2004 (1) TMI 348 - AT - Income Tax

Summary

Issues:
1. Deduction for compensation paid to M/s Sabari Builders
2. Allowance of deduction for losses incurred on advance payments for property purchase
3. Levy of surcharge on undisclosed income

Issue 1: Deduction for compensation paid to M/s Sabari Builders
The assessee appealed against the assessment under Chapter XIV-B of the IT Act, raising an issue regarding the non-allowance of a deduction for compensation paid to M/s Sabari Builders. The ground was dismissed as it was not insisted upon during the hearing.

Issue 2: Allowance of deduction for losses incurred on advance payments for property purchase
The appellant contended that losses of Rs. 7.5 lakhs and Rs. 3.43 lakhs, arising from advance payments made for property purchases, should be allowed as deductions. The losses occurred due to fraudulent activities by individuals claiming ownership of the properties. The appellant argued that the losses should be considered as business losses based on relevant legal precedents. However, the Departmental Representative opposed the claim, stating that such deductions are not permissible under s. 158BC of the Act for assessments related to undisclosed income. The tribunal upheld the authorities' decision, stating that the losses suffered due to fraud were outside the scope of Chapter XIV-B, as they were not linked to undisclosed income.

Issue 3: Levy of surcharge on undisclosed income
The issue of levying surcharge on undisclosed income was raised concerning a search conducted before the effective date of the surcharge provision. The tribunal ruled that the surcharge provision, introduced by the Finance Act, 2002, was applicable only to searches conducted after 1st June 2002. Since the search in question occurred before this date, the surcharge was deemed inapplicable for that year. Consequently, the tribunal partially allowed the appeal.

Judgment by N. VIJAYAKUMARAN, J.M.:
In a separate judgment, N. VIJAYAKUMARAN, J.M., supported the decision to disallow the deduction claimed by the assessee for losses incurred on advance payments for property purchases. Referring to legal precedents, including the decision of the Hon'ble Supreme Court in the case of Hasimara Industries Ltd. vs. CIT, it was concluded that such losses should be treated as capital losses and not deductible as business losses. The judgment aligned with the CIT(A)'s findings that the amounts were advanced for acquiring capital assets, making the losses capital in nature and not allowable as business losses.

In conclusion, the tribunal dismissed the appeal regarding the deduction for compensation paid to M/s Sabari Builders, upheld the decision to disallow deductions for losses incurred on advance property payments, and ruled against the levy of surcharge on undisclosed income based on the effective date of the surcharge provision.