2019 (12) TMI 1261 - HC - Income Tax

Addition on account of forfeiture of advance - nature of expenses - HELD THAT - In order to claim deduction, the assessee has to satisfy requirements of Section 37(1) of the Act, which lays down several conditions, such as-the expenditure should not be in the nature described under Section 30 to 36; it should not be in the nature of capital expenditure; it should be incurred in the previous year; it should be in respect of business carried by the assessee; and be expended wholly and exclusively for the purpose of such business. The assessee is a company which is engaged in the business of real estate. The main object of the business of the company is development of real estate. It made a payment of ₹ 3.50 crores as advance to HDIL for purchase of land to construct commercial complex for the development of real estate. Since it did not make payment of the balance amount - for whatever reason, the advance given was forfeited. In this view of the matter, the advance given in the ordinary course of business has been rightly treated as loss incurred by the company. We are unable to find any material on record to suggest to the contrary. In view of the aforesaid factual findings, the treatment given to the forfeiture of advance ₹ 3.50 crores could not be categorised as capital expenditure. Therefore, the question of law urged by the appellant does not arise for consideration, as the issue is factual.

Summary

Issues:
1. Appeal against order of Income Tax Appellate Tribunal dismissing revenue's appeal.
2. Addition made by Assessing Officer under Section 14(A) read with Rule 8(D) (2) of the Income Tax Rules 1962.
3. Justification of offsetting entire capital gain and interest income with forfeiture of advance.
4. Whether the forfeiture of advance should be treated as capital expenditure.
5. Question of law regarding deletion of addition of ?3.50 crores by Assessing Officer.

Analysis:
1. The appeal was directed against the order of the Income Tax Appellate Tribunal (ITAT) dismissing the revenue's appeal against the order of the Commissioner of Income Tax [Appeals]-3 (CIT (A)), where the addition made by the Assessing Officer under Section 14(A) read with Rule 8(D) (2) of the Income Tax Rules 1962 was deleted. The ITAT upheld the findings of the CIT (A), leading to the current appeal before the High Court.

2. The Assessing Officer noticed that the entire capital gain and interest income were offset with the amount of ?3.50 crores claimed as forfeiture of advance for the purchase of property. The AO characterized the forfeiture as capital expenditure, resulting in an addition of ?3.50 crores. However, the CIT (A) overturned this assessment order and deleted the addition. The ITAT confirmed the CIT (A)'s findings, prompting the revenue to file the present appeal.

3. The appellant contended that the forfeiture of advance was a colorable device created by the assessee to adjust short-term capital gains against the forfeiture. The appellant argued that the transaction was a scheme to take advantage of Income Tax provisions and questioned the timing of claiming the forfeiture when short-term capital gains were earned. The High Court analyzed various documents provided by the assessee and concluded that the transaction was genuine and not a colorable device.

4. The High Court considered the nature of the transaction between the assessee and the other party, where an advance was forfeited due to non-payment of the balance amount for the purchase of property. The Court noted that the genuineness of the transaction was not disputed, and the forfeiture was rightly treated as a loss incurred in the ordinary course of business. The Court found no grounds to categorize the forfeiture as capital expenditure, as it was related to the business of real estate development.

5. The High Court dismissed the appeal, stating that the treatment given to the forfeiture of advance as a loss incurred in the ordinary course of business was appropriate. The Court emphasized that the issue was factual, and there was no material to suggest otherwise. Therefore, the question of law raised by the appellant did not warrant consideration as the treatment of the forfeiture as capital expenditure was deemed incorrect based on the factual findings.