Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company engaged in business of development of real estate had, in ordinary course of business, made certain advance for purchase of land to construct commercial complex but same was forfeited as assessee could not make payment of balance amount – Forfeiture of advance would be allowed as business expenditure

9. Principal CIT vs.
Frontiner Land Development P. Ltd.

[2020] 114 taxmann.com 688
(Delhi)

Date of order: 25^th
November, 2019

A.Y: 2012-13

Business expenditure – Section
37(1) of ITA, 1961 – Where assessee company engaged in business of development
of real estate had, in ordinary course of business, made certain advance for
purchase of land to construct commercial complex but same was forfeited as
assessee could not make payment of balance amount – Forfeiture of advance would
be allowed as business expenditure

The assessee, a company engaged
in the business of real estate development, had entered into a contract with
HDIL for purchase of land to construct a commercial complex in 2004 and had
paid an advance of Rs. 3.50 crores. However, it could not pay the balance
amount and, therefore, HDIL forfeited the advanced amount in 2011. In the
relevant year, i.e., A.Y. 2012-13, the entire capital gain and interest income
of the assessee company was offset with the amount so forfeited. The A.O. held
that forfeiture of advance was a colourable device to adjust capital gains. He
characterised the forfeiture as capital expenditure and made an addition.

The Commissioner (Appeals)
allowed the assessee’s appeal and deleted the addition of Rs. 3.5 crores. The
Tribunal upheld the decision of the Commissioner (Appeals).

On appeal by the Revenue, the
Delhi High court upheld the decision of the Tribunal and held as under:

‘i)   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 A.O. 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 12^th
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.

ii) In order to claim deduction, the assessee has
to satisfy the 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 sections 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 out by the assessee; and be expended wholly and exclusively for the
purpose of such business.

iii) 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 a commercial complex for the development of real estate.
Since it did not make the 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.