2022 (4) TMI 165 - AT - Income Tax

Capital loss - Expenditure claimed on abandoned project - DR argued that there is no capital asset on which capital loss can be allowed u/s.45 of the Act, thereby the provisions of section 70 of the Act, cannot be brought into operation - HELD THAT - We noted from the decision of R. Chidambaranatha Mudaliar, 1998 (4) TMI 77 - MADRAS HIGH COURT was concerned with the allowances of capital loss against the set off of subsequent year income i.e., capital gains and held that any loss arising on account of transfer of own capital asst, which is a pre-condition of loss to be treated as capital loss, such loss cannot be carried forward and set off against capital gains of subsequent year. In the present case before us, the facts are very clear that the assessee is claiming loss of current year against the incomes of current year and particularly capital gains. The issue before the Hon ble Bombay High Court in Sterling Investment Corporation Ltd. 1979 (2) TMI 19 - BOMBAY HIGH COURT is as regards to loss occurred due to forfeiture and not by relinquishment of assessee by its capital asset. In the present case, the issue is abandon of the project due to certain reasons. We have gone through the decision of Mascon Technical Services Ltd. 2013 (10) TMI 112 - MADRAS HIGH COURT and noted that the issue before Hon ble Madras High Court is as regards to share issue expenses whether is to be allowed as revenue expenditure even when shares could not be issue due to non-approval of SEBI. But the facts before us in present case are altogether distinguishable and different. As before us, the issue is capital loss can be allowed arising out of abandoned project against the capital gains earned during the year or not. This has been answered by Hon ble Madras High Court in the case of Kwality Fun Foods and Restaurants (P) Ltd. 2013 (10) TMI 1029 - MADRAS HIGH COURT , and EID Parry India Ltd., 2001 (11) TMI 25 - MADRAS HIGH COURT , holding the assets as capital asset and loss arising out of the same as capital loss. Also in the case of Tamilnadu Magnesite Ltd., 2018 (6) TMI 1236 - MADRAS HIGH COURT , has considered the issue and found that the expenditure claimed on abandoned project is of capital in nature Undisputed fact is that the letter for termination of contract and forfeiture of advance paid received from M/s. Thales UK Ltd. Based on the terms of joint business arrangement executed with M/s. Raghav Tech Park Ltd., the assessee eventually recognized that the investment made in its own project as terminal loss and loss incurred on forfeiture of advance i.e., payment to suppliers. But, now assessee just supported alternative claim that even it is considered as capital loss as supported by various High Court s decisions, the same will meet the ends of justice. We are of the view that the alternative claim decided by the CIT(A) regarding allowability of capital loss and this being a short term capital loss as per section 70 of the Act, this loss can be set off against income from other sources under the same head in the current year and even there was long term capital gain from sale of land this should be set off accordingly. We find no infirmity in the findings of CIT(A) and hence, the same is affirmed. The appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of disallowance of write-off amounting to ?12,37,27,087/- claimed by the assessee as a joint venture loss and held by the CIT(A) as capital loss.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Write-Off Amounting to ?12,37,27,087/- Claimed by the Assessee as a Joint Venture Loss and Held by the CIT(A) as Capital Loss:

Facts and Background:
The assessee, a private limited company incorporated to start an Aviation Training School, filed its return of income claiming a total loss of ?6,01,88,401/-. The loss included an irrecoverable advance of ?12,37,27,087/- written off as a joint venture loss. The AO disallowed this claim, treating it as a capital loss, not deductible under sections 28(i) and 36(1)(vii) of the Income Tax Act, 1961, referencing various court decisions, including Kwality Fun Foods and Restaurants (P) Ltd. and Swadeshi Cotton Mills Co. Ltd.

CIT(A)’s Decision:
The CIT(A) allowed the assessee’s claim of loss as a capital loss to be set off against capital gains arising from transactions relating to the abandoned project. The CIT(A) noted that the AO had considered this loss as a capital loss, not a revenue loss. The CIT(A) directed the AO to allow the capital loss of ?12,37,27,087/- to be set off against the current income from all sources, including capital gains.

Revenue’s Argument:
The Revenue argued that the claimed expenditure was capital in nature and the loss arising out of the same is not allowable under any head of income. They contended that there was no transfer of any asset as envisaged under section 45 of the Act, and hence, the loss does not qualify as a capital loss. The Revenue relied on several court decisions, including R. Chidambaranatha Mudaliar, Vania Silk Mills (P) Ltd., and Sterling Investment Corporation.

Assessee’s Argument:
The assessee argued that the CIT(A)’s decision to allow the capital loss to be set off against the incomes of the current year, including capital gains, was correct. They referenced the Hon’ble Madras High Court decision in Kwality Fun Foods and Restaurants (P) Ltd., which treated such losses as capital losses. The assessee also cited the decision in Tamilnadu Magnesite Ltd., where the court held that the expenditure on an abandoned project was capital in nature.

Tribunal’s Analysis and Decision:
The Tribunal noted that the assessee was incorporated to start an Aviation Training School and had entered into a joint venture to acquire flight simulation equipment, making an advance payment of ?14,10,97,242/-. Due to economic reasons, the project was abandoned, and the advance was written off. The Tribunal observed that the CIT(A) had correctly allowed the capital loss to be set off against the current year’s income, including capital gains, following the jurisdictional High Court decisions.

The Tribunal found no infirmity in the CIT(A)’s findings and upheld the decision, dismissing the Revenue’s appeal. The Tribunal also dismissed the assessee’s cross-objection as academic since the assessee was satisfied with the CIT(A)’s decision.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to allow the write-off of ?12,37,27,087/- as a capital loss to be set off against the current year’s income, including capital gains, dismissing both the Revenue’s appeal and the assessee’s cross-objection. The judgment emphasized the application of relevant High Court decisions and the factual context of the abandoned project.