2021 (2) TMI 226 - AT - Income Tax

Capital or revenue loss - non-recovery of advances given by the assessee for acquiring immovable property in carrying out the business activities of the assessee - HELD THAT In the present case, the loss has direct nexus with carrying on business and is incidental to the business activity of the assessee wherein immovable property is stock in trade to the assessee. The assessee's business activity is dealing in Real Estate. Since there is a direct and proximate nexus with the assessee and the loss is incidental to the business of the assessee. The deduction has to be granted to the assessee u/s. 37 - One more argument was advanced by the ld.DR that the assessee treated the amount as capital loss in its books of accounts and the same was reflected in the P L Account. The assessee might have treated this loss as capital expenditure in regular books of accounts maintained and for fairly disclosing financial status of the assessee, as required by law. Capitalization of this expenditure in the books of accounts alone was not the decisive factor for examining the expenditure for the purpose of income tax. The name given to an expenditure is a nomenclature in the books of accounts is not the final test to decide the exact nature of expenditure for the purpose of income tax. Classification of this expenditure as capital in nature in its books of accounts of the assessee for the purpose of Companies Act does not ipso facto make that expenditure as capital expenditure for the purpose of income tax. Hence we are of the view that the non-recovery of advances given by the assessee for acquiring immovable property in carrying out the business activities of the assessee had to be treated as business loss instead of capital loss and to be allowed u/s. 37 - Decided in favour of assessee.

Issues Involved:

1. Validity of the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Classification of the loss incurred by the assessee as capital loss or revenue loss.
3. Allowability of the forfeited advance as a business loss under Section 37(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the CIT(A):

The assessee contended that the order by the CIT(A) was "bad and unsustainable in the eyes of law" due to lack of proper application of mind and failure to address the grounds and alternate pleas raised by the appellant. The tribunal noted these concerns but primarily focused on the substantive issue of whether the loss should be classified as a capital or revenue loss.

2. Classification of the Loss Incurred by the Assessee:

The core issue was whether the loss of ?17.50 lakhs, incurred due to forfeiture of advance payments for the purchase of coffee estates, should be classified as a capital loss or a revenue loss. The assessee argued that the loss was related to its business activities in real estate development, investment, and brokerage, and thus should be treated as a business loss. The CIT(A) and the Assessing Officer (AO) had classified the loss as a capital loss, stating that the properties intended for purchase were capital assets.

The tribunal examined the nature of the assessee's business, which included real estate development and brokerage, and noted that the advances were made in the ordinary course of business for purchasing immovable properties. The tribunal opined that since the loss had a direct nexus with the business activities of the assessee and was incidental to the business, it should be treated as a revenue loss.

3. Allowability of the Forfeited Advance as a Business Loss under Section 37(1):

The tribunal considered whether the forfeited advance could be allowed as a business loss under Section 37(1) of the Income Tax Act, 1961. The tribunal referred to the decision of the co-ordinate bench in the case of DCIT Vs. Max Hypermarket India Pvt. Ltd., where it was held that a rental advance forfeited due to commercial expediency was an allowable revenue expenditure.

The tribunal emphasized that the classification of the expenditure in the books of accounts as capital loss was not decisive for income tax purposes. It reiterated that the loss incurred by the assessee had a direct and proximate nexus with its business activities and should be allowed as a business loss under Section 37(1). The tribunal concluded that the non-recovery of advances given for acquiring immovable property in the course of business activities should be treated as a business loss.

Conclusion:

The tribunal allowed the appeal of the assessee, holding that the loss incurred due to the forfeiture of advance payments was a business loss and should be allowed under Section 37(1) of the Income Tax Act, 1961. The orders of the lower authorities were set aside, and the assessee's claim for the loss was accepted as a business loss.

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