The assessee is a company which is engaged in the business of real estate. The main object of the business of the company is development of real estate. It made a payment of Rs. 3.50 crores as advance to HDIL for purchase of land to construct commercial complex for the development of real estate. Since it did not make payment of the balance amount – for whatever reason, the advance given was forfeited. In this view of the matter, the advance given in the ordinary course of business has been rightly treated as loss incurred by the company.
HIGH COURT OF DELHI
Principal Commissioner of Income-tax-3
Frontiner Land Development P. Ltd.
IT APPEAL NO. 961 OF 2019
NOVEMBER 25, 2019
Ruchir Bhatia, Adv., for the Appellant.
Sanjeev Narula, J. – The present appeal under section 260A of the Income Tax Act is directed against the order dated 28th May, 2019 passed by Income Tax Appellate Tribunal (Bench): ‘B’, New Delhi (hereinafter referred to as ITAT), ITO v. Frontiner Land Development (P.) Ltd. IT Appeal No. 5947 (Delhi) of 2016″ for Assessment Year 2012-13, whereby the appeal filed by the revenue against order of Commissioner of Income Tax [Appeals]-3 (hereinafter referred to as “CIT (A)”), New Delhi has been dismissed.
2. The impugned order upholds the findings of the CIT (A) whereby the addition made by the Assessing Officer (hereinafter referred to as “AO”) under section 14(A) read with Rule 8(D) (2) of the Income Tax Rules 1962 has been deleted.
3. The Respondent- Frontier Land Development Pvt. Ltd. (hereinafter referred to as ‘Assessee’) had filed its return of income on 14th March, 2014 declaring loss of Rs. 11,13,970/-. The same was processed under section 143(1) of the Act and thereafter, the case of the assessee was selected for scrutiny assessment and notice was issued under section 143(2) of the Act. During the assessment, the AO noticed that the entire capital gain and interest income was offset with the amount of Rs. 3.50 crores, claimed as forfeiture of advance for purchase of property. The assessee was asked to justify the offset and to show cause as to why forfeiture of advance should not be treated as capital expenditure. The explanation offered by the assessee was not accepted and the AO observed that forfeiture of advance given in 2004 was a colourable device to adjust capital gains. He accordingly, framed the assessment and characterised the forfeiture as capital expenditure and made addition of Rs. 3.50 crores.
4. On an appeal filed by the assessee, CIT (A) overturned the assessment order and the addition of Rs. 3.50 crores was deleted. Revenue preferred an appeal before the ITAT, which was dismissed and, the findings of the CIT (A) were confirmed.
5. Aggrieved with the aforesaid order of ITAT, revenue has preferred the present appeal, proposing the question of law for determination before this Court to the effect “whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in deleting the addition of Rs. 3.50 crores made by Assessing Officer on account of forfeiture of advance?”
6. Before noting the submissions advanced by Mr. Bhatia, learned senior standing counsel for the revenue, it would be appropriate to note the context for making the addition of Rs. 3.50 crores by the AO. The assessee had entered into a contract dated 12th October, 2004 with Housing Development & Infrastructure Limited (hereinafter referred to as „HDIL‟) for purchase of Building No. 2, District Thane, Maharashtra, for a consideration of Rs. 11,65,00,000/-. The company paid an advance of Rs. 3.50 crores and thereafter, could not pay the balance amount of Rs. 8,15,00,000/-. Vide letter dated 5th March, 2011 in Financial Year 2011-12, relevant to the concerned assessment year, HDIL forfeited the amount of Rs. 3.50 crores.
7. Mr. Bhatia has argued that the findings of the ITAT are perverse, in as much as, both CIT (A) as well as the Tribunal have erred by failing to take note of the fact that the forfeiture of advance was a colourable device, created by the assessee-company to adjust short-term capital gains earned due to sale of property in Defence Colony, against forfeiture of advance. He further argued that the agreement to sell was entered by the assessee-company on 12th October, 2004 and substantial amount of Rs. 3.50 crores had been paid. All of a sudden, when assessee-company sold its Defence Colony property and earned short-term capital gain, the forfeiture of advance was claimed. He further submitted that the document furnished by the assessee in support of forfeiture of advance was a self-serving document. By way of this methodology, both the assessee as well as the intending seller had taken advantage of the Income Tax provisions. There is no explanation as to why the forfeiture was claimed in the year in which short term capital gain had arisen for the assessee.
8. We have given a thoughtful consideration to the submission advanced by Mr. Bhatia. The ITAT while confirming the order of the CIT (A) has observed as under:
‘9. Aggrieved by this the revenue is before us.
10. The DR strongly supported the findings of the Assessing Officer and in support relied upon the decision of Hon’ble Supreme Court in the case of Durga Prasad More reported in 82 ITR 540, Sumati Dayal reported in 214 ITR 801 and Mc Dowell & Company Limited reported in 1986 AIR 649. It is the say of the DR that the CIT(A) ignored the facts highlighted by the Assessing Officer treating the transaction as a colourable device.
11. Per contra the Counsel for the assessee vehemently supported the findings of the CIT(A). It is the say of the counsel that it is incorrect to say that the transaction is a colourable device when the same has been accepted by the Assessing Officer while treating the write off as capital expenditure.
12. We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the forfeiture of Rs. 3.50 cores claimed by the assessee as revenue expenditure has been treated by the Assessing Officer as capital expenditure. This conclusively establishes the genuineness of the transaction and therefore, cannot be accepted as a colourable device. All that is now required to be decided is whether the write off is a capital expenditure or revenue expenditure. The judicial decisions relied upon by the Ld. DR (supra) would do no good to the revenue.
14. In our considered opinion the Assessing Officer cannot step into the shoes of the assessee so as to hold that when the funds were available why the balance sum of money was not paid.
15. As mentioned elsewhere by treating the forfeiture as a capital expenditure, the Assessing Officer himself has accepted the transaction of adjustment of Rs. 3.50 crores and its write off / forfeiture subsequently. On identical set of facts the coordinate bench in the case of Rekhi Lamba Realtors v. ITO in ITA NO.888/Mum/2009, held as under :—
”After considering the rival contentions and relevant record. We find that the CIT(A) has not subscribed the view taken by the Assessing Officer on the, disallowance of the claim of the assessee but rejected the claim of the assessee on the ground that forfeiture earnest money is a capital loss to the assessee. It is undisputed fact that the forfeiture money deposited was as per the terms and conditions of the agreement executed between the CIDCO/ HDIL and the assessee and not because of in violation of any law which would amounts to any offence and an act which prohibited by law. Therefore, the forfeiture of the earnest money by the CIT(A) as per the terms of the agreement does not fall under the Explanation to section 37(1). As far as the nature of loss is concerned since the assessee in the business of sale – purchase of the property/ land, therefore, the earnest money paid by the assess was for purchase of plot of land which should have been stock in trade of the assessee and not for acquisition of capital asset. Accordingly, loss due to the forfeiture of the earnest money deposited cannot be a capital loss. The earnest money deposit was made by the assessee was not for acquiring of any capital asset for investment of business assets but it was deposit for the business of the assessee i.e. the sale and purchase of land. Accordingly, the forfeiture of earnest money in the case in hand is a business expenditure. Therefore, we set aside the orders of the lower authorities and the claim of the assessee is allowed. ”
16. Considering the facts in totality, in the light of the decision of the co-ordinate bench we do not find any reason to interfere with the findings of the CIT(A). The appeal filed by the revenue is dismissed.’
9. From the facts narrated in the impugned order, it emanates that the transaction between the assessee and HDIL, is not disputed. The transaction, in fact, has also been accepted by the AO while treating the write off as capital expenditure. Thus, the only question that arises for consideration is whether such a transaction could be categorised as “colourable device” and the forfeiture of Rs. 3.50 crores could be treated as capital expenditure. Since the genuineness of the transaction is not disputed, we are unable to find any cogent ground or reason for the same to be considered as colourable device. In fact, the assessee had produced several documents in support of the forfeiture, such as the copy of the agreement to sell dated 12th October, 2004; letter requesting for extension of agreement; letters granting extension from HDIL; letter granting final opportunity, and; letter of forfeiture of advance, which in fact has been extracted in the impugned order. In order to claim deduction, the assessee has to satisfy requirements of section 37(1) of the Act, which lays down several conditions, such as-the expenditure should not be in the nature described under Section 30 to 36; it should not be in the nature of capital expenditure; it should be incurred in the previous year; it should be in respect of business carried by the assessee; and be expended wholly and exclusively for the purpose of such business. The assessee is a company which is engaged in the business of real estate. The main object of the business of the company is development of real estate. It made a payment of Rs. 3.50 crores as advance to HDIL for purchase of land to construct commercial complex for the development of real estate. Since it did not make payment of the balance amount – for whatever reason, the advance given was forfeited. In this view of the matter, the advance given in the ordinary course of business has been rightly treated as loss incurred by the company. We are unable to find any material on record to suggest to the contrary. In view of the aforesaid factual findings, the treatment given to the forfeiture of advance Rs. 3.50 crores could not be categorised as capital expenditure. Therefore, the question of law urged by the appellant does not arise for consideration, as the issue is factual.
10. The appeal is accordingly, dismissed.