2019 (10) TMI 432 - AT - Income Tax

Waiver of advance as Business Income - said advance was in the nature of revenue as it was sales consideration for the electricity to be supplied in the future and, thus, the adjustment of the advance was to be made by way of supply of electricity - CIT(A) upheld the same by holding that the advance received by the assessee was revenue receipt - HELD THAT - Advance received by the assessee is revenue advance as is clear from the fact that the same is to be discharged/repaid/adjusted by way of supply of energy to the holding company. We have also perused the decisions relied upon by the AR in defence of his arguments in the case of CIT vs. Mahendra And Mahendra 2018 (5) TMI 358 - SUPREME COURT and Solid Containers vs. DCIT 2008 (8) TMI 156 - BOMBAY HIGH COURT . However, the facts underlying the said decisions are different and the ratio laid down cannot be applied to the present case. In the said decisions, the advance raised by the assessee were of capital in nature and, therefore, they are not applicable to the present case. Accordingly, we uphold the order of the CIT(A) on this issue and the ground raised by the assessee is dismissed. Capital gain computation - not allowing the claim for cost of improvement capitalized with cost of land, while computing the Long Term Capital Gains - HELD THAT - The issue of developmental expenses of land could not be examined by the AO as the assessee could not produce the documents being damaged and mutilated in the building collapse. Now the learned AR submitted before the Bench that the assessee has genuinely incurred these expenses and the same as to be treated as part of cost of property while computing the cost of land. It is further submitted that the assessee has reconstructed the record, which could be produced before the AO. DR, on the other hand, strongly opposed the arguments of the learned AR by submitted that the assessee has failed to produce the record before the authorities below and no second round should be allowed to the assessee to prove its case. After analysing the facts on record, we observe that it would be in the interest of justice, if the assessee is given one more opportunity to explain its case before the AO by filing the necessary evidences of expenditure incurred on development of the land. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Treatment of waiver of advance as Business Income.
2. Disallowance of claim for cost of improvement while computing Long Term Capital Gains.

Issue 1: Treatment of Waiver of Advance as Business Income

The primary issue revolves around whether the waiver of an advance amounting to ?2,96,19,07,058/- should be treated as Business Income. The assessee, a wholly-owned subsidiary of JSW Ispat Steel Ltd., received financial assistance to set up a power plant. The project was abandoned, leading to the write-off of various expenses and advances, including the waiver of the advance from JSW Ispat Steel Ltd. The Assessing Officer (AO) considered this waiver as taxable income under sections 28(iv) and 41(1) of the Income Tax Act, arguing that the advance was revenue in nature since it was to be repaid through the supply of electricity.

The CIT(A) upheld the AO's decision, stating that the advance's character changed from capital to revenue receipt as it was meant to be adjusted against future revenues. The CIT(A) emphasized that the waiver of this advance should be treated as business income under section 28(iv) of the Act, as it provided a benefit arising from business.

The assessee argued that the advance was a capital receipt and relied on the Supreme Court's decision in CIT vs. Mahindra And Mahindra, which held that section 28(iv) does not apply to receipts in the nature of cash or money, and section 41(1) does not apply to the waiver of loan liability. However, the Tribunal upheld the CIT(A)'s decision, distinguishing the facts of the present case from the cited judgments, and confirmed the treatment of the waiver as revenue receipt.

Issue 2: Disallowance of Claim for Cost of Improvement

The second issue pertains to the disallowance of a claim for the cost of improvement amounting to ?5,03,17,635/- while computing Long Term Capital Gains on the sale of land. The assessee sold land for ?13,45,00,000/- and claimed a capital loss after including the cost of improvement. The AO disallowed the improvement cost due to the lack of supporting evidence, as the assessee claimed the records were damaged in a building collapse.

The CIT(A) upheld the AO's decision, noting that the assessee failed to provide any details or supporting evidence for the claimed expenses. The CIT(A) emphasized that the onus was on the assessee to substantiate the expenditure incurred for the improvement of the property.

The Tribunal, considering the assessee's claim of genuine expenditure and the reconstruction of records, set aside the issue to the AO for a fresh examination. The AO was directed to decide the matter de novo, taking into account the details and evidence provided by the assessee.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal upholding the treatment of the waiver of advance as Business Income and remanding the issue of the cost of improvement back to the AO for reconsideration.