2019 (3) TMI 1205 - HC - Income Tax

Nature of loss claimed - capital loss or busniss loss - assessee to start a new business of generation of power through windmill entered into an agreement with the seller for acquiring a windmill plant situated on a plot of land and paid advance for acquisition of Windmill - After making initial payment of ₹ 1 Crore, the assessee defaulted in making further payments, upon which the said MOU was cancelled - HELD THAT - The analysis of the terms would suggest that title of the property in question, was not to pass to the assessee till full payment. Even otherwise, title in the immovable property would not pass otherwise than under a registered document which is compulsorily registerable. It may be that the assessee was put in possession at the time of execution of the agreement and allowed the use of the project also. Clause (17) reiterates that the seller would put the assessee in possession upon payment of the final installment. This clause necessarily refers to the possession with ownership. Till then, the assessee can at best be seen as a permissive user. We are not required to consider the alternative scenario presented before us by the learned Counsel for the assessee, as to what will be the position if the title in the asset had passed on to the assessee. Even then, one would briefly comment on such hypothetical situation. In this case, in order to claim depreciation, the assessee must establish basic facts. Any such claim is necessarily based on facts and law. Whether the original owner in the meantime claimed depreciation, when was the asset installed, when was the asset put to use are some of the factual aspects needed to be gathered before the claim of depreciation could have been granted. Such a claim is raised for the first time before us. The assessee cannot raise such a contention for the first time before the High Court, when no factual foundation was laid before the authorities below. Whether the sum retained or forfeited by the seller can be treated as lease rental? - The question has to be answered in the negative. Clause (10) of the agreement provides that in case of any failure to pay the agreed amount within the agreed time on the part of the assessee, the seller would withdraw or cancel the contract and in such event, the seller would be entitled to forfeit an amount of ₹ 90,00,000/and return the balance out of the sum already paid. The salient feature of this clause is that the sum of ₹ 90,00,000/to be retained by the seller is fixed irrespective of which installment the assessee failed to pay, for how long the possession and use of the asset is retained by the assessee and under what circumstances the payment could not be made. Linking of sum of ₹ 90,00,000/to be retained by seller on account of default of payment by the assessee, to the lease rental charges, would be opposed to the forfeiture clause having no relation to the period for which such asset was put to use by the assessee. In a given case, the asset may remain with the assessee for only one month before the forfeiture clause may kick in and in a given case, the assessee may default in the last installment and till then continue to use the asset for generation of power. In either case, the forfeiture of the amount would remain the same i.e. ₹ 90,00,000/. Quite apart from this, clause (10) refers to forfeiture of the amount and not a lease rental, nor such intention can be gathered from any other clause contained in the MOU. The MOU was one integrated contract for sale of the asset and permissive user of the asset till payment of full installments. The lease rental if at all was embedded in the contract terms. There was no separate lease rental envisaged, none can be culled out from the terms of the contract. Appeal dismissed.

Summary

Issues:
Challenge to the judgment of the Income Tax Appellate Tribunal regarding the nature of a forfeited amount in a business transaction.

Detailed Analysis:

Issue 1: Nature of Forfeited Amount
The appellant challenged the Tribunal's decision on whether the forfeited amount of ?90,00,000 during a failed business transaction should be treated as capital or revenue expenditure. The Tribunal held that the amount was a capital loss as it was an advance for acquiring a windmill, which was considered a capital investment. The loss did not occur during regular business operations but stemmed from an investment in a capital asset.

Issue 2: Interpretation of Agreement Terms
The appellant contended that the Memorandum of Understanding (MOU) was akin to a sale agreement, and the possession of the asset was transferred to the appellant. However, the clauses of the MOU indicated that the title of the property would only pass upon full payment. The clauses specified that the appellant would bear transfer expenses and receive possession only after full payment, indicating a transfer of ownership upon completion of payment.

Judicial Precedents
The appellant's arguments were supported by legal precedents. The case of Commissioner of Income-Tax Vs. Anjani Kumar Co. Ltd. highlighted that failed projects could result in revenue expenditure. Similarly, in I. B. M. World Trace Corporation Vs. Commissioner of Income-Tax, the court allowed a business loss claim due to a failed lease agreement. The appellant also referenced the decision of the Supreme Court in Commissioner of Income-tax Vs. Mahalaxmi Textile Mills Ltd., emphasizing alternative provisions for claim allowance.

Conclusion
The High Court dismissed the Income Tax Appeal, affirming the Tribunal's decision that the forfeited amount was a capital loss. The Court analyzed the clauses of the MOU, concluding that the amount was not akin to lease rental but a fixed forfeiture amount, irrespective of the asset's usage duration. The Court distinguished previous judgments cited by the appellant and provided detailed reasons for upholding the decision.

In summary, the High Court's judgment clarified the nature of the forfeited amount in the failed business transaction, emphasizing the distinction between capital and revenue expenditure based on the terms of the agreement and legal precedents.