2021 (3) TMI 394 - AT - Income Tax

Long term capital gain - forced sale of mortgaged property to pay to the lender - distress sale - during the course of the scrutiny assessment proceedings, the Assessing Officer noticed that in the original return of income, the assessee has declared capital gains which was subsequently withdrawn in the revised return of income - as per AO since the plot of land was sold in the open market, it does not mean to foreclosure or action of the property by the lendor under distress AND key differentiating factor in diversion of income is that income in that source is charged with an over-riding title which diverts the income - HELD THAT - Appellant company received the entire sale consideration and it cannot be said that it was a forced sale due to the pressure mounted by IBFSL. It may be possible that the plot of lands were sold under the vigil and direction of IBFSL but the fact remains that the entire sale consideration was realized by the appellant and thereafter the sale consideration was taken by IBFSL in discharge of its loan. It may be possible that the buyer desired the transfer of title from the owner to avoid any litigation with the owner in future and therefore, IBFSL, after receiving ₹ 3 crores, released the mortgage in favour of the assessee, thus, facilitating the assessee to sell the land with clear title. We are of the view that the income did accrue to the assessee and it cannot be said that the assessee sold the said plots of land involuntarily as forced sale. Considering the facts of the case relating to sale of mortgaged property, we do not find any force in the claim of the assessee. Ground No. 1 is accordingly, dismissed. Addition u/s 36(2) - addition on the amount returned - assessee had given guarantees to the lender on behalf of the borrowers as giving guarantee is one of the business objects of the assessee and for which guarantee commission is charged - AO was of the firm belief that the appellant has not fulfilled the conditions of section 36(2) of the Act as the assessee has not received any guarantee commission from CIPL - HELD THAT - The entire transaction cannot be considered as the colorable device as the same was never entered with any intent to defraud the Revenue. We find that all the transactions were undertaken with third parties through bank accounts or registered Mortgage Deeds etc. in the regular course of business and were duly recorded in the books of accounts. Nothing could be managed as the transactions were spread over a period of five years. Due to mayhem in the stock market in the year 2008, the stocks of the listed companies nose-dived and the borrowers suffered huge losses, nothing was recoverable from them and there was no point in filing legal suit. It is true that no guarantee commission has been received by the assessee from CIPL but CIPL was not in a position to make any payment to the assessee. It is true that CIPL made certain donations but that cannot be considered against the assessee as the assessee could not be held responsible for the business module of CIPL. The assessee could recover only ₹ 36.50 crores out of ₹ 64.26 crores, the balance written off may not fulfill the condition of section 36(2) of the Act but definitely a business loss suffered by the assessee in carrying out its ordinary course of business. Considering the facts of the case in totality, the write off of ₹ 27,76,92,000/- is definitely a business loss and deserve to be allowed. We accordingly direct the Assessing Officer to delete the addition - Decided in favour of assessee. Addition of payment made for legal professional charges - HELD THAT - On perusal of the bill show that some of the payments do not relate to the professional services received by the assessee but other members of the group companies. Since no bifurcation has been provided by the assessee, it is very difficult to decide how much of the charges paid pertain to the professional services received by the assessee company. The CIT(A) found that 75% of the expenses must have been incurred on other group companies and accordingly, sustained the addition of ₹ 28.60 lakhs.Before us also, the Counsel was not in a position to furnish the details. For the lack of evidences, we decline to interfere with the findings of the CIT(A), Ground of the assessee is dismissed.

Summary

Issues:
1. Addition of taxable long term capital gain
2. Addition on the amount returned
3. Addition towards legal matters spent

Analysis:
1. Addition of Taxable Long Term Capital Gain:
The appellant declared a loss in the original return, later revised to a loss of &8377; 27.43 crores. The Assessing Officer noticed capital gains declared in the original return but withdrawn in the revised return. The appellant explained that the surplus from the sale of mortgaged property was not taxable. However, the Assessing Officer believed the appellant received the sale consideration and added &8377; 27,38,96,372 as long term capital gain. The Tribunal found the appellant received the entire sale consideration voluntarily, dismissing the claim that it was a forced sale. The Tribunal upheld the addition, emphasizing the income accrued to the appellant.

2. Addition on the Amount Returned:
The appellant acted as a guarantor for borrower companies and had to repay loans when borrowers defaulted. The appellant settled a debt with one borrower, writing off &8377; 27,76,92,000. The Assessing Officer added this amount, stating the conditions of section 36(2) were not met. The Tribunal noted the settlement was a business loss incurred in the ordinary course of business. It found the transactions were genuine and not intended to defraud, directing the deletion of the addition.

3. Addition Towards Legal Matters Spent:
The appellant claimed &8377; 35.80 Lakhs as legal professional charges. The CIT(A) sustained an addition of &8377; 28.60 lakhs, finding 75% of expenses were incurred on other group companies. The Tribunal declined to interfere due to lack of evidence, dismissing the appellant's appeal on this issue.

In conclusion, the Tribunal partly allowed the appeal, upholding the addition of taxable long term capital gain, deleting the addition on the amount returned, and dismissing the addition towards legal matters spent.