2019 (1) TMI 1273 - HC - Income Tax

Nature of loss - loss of money of the appellant caused by forfeiture of advance/deposit towards proposed purchase of plot - capital loss or Revenue loss - Held that - Once and for all, fixed capital or an enduring benefit test should be applied to differentiate between purchase of capital asset and stock-in-trade, which demarcate the distinction between capital and revenue expenditure. In the said case, as capital asset was not capable of being exploited as a business asset, payment of compensation in respect thereof for not executing the agreement was considered as capital expenditure. We agree with the aforesaid reasoning. In the present case the loss incurred was in the transaction relating to and for acquisition of a capital asset. For some reason, the attempt made by the appellant-assessee to acquire land/plot as a capital asset did not fructify. Hence, the appellant-assessee had asked for refund of the amount, which was paid for acquisition of the capital asset. Forfeiture or deduction made by the HSIDC while refunding the amount would be a capital loss and not a revenue expenditure. - Decided against the assessee.

Summary

Issues:
1. Whether the loss incurred by the appellant due to the forfeiture of advance/deposit towards the proposed purchase of a plot is a capital loss or a revenue loss in the context of the appellant's business activities.

Analysis:
The appellant, a company engaged in manufacturing activities, filed an appeal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2001-02. The primary issue revolved around the forfeiture of an amount by Haryana State Industrial Development Corporation (HSIDC) on the surrender of an industrial plot that the appellant had applied for. The appellant had deposited a significant sum with HSIDC, which was partially refunded, and the balance amount was forfeited. The Assessing Officer considered this forfeiture as a capital loss, disallowing it as a revenue expenditure, while the Commissioner of Income Tax (Appeals) allowed the claim as revenue loss, citing precedents. However, the Tribunal, in the impugned order, held that the expenditure was for acquiring a capital asset, making the forfeiture a capital loss, as the appellant's attempt to acquire a new capital asset had failed.

The Tribunal distinguished cases cited by the appellant where expenditure was incurred for expanding existing business operations, emphasizing that the appellant's situation involved attempting to acquire a new capital asset. The Tribunal relied on decisions from the Allahabad High Court and Bombay High Court, supporting the classification of the forfeiture as a capital loss. The Tribunal applied the principle from the Empire Jute Company case, emphasizing that the nature of the expenditure must be viewed in the context of business necessity and profit-earning process. The Tribunal concluded that the forfeiture amount was a capital expenditure, not integral to profit-earning, but for acquiring a permanent asset or right.

Additionally, the Tribunal referenced relevant decisions such as Commissioner of Income Tax versus State Trading Corporation of India Limited, highlighting the distinction between revenue and capital income based on the nature of the transaction. The Tribunal also discussed cases like Travancore Rubber and Tea Company Limited, emphasizing that amounts received due to cancellation of agreements for capital assets were considered capital receipts. Ultimately, the Tribunal concluded that the appellant's loss was related to the transaction for acquiring a capital asset, making the forfeiture a capital loss, not a revenue expenditure.

In summary, the Tribunal's decision upheld the classification of the forfeiture amount as a capital loss, considering the nature of the transaction and the appellant's intent to acquire a capital asset. The Tribunal's reasoning aligned with established principles distinguishing between revenue and capital expenditures, leading to the dismissal of the appellant's appeal in favor of the respondent-Revenue.