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2020 (3) TMI 1228 - AT - Income TaxDisallowance of bad debts u/s 36(1) - assessee had written off inventory of land - Diversion of income by overriding title - as concluded by directing the AO to restrict the addition on account of amount received through e-auction of impugned land and property by HDFC to only 5% of the receipt and recomputed income after giving benefit for amount of inventory of land written off - HELD THAT - By no stretch of imagination it can be said that entire sum was received only against land belonging to the assessee. It is further clear from sale certificate wherein in the description of the property it has been mentioned that the same consists of immovable property being sold by way of sale of residuary right including receivable of HPGPL with step-in obligation in respect to the immovable property. Hence it is quite evident that the receipt of e-auction by the HDFC against its finance to HPGPL did not belong to the assessee in its entirety as the same was of project as it stood as on that date. It comprised of the constructions there on as well receivable by HPGPL. Learned CIT(A) is correct in his appreciation that the assessee can be entitled to 5% which was agreed upon in the facilitation agreement between the assessee and its developer holding company i.e. HPGPL. We come to the assessee s claim that since it has not received any amount and its land has also been e-auctioned the assessee s case should be treated as business loss. That it should be treated that land being trading asset of the assessee has been lost so assessee has claimed business loss. Further limb of the assessee s submission is that since land was mortgaged to the bank for loan to HPGPL and the bank has adjusted the sale proceeds against loan to HPGPL there is diversion of income by overriding title. The income has been diverted to HDFC by HPGPL and the assessee has not received any amount. So nothing can be attributed to the assessee s income. We find that this limb of the assessee s submission is also not sustainable. It is undoubted that the assessee had facilitation agreement with its holding company for development of the project on its land. As per the said agreement the assessee was entitled to 5% of the sale proceeds of the constructed property. Since in the present case holding company s loss was adjusted upon by e-auctioned of the property for an amount of 296 crores the assessee-company s share out of the same as per the facilitation agreement clearly accrued to the assessee-company. If the assessee-company did not press for or forwent its claim it cannot be diversion of income by overriding title. But it will be treated as application of income. Hence firstly assessee s share has to be considered as income of the assessee for which necessary consequences of taxation has to follow. In this view of the matter in our considered opinion assessee s contention that it had lost everything. That its land which was its stock-in-trade has been lost and hence assessee should be allowed loss to that extent is not acceptable as assessee s share will be deemed to have been applied by the assessee after accrual and hence contention of the assessee is not accepted. Sale of land by e-auction and consequent realisation of moneys are income of the assessee as the land was a trading asset. Hence the income which accrues to the assessee upon sale of trading asset is to be considered debt. Even Assessing Officer has recognised that the sale proceeds of land are sale receivable in the hand of the assessee. The non-realisation of debt can result in bad debt written off if the same is written off in the books. Since it is not the case that any bad debt has been written in the books the assessee s plea fails. As per section 36(1)(vii) the allowance of bad debt is depending upon its being written off as irrecoverable in the accounts of the assessee in the previous year. Hence in absence of this prerequisite the assessee s claim of bad debt fails.
Issues Involved:
1. Addition made by the Assessing Officer of ?2,96,29,01,000/- to the extent of 5%. 2. Accrual of income from e-auction of property by HDFC. 3. Rejection of the claim of bad debts or business loss by the assessee. 4. Justification of restricting 5% of sale receipt as assessee's income. 5. Validity and reliance on the amended facilitation agreement. 6. Evidence related to construction on the property and its cost. 7. Treatment of the sale consideration of ?2,96,29,01,000/-. Detailed Analysis: 1. Addition Made by the Assessing Officer: The learned Commissioner of Income Tax (Appeals) confirmed the addition made by the Assessing Officer but restricted it to 5% of the sale receipt, amounting to ?14,81,45,050/-. The Assessing Officer had initially added ?2,96,29,01,000/- as the income of the assessee from the e-auction of property. 2. Accrual of Income from E-Auction: The CIT(A) noted that the e-auction included both the land owned by the assessee and the construction done by HPGPL. The facilitation agreement between the assessee and HPGPL entitled the assessee to 5% of the total sale price of the developed property. The CIT(A) held that only 5% of the e-auction proceeds could be considered as the assessee's income. 3. Rejection of Claim of Bad Debts or Business Loss: The assessee's claim that the amount receivable from the e-auction should be considered as bad debts or business loss was rejected. The CIT(A) referred to the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Sitaldas Tirathdas (41 ITR 367) to support this rejection. 4. Justification of Restricting 5% of Sale Receipt: The CIT(A) justified restricting the addition to 5% of the sale receipt based on the facilitation agreement, which stipulated that the assessee was entitled to only 5% of the sale price of the developed property. The CIT(A) disagreed with the Assessing Officer's view that the entire sale proceeds belonged to the assessee. 5. Validity and Reliance on the Amended Facilitation Agreement: The Revenue argued that the amended facilitation agreement was not registered and hence could not be relied upon. However, the CIT(A) and the Tribunal noted that both the original and amended facilitation agreements were acted upon by the parties in earlier years, and the Revenue had accepted the same. 6. Evidence Related to Construction on the Property: The Revenue contended that the assessee failed to produce evidence related to the construction on the property and its cost. The Tribunal noted that the construction was done by HPGPL, and the Assessing Officer could have obtained information from HPGPL if necessary. The Tribunal found this contention irrelevant as the construction was not done by the assessee. 7. Treatment of Sale Consideration: The Tribunal upheld the CIT(A)'s decision that the sale consideration from the e-auction should be restricted to 5% of the total receipt. The Tribunal rejected the assessee's claim of business loss, stating that the assessee's share of the proceeds had accrued as income and could not be treated as a loss. The Tribunal also noted that the non-realization of debt could result in bad debt written off if it was written off in the books, which was not the case here. Conclusion: The Tribunal dismissed the appeals of both the assessee and the Revenue, upholding the CIT(A)'s order to restrict the addition to 5% of the sale receipt from the e-auction of the property. The Tribunal found no infirmity in the CIT(A)'s order and concluded that the assessee's share of the proceeds had accrued as income and could not be treated as a business loss or bad debt.
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