TaxTMI 
TaxTMI 
2019 (2) TMI 1062
X X X X Extracts X X X X
X X X X Extracts X X X X
....and and not to purchase and sale of offices and the same cannot be treated revenue expenditure and hence not allowable in view of the provisions of Section 37(1) and 36(vii) of the Income Tax Act, 1961." 2. The assessee is an AOP constituted on 1st May, 2007 and was engaged in the business of real estate. The assessee filed its return of income on 29/9/2014 declaring total income of Rs. 14,48,510/-. During the course of scrutiny assessment, the Assessing Officer noted that the assessee has debited Rs. 7.00 crores in the P&L account on account of amount forfeited. The Assessing Officer asked the assessee to furnish nature, details and amount forfeited. In response, the assessee explained that the assessee entered into an agreement with M/s Synod Farm and Infra Developers Pvt. Ltd., New Delhi for purchase of 20 offices bearing No. 222 to 241 at Vatika Business Park, Sohna Road, Gurgaon on 11/01/2014. At the time of agreement, the assessee paid Rs. 2.00 crores and as per the terms of the agreement, further payment of Rs. 2.00 crores to be made within 10 days from the date of execution of agreement and Rs. 3.00 crores within 30 days from the date of agreement. The balance full and f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld have purchased 7 offices against the payment of Rs. 7.00 crores. Thus, the ld. CIT-DR has submitted that the claim of forfeiture of Rs. 7.00 crores is nothing but a mutual arrangement between the parties. He has relied upon the order of the Assessing Officer. 4. On the other hand, the ld AR of the assessee has submitted that the agreement in question is not in dispute and the Assessing Officer has not held that agreement dated 11/1/2014 is bogus document. It is also not in dispute that there is a forfeiture condition as per the clauses of the agreement and on failure on the part of the assessee to make the entire payment of sale consideration within the time period prescribed under the agreement, the advance paid by the assessee was liable to be forfeited. The ld AR has further contended that the seller has duly declared the amount of Rs. 7.00 crores in its books of account by reducing the same from the cost of property, therefore, there is no revenue effect as per the provisions of Section 51 of the Income Tax Act, 1961 (in short the Act) when the forfeiture amount would reduce the cost of acquisition in the hand of the seller and therefore, the profit on the sale of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re in its financial statements for the financial year 2013-14 relevant to AY 2014-15 wherein, the sum of Rs. 7 Crore was adjusted in the gross block under the head 'Building' and the assessment of M/s Synod was also completed u/s 143(3) of the Act and in fact, the returned income was accepted thereon. It appears from the impugned assessment order that no enquiries were made by the AO from M/s Synod and a huge disallowance was made by the AO on the basis of suspicion. In view of this fact, the AO was directed to make enquiries from M/s Synod in this regard. It is to be noted from the remand report of the AO that the enquiries were made by the AO and the statement of Shri R.C. Gupta, the Director of M/s Synod was recorded on oath u/s 131 of the Act, wherein, the transaction under consideration was confirmed by him and he admitted that its company M/s Synod has forfeited the amount of Rs. 7 Crore advanced by the appellant AOP. It is further noted that in the remand report, the AO has just repeated its version as recorded in the assessment order. It has already been mentioned earlier that the forfeited amount of Rs. 7 Crore has already been declared by M/s Synod in its financial sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ake its commercial decisions and the AO cannot dictate to the assessee the way to conduct its business. There is no evidence on record which may establish that the transaction under consideration was sham, the 'Agreement to Sell' was a sham document, the sum of Rs. 7 Crore was received back by the appellant from M/s Synod either directly or indirectly or in cash. It appears that the disallowance was made by the AO on the basis of surmise and conjectures and it is trite law that the suspicion, however strong it may be, cannot substitute evidence which is required for making the addition/disallowance. It is to be noted that there is nothing on record which may justify the addition except the suspicion of the AO which cannot be the basis of either making or sustaining an addition as at best it could have been the basis for making a further enquiry which was already made in the remand proceedings. It is the evidence and evidence alone which can dictate the true picture of things. Further, it may be mentioned that it is not the case of the AO that M/s Synod was not owning/having these offices and the contract was executed without owning the assets. (ix) It may be mentioned that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been shown to us so as to conclude that the sale agreement between the respondent-assessee and his vendor M/s. Emtech Solution (P) Ltd. is collusive. We find that the CIT (A) as well as the Tribunal have rendered concurrent findings of fact that the parties had entered into agreement which was genuine. In fact, the vendor M/s. Emtech Solutions (P) Ltd. had itself confirmed the transaction and also of having received the sum of Rs. 2.40 crores from the respondent. The transaction could not be completed as a ready buyer one Mr. Gandhi had withdrawn his offer to purchase the subject property. The further cheques issued by the respondent had been dishonoured, which led the respondent to permit forfeiting the advance/part payment. In respect of the manner in which the vendor has shown the receipt, we asked Mr. Pinto whether it has shown its receipt on capital account to avoid paying taxes. Mr. Pinto responded by stating he is not aware. In any case it is a settled position that nature of receipt in the hands of the payee will not determine the nature of payment i.e. capital or revenue in the hands of the payer. The respondent assessee is dealer in immovable property and it is f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gly the profits shall also be distributed proportionately as per their capital contribution in the form of plots transferred to the AOP periodically as recorded in the books of the AOP and as decided mutually by the members of the AOP." (xiv) Further, vide addendum dated 04/12/2013, the object of the AOP was modified as under: "1. Shri Ramesh Chondra Pradhan S/o Late Shri Gopi Nath Pradhan by caste Bagra Brahmin aged 57 years resident of 38, Shiv Path, Suraj Nagar, (West) Civil Lines, Jaipur (referred as Party No. 1). 2. Smt. Geeta Pradhan W/o Shri Ramesh Chandra Pradhan by caste Bagra Brahmin, aged 51 years resident of 38 Shiv Path, Suraj Nagar, (West) Civil Lines, Jaipur (referred as Party No.2). Had entered into an agreement of joint venture on 1.5.2007 to undertake certain ventures jointly as per terms and conditioners as laid down in the said agreement. 2. Today, i.e. on 04.12.2013 at Jaipur, we the party No. 1 and 2 above have further mutually agree to carry on and undertake following further ventures jointly. (i) To invest and trade in shares, debentures, funds bonds and other derivatives of all types. (ii) To invest a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... enjoying the rental income from them and thus, the loss on forfeiture of advance amount cannot be treated as capital expenditure as stated by the AO. Even if the addendum dated 04.12.2013 is ignored, then the purchase and sale of offices was nothing but the extension of the real estate business of the appellant as there was unity of control, intermingling and interlacing of funds; and marketing under supervision and control of same set of persons i.e. member of the appellant AOP in both the arms of the real estate business as held in number of judicial pronouncements. (xvii) In the case of Jay Engineering Works Ltd. Vs CIT [2008] 166 Taxman 115 (Delhi), the Hon'ble High Court has considered a number of judicial pronouncements and has held as under: "9. In Prern Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All.), the assessee was a limited company running a spinning and weaving mill as well as a new project of straw-board manufacturing factory. The question before the Court was whether the expenditure incurred for the new venture was a revenue expenditure or not. The Allahabad High Court noted that control over the existing spinning mill as well as the new projec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The assessee in this case was engaged in the manufacture of various commodities like sugar, vanaspati, soaps, paints and varnish, torch and lantern and it was intending to diversify its activities by manufacturing a new commodity, that is, special alloy wire and billets. Based on the finding that the new business and the earlier business is the same, in a broad sense namely that the activity is of manufacture and that there is unity of control and a common fund, it was held that the business of manufacture of special alloy wire and billets was an extension of the existing business and not a new business. Consequently, the expenditure incurred was held to be a revenue expenditure. 13. Finally, in Veecumsees v. CIT [1996] 220 ITR 185(SC), the assessee ran a jewellery business and then commenced business in the exhibition of cinematographic films. The assessee obtained loans for building a cinema theatre and the question was whether the interest payable on the loans borrowed for the new business was a revenue expenditure or not. While answering the question in favour of the assessee, the Supreme Court found that the two businesses were composite in the sen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest on borrowed capital - Assessment year 1996-97 - In 1991, assessee- company had set up a ferro-alloys manufacturing plant - In relevant year, it had also set up a sugar manufacturing plant at different places and commenced its trial production - It paid interest on monies borrowed for purpose of setting up sugar plant and claimed deduction of same as revenue expenditure - Assessing Officer disallowed its claim primarily on ground that sugar plant constituted a new source of income and it was not same business in which assessee was engaged in - On appeal, Tribunal found as a fact that there was a common board of directors controlling both plants; that funds for two plants were common and, hence, there was intermingling and interlacing of funds; and that even though two divisions were geographically located at different sites, yet marketing of final products was carried out under supervision and control of same set of executives at head office - Tribunal, accordingly, held that sugar plant was a mere extension of existing business of ferro-alloys plant and, therefore, interest paid on funds borrowed for purpose of setting up of sugar plant was allowable under section 36(1) (iii....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g nature, it can be treated as capital nature, meaning thereby that depreciation can be claimed upon the total expenditure for setting up the new project. But in the present case, the new project has never matured. The expenditure incurred by the assessee has, therefore, to be written off. The efforts to make a new project by the same management in relation to the same business would certainly come within the test of identity laid down by the Hon'ble Supreme Court in the two authorities cited aforesaid and since no benefit of enduring nature resulted to the assessee, the expenditure in question cannot be created to be of capital nature." 5. The admitted facts are that the advance was paid for acquiring the agricultural land to set-up a factory, but when the agricultural land was not acquired, no capital asset came into existence, therefore, there is no question of allowing depreciation on such asset. If any asset is acquired and if it is a benefit of enduring nature, then of course the assessee cannot get the deduction of amount for acquisition of land as revenue expenditure. When land was not acquired, no capital asset has been acquired, therefore, the payment of Rs. 50,4....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act envisaged that the money has to be reduced from the cost of the asset acquired or written down value of the asset as the case may be for the purpose of computing the capital gain. For ready reference, we reproduce Section 51 of the Act as under: "51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money43 received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition: ^44[Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.]" Therefore, the forfeiture amount was either to be reduced from....