the total income. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow ₹ 50 lakhs as business loss while computing the taxable income of the assessee. - Decided in favour of assessee Disallowance of labour expenditure - Held that - Obtaining proper voucher from such kind of unorganized laboruers is something beyond the control of the assessee. Therefore, the assessee has to necessarily make self-made vouchers to evidence the payment of salary to such labourers engaged in the construction activity. Therefore, the Assessing Officer has to examine whether there was any inflation of the expenditure claimed by the assessee after comparing the nature of the work carried out by them. In the case before us, it is nobody s case that the assessee has inflated the expenditure. In the absence of any allegation that the assessee has inflated the expenditure, this Tribunal is of the considered opinion that merely because self-made vouchers are made with regard to payment made to labourers who engaged in the construction activity that alone cannot be reason for disallowing any part of the expenditure on estimate basis. Therefore, this Tribunal is of the considered opinion that the disallowance made by the Assessing Officer at 3% of the total expenditure is not called for. Accordingly, the orders of the lower authorities are set aside and the disallowance made by the Assessing Officer @ 3% to the extent of ₹ 37,37,206/- is deleted. Allowability of interest on borrowed funds - Held that - This Tribunal is of the considered opinion that the entry in the books of account is irrelevant for the computation of taxable income. The income is computed as per the Income-tax Act, 1961 irrespective of the entries made in the books of account. When the assessee borrowed funds and paid interest on such borrowed funds, this Tribunal is of the considered opinion that the interest paid on the borrowed funds has to be allowed as business expenditure. Thaiyur is one of the project proposed by the assessee. Merely because the loan was borrowed for Thaiyur project there is no restriction for the assessee to use the borrowed funds for other projects. The borrowed funds can also be utilized for other projects. It is not the case of the Revenue that the assessee is not constructing any other flats or residential complex at the relevant point of time. When the assessee is constructing residential complexes during the relevant period of time and also proposed to commence a project at Thaiyur, this Tribunal is of the considered opinion that the expenditure on the borrowed funds has to be necessarily allowed. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the payment of interest on the borrowed funds claimed by the assessee while computing the taxable income.

Summary

Issues Involved:
1. Disallowance of ?50 lakhs as business loss.
2. Disallowance of labour expenditure.
3. Disallowance of brought forward losses and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of ?50 lakhs as Business Loss:
The first issue pertains to the disallowance of ?50 lakhs claimed as a business loss by the assessee. The assessee, engaged in real estate and construction, had entered into an agreement to purchase 6.68 acres of land for ?17.50 crores, paying ?50 lakhs as an advance. Due to a financial crisis in the US, which affected the real estate market in India, the assessee decided to abandon the project, leading to the forfeiture of the advance by the landowners. The assessee treated this forfeiture as a business loss. However, the Assessing Officer (AO) rejected this claim, treating the loss as a capital loss on the grounds that the landowners treated the land as a capital asset and did not consider the forfeited amount as income. The Tribunal, however, held that the land was stock-in-trade for the assessee, and the loss occurred in the regular course of business. Therefore, the forfeited amount should be treated as a business loss. The Tribunal emphasized that the AO cannot dictate business decisions and that the treatment of the asset in the hands of the vendors does not determine its nature in the hands of the assessee.

2. Disallowance of Labour Expenditure:
The second issue involves the disallowance of 3% of the total labour expenditure claimed by the assessee, amounting to ?12,45,73,509/-. The AO found the vouchers maintained by the assessee to be incomplete and self-made, leading to a disallowance of ?37,37,206/-. The assessee argued that due to the nature of the labour force, obtaining proper vouchers was not feasible. The Tribunal acknowledged the challenges in obtaining proper vouchers from unorganized and migratory labourers. It held that in the absence of any allegations of inflated expenditure, the use of self-made vouchers alone cannot justify the disallowance. Therefore, the Tribunal set aside the orders of the lower authorities and deleted the disallowance.

3. Disallowance of Brought Forward Losses and Unabsorbed Depreciation:
The third issue concerns the disallowance of brought forward losses and unabsorbed depreciation amounting to ?86,84,479/-. The assessee had borrowed funds for a housing project at Thaiyur, Chennai, and due to delays in project commencement, treated the interest on borrowed funds as deferred revenue expenditure. The AO disallowed this claim, treating the interest as a capital expenditure. The Tribunal, however, held that since the assessee was engaged in the business of construction and borrowed funds for business purposes, the interest on such borrowed funds should be allowed as a business expenditure. The Tribunal emphasized that the entry in the books of account is irrelevant for computing taxable income, and the interest paid on borrowed funds must be allowed as a business expenditure. Consequently, the Tribunal set aside the orders of the lower authorities and directed the AO to allow the payment of interest on borrowed funds as claimed by the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities on all three issues. The disallowance of ?50 lakhs as a business loss, the disallowance of labour expenditure, and the disallowance of brought forward losses and unabsorbed depreciation were all overturned, with directions to the AO to allow these claims while computing the taxable income of the assessee.