2019 (2) TMI 1062 - AT - Income Tax

Nature of expenditure - loss on forfeiture of advance to be treated as capital expenditure - AO has doubted the genuineness of forfeiture - AO has rejected the claim of the assessee on the ground that the assessee has not made any effort to recover the forfeitured advance and no documents have been filed to show that the assessee sought extension of time or recovery of the advance - allowable claim U/s 37 - Held that - Forfeiture amount was either to be reduced from the cost of the asset/property or to be assessed as income as per the provisions of Section 56(2)(ix) of the Act. Since the provisions of Section 56(2)(ix) of the Act are not applicable for the year under consideration, therefore, the only option was to reduce the said amount from the cost of acquisition of the property in the hand of the seller and consequently the profit earning on the sale of the said property would be enhanced by the said amount. The provisions of Section 51 of the Act is a safeguard against the loss of revenue on account of such forfeiture. Therefore, the said claim of forfeiture of ₹ 7.00 crores is not a revenue affecting transaction but it will be taken into consideration at the time of sale of the property by the seller. Hence, it is only a matter of different assessment year when finally the properties in question are to be sold by the seller. The Assessing Officer has not brought any material or fact that the seller has circumvented the provisions of Section 51 of the Act. Further the payment of ₹ 7.00 crores by the assessee to the seller is not in dispute and this is a real transaction but the Assessing Officer has disallowed the claim on the ground that the forfeiture of the amount is not genuine. It is pertinent to note that once the parties to the transaction have accepted the forfeiture and the assessee has not made any claim or the amount was otherwise not paid to the assessee then there is no reason to treat the forfeiture as non-genuine. Accordingly, when the AO has duly examined all the relevant facts as well as the seller during the course of remand proceedings and nothing adverse was either found or brought on record to contradict the claim of the assessee then the claim of forfeiture of the amount in question is an allowable claim U/s 37 as it is a business loss occurred during the course of business activity of the assessee being business of real estate. The Assessing Officer has not disputed the business activity and the income offered by the assessee from the business of real estate, therefore, in the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the ld. CIT(A) and the same is hereby upheld. - decided against revenue

Issues Involved
1. Whether the CIT(A) was justified in deleting the disallowance of ?7,00,00,000/- made by the AO on account of forfeited advance and treating the same as capital expenditure.
2. Whether the CIT(A) was justified in holding the forfeited advance as revenue expenditure by ignoring the nature of the assessee's business.

Detailed Analysis

Issue 1: Justification for Deleting the Disallowance of ?7,00,00,000/-
The assessee, an AOP engaged in the real estate business, entered into an agreement with a company for the purchase of 20 offices. The assessee paid ?7 crores but failed to pay the remaining ?13 crores, leading to the forfeiture of the advance. The AO disallowed the forfeiture claim, suspecting it to be a mutual arrangement to avoid tax. The CIT(A), after calling for remand reports and examining the seller's records, concluded that the forfeiture was genuine and allowable. The seller had recorded the forfeiture in its books, and its assessment was completed under Section 143(3) of the Income Tax Act, 1961.

Issue 2: Classification of Forfeited Advance as Revenue Expenditure
The AO argued that the forfeiture should not be treated as revenue expenditure since the assessee's business was to develop land, not to purchase and sell offices. The CIT(A) found that the assessee's business activities included real estate transactions, which were extended to purchasing offices for resale. The CIT(A) referred to judicial precedents to support that the forfeiture was a business loss and thus allowable as revenue expenditure. The Tribunal upheld this view, noting that the forfeiture was a genuine business transaction and not a sham.

Tribunal's Findings
- The Tribunal found no evidence to support the AO's claim that the forfeiture was a fictitious arrangement.
- The seller confirmed the transaction and forfeiture in remand proceedings.
- The forfeiture amount was recorded in the seller's books, and the assessment was completed without any adverse findings.
- The Tribunal emphasized that suspicion, however strong, cannot replace concrete evidence.
- The Tribunal cited judicial precedents to establish that the forfeiture was a legitimate business loss and should be treated as revenue expenditure.

Conclusion
The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal. The forfeiture of ?7 crores was deemed a genuine business loss, allowable as revenue expenditure under Section 37 of the Income Tax Act, 1961. The Tribunal found no error or illegality in the CIT(A)'s decision and confirmed that the forfeiture was part of the assessee's business activities in real estate.

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