2012 (11) TMI 108 - AT - Income Tax

Adventure in the nature of trade - Unsecured loan treated as a nonrefundable liability - Held that - The assessee had not drawn profit and loss account for the relevant period neither it got its account audited under the provisions of Section 44AB, therefore, under the circumstances it is difficult to verify the correctness of the accounts maintained by it for the relevant period. Moreover, the assessee, itself, had accepted that the amount of Rs.75,06,811/- received during the relevant period has been shown wrongly under the head unsecured loan by the auditors. However, neither during the assessment proceedings nor during the appellate proceedings certificate from the auditors was filed to the effect that they had made a wrong entry for such amount. Since the AO has treated the same as trading receipt on such receipt, the deduction of cost and other expenditure incurred by the assessee is required to be given as decided in Calcutta Company Limited Versus Commissioner Of Income-Tax, West Bengal 1959 (5) TMI 3 - SUPREME COURT - issue is restored back to the file of AO to decide afresh after verifying the claim of the assessee in respect of expenditure incurred out of the trading receipt and make a de novo assessment - assessee s appeal is allowed for statistical purposes.

Summary

Issues:
Taxation of contribution received for residential units, treatment of unsecured loan, deduction for corresponding cost, completion of construction, nature of trade, liability of unsecured loan, trading receipt, verification of accounts, deduction of cost and expenditure.

Analysis:

1. Taxation of Contribution Received for Residential Units:
- The appellant contested the taxing of the entire amount of contribution received from members for residential units, arguing that it should not be considered the sale value of the flats as the construction was incomplete. The appellant emphasized that only the surplus amount should be taxed as income in the next year. The appellant relied on a Supreme Court judgment to support the claim that expenditure on development and construction is allowable as it is incidental to the business. The Appellate Tribunal found that the unsecured loan, treated as a liability, was not payable back to the lender, making it a non-refundable trading receipt taxable in the hands of the company. The Tribunal directed the Assessing Officer to re-evaluate the expenditure incurred from the trading receipt before making a new assessment.

2. Treatment of Unsecured Loan and Deduction for Corresponding Cost:
- The appellant argued that the unsecured loan amount was wrongly shown in the balance sheet and should not be considered a liability as it was non-refundable. The Appellate Tribunal agreed that the unsecured loan was non-refundable and should be treated as a trading receipt. It was emphasized that the deduction of cost and other expenditure incurred by the assessee should be considered while taxing the trading receipt.

3. Completion of Construction and Nature of Trade:
- The appellant highlighted that the construction was incomplete by the end of the financial year, suggesting that the excess amount received should be treated as an advance for future costs. The Tribunal acknowledged the incomplete construction and directed the AO to re-examine the claim in light of the expenditure incurred by the assessee.

4. Verification of Accounts and Deduction of Cost and Expenditure:
- The Tribunal noted that the appellant did not provide a profit and loss account or audited accounts under Section 44AB of the Act, making it challenging to verify the correctness of the accounts. However, it was recognized that the unsecured loan was treated as a non-refundable trading receipt, necessitating the deduction of costs and expenditures incurred by the assessee.

5. Liability of Unsecured Loan and Trading Receipt:
- The Tribunal clarified that any non-refundable receipt is considered a trading receipt and fully taxable. It was emphasized that the unsecured loan, in this case, was non-refundable and taxable in the hands of the company.

6. Conclusion:
- The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to re-evaluate the expenditure incurred by the assessee from the trading receipt and make a new assessment after providing a reasonable opportunity for the assessee to be heard.

This detailed analysis covers the issues raised in the legal judgment, addressing the taxation of contributions, treatment of unsecured loans, deduction for corresponding costs, completion of construction, nature of trade, verification of accounts, and the liability of unsecured loans and trading receipts.