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2018 (12) TMI 1144 - AT - Income TaxDisallowance u/s 37(1) treating the earnest money forfeited by Maruti Suzuki India Pvt. Ltd as capital expenditure - whether the alleged amount is a capital expenditure or revenue expenditure? - Held that - the alleged earnest money was paid by the assessee to Maruti Suzuki India Ltd in its capacity as a person carrying on business and the contract for taking an agency of vehicle manufactured by Maruti Suzuki India Ltd was a business contract entered into with a view to earn profit and it was not made or secure any capital asset or a advantage endeavour in nature. As such the alleged amount though is not covered by the provisions of Section 36(1)(viia) of the Act but certainly it will be allowable u/s 37(1) of the Act - Decided in favour of assessee.
Issues Involved:
Appeal against disallowance of earnest money as capital expenditure under Section 37(1) of the Income Tax Act for Assessment Year 2013-14. Detailed Analysis: Issue 1: Disallowance of Earnest Money The assessee, a Private Limited Company engaged in bus body building work, declared income of ?8,36,61,650/- for the year. The Assessing Officer disallowed ?31,50,000/- claimed as revenue expenditure by the assessee, treating it as capital expenditure. The disallowance was based on the view that the amount was in the nature of capital expenditure and not revenue expenditure. The Assessing Officer also made an ad-hoc disallowance of ?3,00,000/-. The income was assessed at ?8,71,11,650/-. The assessee appealed before the Commissioner of Income Tax (Appeals) and partly succeeded. Issue 2: Appeal to the Tribunal The assessee appealed before the Tribunal against the findings of the Commissioner of Income Tax (Appeals) maintaining the disallowance of ?31,50,000/- made by the Assessing Officer under Section 37(1) of the Act. The Tribunal was tasked with determining whether the lower authorities were justified in treating the forfeiture of earnest money as capital expenditure. Analysis of Tribunal's Decision The Tribunal reviewed the facts and found that the assessee applied for a dealership with Maruti Suzuki India Ltd and paid an amount of ?31,50,000/-, including a deposit of ?30,00,000. The dealership required the purchase of a plot approved by Maruti Suzuki India Ltd for a showroom. However, due to the non-allotment of the plot by the Indore Development Authority, the dealership was not finalized, resulting in the forfeiture of the amount deposited. The Tribunal noted that the transaction was entered into for business purposes to increase profitability. Legal Precedents The Tribunal cited various legal precedents, including judgments from the Bombay High Court and the Supreme Court, supporting the treatment of the forfeiture of security deposits under contracts as business losses and revenue expenditures. The Tribunal emphasized that the alleged earnest money was paid in the course of business and was not intended to acquire a capital asset. Therefore, the Tribunal allowed the appeal, directing the Assessing Officer to delete the disallowance of ?31,50,000/-. Conclusion The Tribunal ruled in favor of the assessee, allowing the appeal and directing the deletion of the disallowance of the earnest money. The decision was based on the business nature of the transaction, following established legal principles regarding the treatment of such losses as revenue expenditures.
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