Shah Nandkishor Motilal Ramtanay, Pune V. Deputy Commissioner of Income-tax,

ITA 867/PUN/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1000 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 07-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 17-04-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Keywords: Capital asset; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B

Judgement Text

] ]] ] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NO.867/PN/2013 ASSESSMENT YEAR : 2009-10 SHAH NANDKISHOR MOTILAL, RAMTANAY, SHANTISHILA SOCIETY, ERANDAWANA, LAW COLLEGE ROAD, PUNE 411 004. PAN : AFHPS4621M . APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 3, PUNE. . RESPONDENT / APPELLANT BY : SHRI M. K. KULKARNI / RESPONDENT BY : SHRI B. C. MALAKAR / DATE OF HEARING : 07.10.2015 / DATE OF PRONOUNCEMENT: 16.10.2015 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE PRESENT APPEAL PREFERRED BY THE ASSESSEE IS AGA INST THE ORDER OF CIT(A)-II, PUNE DATED 02.11.2012 RELATING TO ASSESS MENT YEAR 2009-10 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE REPRODUCED AS UNDER :- 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) FAILED TO APPRECIATE THE LEGAL CONCEPT AND CONSEQUENCES OF AN AGREEMENT WHICH WAS MIDWAY RENUNCIATED FOR ON 28-02-2009, THAT IS IN TH E SAME ASSESSMENT YEAR AND BEFORE THE ASSESSMENT YEAR 2009-10 CAME TO CLOSE WH ICH RENUNCIATION OF AGREEMENT RELATES BACK TO THE DATE OF THE EXECUTION OF THE CO NTRACT MEANING THEREBY THE CONTRACT SO EXECUTED WAS NOT IN EXISTENCE. IN VIEW OF THIS L EGAL POSITION THE CONTRACT TO PURCHASE WIND MILL FOR RS.5.71 CRORES GOT ABRUPTLY ABORTED AND THE EXPENDITURE IN BETWEEN INCURRED WAS ALSO ABORTIVE AND WAS TOTAL LO SS TO THE ASSESSEE WHEN THE ORIGINAL ASSET WAS NOT RESULTANTLY ACQUIRED BY THE ASSESSEE. THE LOSS BE ALLOWED TO THE ASSESSEE. 2 ITA NO.867/PN/2013 2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW AND IN VIEW OF GROUND NO. 1 NO TANGIBLE CAPITAL ASSET BY INCURRING EXPEND ITURE OF RS.97,91,624/- WAS OBTAINED BY THE ASSESSEE. IT WAS A SHEER LOSS BUT S UFFERED DURING THE COURSE OF CARRYING ON OF THE BUSINESS AND AS SUCH ALLOWABLE U NDER S. 29 OF THE ACT. IT BE ALLOWED TO THE ASSESSEE. 3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THERE TOOK PLACE THE RENUNCIATION OF THE CONTRACT TO PURCHASE THE ASSET WIND MILL FOR A CONSIDERATION OF RS.5.29 CRORES IN RESPE CT OF WHICH AN AMOUNT OF RS.90 LAKHS WAS PAID. IN VIEW OF RENUNCIATION THE AMOUNT PAID OF RS.90 LAKHS WAS LOST WITHOUT ANY POSITIVE ASSET IN THE HANDS OF THE ASSE SSEE. SUCH LOSS IS TO BE ALLOWED AS 'BUSINESS LOSS' OF THE ASSESSEE. THE LD. CIT(A) WAS NOT JUSTIFIED IN NOT APPRECIATING THIS LEGAL POSITION. IT BE HELD ACCORDINGLY. 4) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LD. CIT(A), THEREFORE, WAS NOT JUSTIFIED IN CONFIRMING THE EXPE NDITURE AS CAPITAL EXPENDITURE. IN VIEW OF HIS SUCH DECISION AND THERE HAVING NO POSIT IVE CAPITAL ASSET IN THE HANDS OF THE ASSESSEE WHICH COULD BE USED IN THE BUSINESS IN FUTURE THE LD. CIT(A) OUGHT TO HAVE ALLOWED THE 'WRITE OFF' OF SUCH IMAGI NARY ASSET SINCE SUCH ASSET DID NOT TAKE ITS BIRTH. THE WRITE OFF IN THE CIRCUMSTANCES BE ALLOWED. 5) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW IT IS AN UNDISPUTED FACT THAT IN VIEW UNILATERAL RENUNCIATIO N OF CONTRACT THE ENTIRE ASSET COMPRISED IN THE WIND-MILL WAS HANDED OVER TO THE O WNER OF THE SAID MILL WITHOUT ANY COMPENSATION. THIS LEADS TO ONLY CONCLUSION THA T THERE WAS NO ANY BENEFICIAL CAPITAL EXPENDITURE. THE ADDITION CONFIRMED BY LD. CIT(A) ON THIS ACCOUNT IS UNWARRANTED AND THE ADDITION BE QUASHED. 6) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE DISALLOWANCE CONFIRMED BY LD. CIT(A) OF RS.90 LAKHS BE DELETED. 7) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEVY OF INTEREST U/S 234A, 234B AND 234C IS NOT JUSTIFIE D. THE LEVY OF INTEREST BE QUASHED. 8) THE APPELLANT CRAVES/LEAVE TO ADD, AMEND OR ALTE R ANY OF THE ABOVE GROUNDS OF APPEAL. 3. THE BRIEF FACTS CONCERNING THE ISSUE INVOLVED AR E THAT THE ASSESSEE IS AN INDIVIDUAL AND IS ENGAGED IN A CIVIL ENGINEERING CO NTRACT BUSINESS WITH VARIOUS GOVERNMENT DEPARTMENTS. THE RETURN OF INCOME, FOR T HE YEAR UNDER CONSIDERATION, WAS FILED ON 29.09.2009 DECLARING TO TAL INCOME OF RS.87,64,790/-. DURING THE YEAR UNDER CONSIDERATIO N, THE ASSESSEE VENTURED INTO A NEW BUSINESS ACTIVITY OF GENERATION AND DIST RIBUTION OF ENERGY BY TAKING OVER EXISTING WINDMILL BUSINESS OF ANOTHER INDIVIDU AL CONCERN, NAMELY, M/S SUNSHINE ENTERPRISES, MUMBAI BY EXECUTING A MEMORAN DUM OF UNDERSTANDING (MOU) DATED 27 TH AUGUST, 2008. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD DE BITED RS.97,91,624/- TO THE PROFIT & LOSS ACCOUNT UNDER THE HEAD WINDMILL EXPE NSES, TREATING THE SAME AS REVENUE EXPENDITURE. BEFORE THE ASSESSING OFFIC ER, THE ASSESSEE CONTENDED 3 ITA NO.867/PN/2013 THAT DURING THE ASSESSMENT YEAR 2009-10 RELEVANT TO THE FINANCIAL YEAR 2008-09, THE ASSESSEE INTENDED TO EXPAND HIS BUSINESS ACTIVI TIES AND THEREFORE ENTERED INTO THE FIELD OF A NEW BUSINESS ACTIVITY OF GENERA TION AND DISTRIBUTION OF POWER. HE ENTERED INTO A MOU WITH M/S SUNSHINE ENT ERPRISES FOR ACQUISITION OF WINDMILL PROJECT TOGETHER WITH LAND AT AGGREGATE PRICE OF RS.5.71 CRORES EXCLUDING THE APPLICABLE TAXES AND MADE A DOWN PAYM ENT OF RS.30,00,000/- ON EXECUTION OF THE MOU. DURING THE YEAR UNDER ASSESS MENT, THE ASSESSEE STATES TO HAVE INCURRED OF RS.97,91,624/- TOWARDS WINDMILL EXPENSES. 3.1 THE ASSESSEE CLAIMED TO HAVE EARNED REVENUE OF RS.10,46,083/- FROM THE IMPUGNED TAKEOVER OF NEW BUSINESS OF GENERATION AND DISTRIBUTION OF POWER AND SPENT OF RS.7,91,624/- TO RUN THE AFORESAID BUS INESS OF WINDMILL. THE INCOME WAS SHOWN SEPARATELY ON INCOME SIDE AND EXPE NDITURE WAS SHOWN SEPARATELY UNDER THE HEAD DIRECT EXPENSES. AS A RESULT, THE NET INCOME OF RS.2,54,459/- WAS GENERATED FROM THE BUSINESS ACTIV ITY OF GENERATION AND DISTRIBUTION OF POWER, WHICH WAS OFFERED TAXATION T HROUGH PROFIT & LOSS ACCOUNT AND THERE IS NO DISPUTE ABOUT THE SAME. 3.2 THE ASSESSEE STATES TO HAVE DEBITED PART PAYMEN T TOWARDS ACQUISITION OF WINDMILL PROJECT TO THE WINDMILL EXPENSES. THE ASS ESSEE COULD NOT ABIDE BY THE TERMS OF THE MOU DATED 27 TH AUGUST, 2008, WHEREIN FULFILLMENT OF THE PAYMENT TERMS WERE ESSENCE OF THE CONTRACT AS PER C LAUSE 10 OF THE AGREEMENT. AS THE ASSESSEE COULD NOT FULFILL THE OBLIGATION AS STIPULATED IN THE MOU, A CANCELLATION DEED OF THE AFORESAID MOU WAS ENTERED INTO ON 28 TH FEBRUARY, 2009 WHEREBY THE SELLER OF THE EXISTING WINDMILL PR OJECT SHALL BE ENTITLED TO FORFEIT AN AMOUNT OF RS.90,00,000/-. THE FORFEITED AMOUNT HAS BEEN DEBITED TO THE WINDMILL EXPENSES AND CLAIMED AS REVENUE EXPENS ES. 4. THE ASSESSING OFFICER CONTROVERTED THE AFORESAID CLAIM OF THE ASSESSEE AS REVENUE EXPENDITURE AND HELD THAT FORFEITURE OF ADVANCE MADE TOWARDS ACQUISITION OF CAPITAL ASSET I.E. WINDMILL PROJECT TANTAMOUNTS CAPITAL EXPENDITURE AND ACCORDINGLY, THE ASSESSEE IS NOT EN TITLED TO CLAIM THE WINDMILL 4 ITA NO.867/PN/2013 EXPENSES AS REVENUE EXPENSES. HE ACCORDINGLY DISAL LOWED THE ENTIRE WINDMILL EXPENDITURE OF RS.97,91,624/- AND ADDED TO THE TOTA L INCOME DECLARED BY THE ASSESSEE. 5. BEFORE THE CIT(A) IN FIRST APPEAL, THE ASSESSEE REITERATED THE SUBMISSIONS AND STATED THAT LOSS ON ACCOUNT OF FORFEITURE OF AD VANCES MADE PURSUANT TO MOU AROSE IN THE ORDINARY COURSE OF BUSINESS AND IS ALLOWABLE UNDER SECTION 28/29 OF THE ACT. THE CIT(A), HOWEVER, GRANTED PAR TIAL RELIEF TOWARDS EXPENSES INCURRED TOWARDS RUNNING WINDMILL AND SUST AINED THE ORDER OF THE ASSESSING OFFICER TO THE EXTENT OF RS.90 LAKHS TREA TING THE EXPENDITURE ATTRIBUTABLE TO THE WINDMILL PROJECT AS CAPITAL EXP ENDITURE QUANTIFIED AT RS.90 LAKHS. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 7. AT THE OUTSET, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE NOS.1 TO 7 OF THE PAPER BOOK CONTAINING COPY OF THE MOU DATED 27 TH AUGUST, 2008 FOR PURCHASE OF THE IMPUGNED WINDMILL PROJECT. HE SUBMITTED THAT THE PROJECT WAS COMMISSIONED ON 2 9 TH AUGUST, 2006 AND WAS A GOOD CONDITION. IN ORDER TO EXPAND AND DIVERSIFY THE BUSINESS, THE ASSESSEE ENTERED INTO A MOU FOR PURCHASE OF AFORESAID EXISTI NG AND RUNNING WINDMILL PROJECT FOR A CONSIDERATION OF RS.5.71 CRORES AND O THER TAXES ON OWNERSHIP BASIS. AS PER THE STIPULATION IN CLAUSE 7 OF THE M OU, THE ENTIRE PAYMENTS WERE TO BE MADE TO THE SELLER BY 30 TH SEPTEMBER, 2008. HE, THEREAFTER, ADVERTED OUR ATTENTION TO CLAUSE 10 OF THE MOU WHEREBY PAYMENT T ERMS ARE THE ESSENCE OF THE CONTRACT. THE FORMAL POSSESSION OF THE PROJECT WAS TO BE GIVEN TO THE ASSESSEE BY THE SELLER ON RECEIPT OF FINAL PAYMENT AS PER CLAUSE 17 OF THE MOU. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IN THE MEANWHILE ON MAKING THE PAYMENT OF PARTIAL AMOUNT, THE ASSESSEE STARTED RUNNING THE WINDMILL BUSINESS AND REVENUE THEREON G ENERATED WERE CREDITED TO HIS ACCOUNT. THE WINDMILL OPERATING AND MAINTENANC E CHARGES WERE BEING 5 ITA NO.867/PN/2013 BORNE BY THE ASSESSEE FROM 19 TH AUGUST, 2008 ONWARDS AS PER CLAUSE 13 OF THE MOU. DUE TO FAILURE ON THE PART OF THE ASSESSEE TO MAKE PAYMENT AS PER STIPULATED TERMS, THE ORIGINAL MOU WAS CANCELLED BY A SUBSEQUENT MOU DATED 28 TH FEBRUARY, 2009 AS ANNEXED AT PAGE 12 OF THE PAPER BOOK. HE CONTENDED THAT THE LOSSES AROSE DUE TO FORFEITURE OF ADVANCED MONEY ON CANCELLATION OF CONTRACT DEBITED TO WINDMILL EXPENSES IN THE PROFIT & LOSS ACCOUNT IS IN THE NATURE OF REVENUE EXPENDITURE AS CLAIMED. HE NEXT SUBMITTED THAT SINCE THE POSSESSION OF THE ASSET WAS NOT HANDED-OVER TO THE ASSESSEE, THE OWNERSHIP OF THE ASSET WAS NEVER TRANSFERRED TO HIM AND THE CAPI TAL ASSET WAS NEVER ACQUIRED AT ANY POINT OF TIME, THE PAYMENT IS IN THE NATURE OF ADVANCE FOR ACQUISITION OF CAPITAL ASSET AND NOT ACQUISITION OF CAPITAL ASSET PER SE . THE EXPENSES REPRESENT WRITE-OFF OF IMAGINARY ASSETS. HE, THEREFORE, VEHE MENTLY ARGUED THAT LOSS ARISING ON FORFEITURE OF ADVANCE DUE TO RENUNCIATIO N OF CONTRACT IS IN THE REVENUE FIELD AND OUGHT TO HAVE BEEN ALLOWED BY THE ASSESSING OFFICER. HE RELIED UPON SEVERAL JUDICIAL PRONOUNCEMENTS FOR THI S PROPOSITION AS UNDER :- (I) CIT VS. RAMLINGA CHOODAMBIGAL MILLS LTD., (1999 ) 239 ITR 120 (MAD); (II) CIT VS. NATIONAL STEEL & GENERAL MILLS (P) LT D., (1990) 88 CTR 13 (DEL); (III) CIT VS. SOHANLAL KUNWAR & SONS, (1987) 164 ITR 129 (RAJ); (IV) DAULATRAM RAWATMALL VS. CIT, (1970) 78 ITR 50 3 (CAL); AND, (V) ASIA POWER PROJECTS (P.) LTD. VS. DCIT, (2014) 49 TAXMANN.COM 428 (KARNATAKA). 8. IN THE LIGHT OF ABOVE, THE LD. AUTHORIZED REPRES ENTATIVE FOR THE ASSESSEE URGED THAT THE ACTION OF THE AUTHORITIES BELOW REQU IRES TO BE SET-ASIDE AND VACATED. 9. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE, ON THE OTHER HAND, SUBMITTED THAT THE ORDER OF THE CIT(A) IS WEL L REASONED AFTER ANALYZING THE FACTUAL AND LEGAL ASPECT OF THE MATTER AND THER EFORE SHOULD NOT BE INTERFERED WITH. 10. WE HAVE CAREFULLY CONSIDERED THE FACTS INVOLVED IN THE PRESENT CASE, ORDERS OF THE AUTHORITIES BELOW AND PERUSED THE CAS E LAWS CITED. THE ONLY 6 ITA NO.867/PN/2013 CONTROVERSY INVOLVED IS WHETHER THE PAYMENT OF ADVA NCE MADE FOR ACQUISITION OF EXISTING WINDMILL POWER PROJECT IS EXPENDITURE I N THE NATURE OF CAPITAL EXPENDITURE OR TO BE REGARDED AS REVENUE EXPENDITUR E. 11. WE FIND THAT THE PAYMENT HAS BEEN MADE IN PURSU ANCE OF THE MOU, WHICH HAS BEEN CANCELLED WITHIN A SHORT PERIOD OF S IX MONTHS IN THE SAME FINANCIAL YEAR. IT IS ADMITTED POSITION FROM THE M OU DATED 27 TH AUGUST, 2008 THAT ASSESSEE HAS GIVEN IMPUGNED ADVANCE FOR ACQUIS ITION OF WINDMILL PROJECT FOR A CONSIDERATION OF RS.5.71 CRORES ON OWNERSHIP BASIS WHICH FAILED DUE TO BREACH OF PAYMENT TERMS. THE ASSESSEE HAD GENERATE D REVENUE FROM THE SAID WINDMILLS PENDING COMPLETION OF THE PAYMENT TERMS A ND ALSO INCURRED EXPENSES WHICH RESULTED IN A NET INCOME OF RS.2.54 LAKHS. FURTHER, IT IS ALSO EVIDENT THAT THE ASSESSEE HAD SOUGHT TO FORAY INTO A NEW BUSINESS LINE BY PROPOSING TO ACQUIRE THE IMPUGNED WINDMILL PROJECT. WE FIND ON THESE FACTS THAT THE PAYMENT OF IMPUGNED ADVANCE OF RS.90 LAKHS IS IN THE NATURE OF CAPITAL ADVANCE OR CAPITAL INVESTMENT AND NOT A REVENUE EXP ENDITURE AS CLAIMED. THE TEST IS TO CONSIDER FOR WHAT PURPOSE THE AMOUNT IS LAID FOR. IF THE AMOUNT IS LAID FOR PURCHASE OF GOODS IN WHICH THE ASSESSEE DEALT W ITH AND WHICH WERE ULTIMATELY TO BE SOLD AS PROFIT THEN THE EXPENDITUR E WOULD ORDINARILY BE REVENUE EXPENDITURE. ON THE OTHER HAND, IN THE PRESENT CAS E, THE CAPITAL WAS PROVIDED BY THE ASSESSEE TO THE SELLER FOR ACQUISITION OF CA PITAL ASSET. THE MOU CLEARLY SHOWS THAT THE ASSESSEE WAS VENTURING ON A NEW BUSI NESS AND THE AMOUNT WAS PUT AS THE CAPITAL EXPENDITURE TO ACQUIRE CAPITAL A SSET. IT IS THEREFORE CLEAR THAT THE LOSS AROSE FROM THE INVESTMENT AND NOT GIVEN IN THE COURSE OF BUSINESS BEING CARRIED ON BY THE ASSESSEE. THUS, IT IS CAPI TAL LOSS AND NOT A LOSS INCIDENTAL TO THE BUSINESS. DEPRIVATION FROM BENEF IT AS A RESULT OF SUCH CAPITAL EXPENDITURE IS OF NO CONSEQUENCE AND CANNOT IMPACT THE CHARACTER OF EXPENDITURE. THE DECISIONS CITED BY THE ASSESSEE A RE DISTINGUISHABLE ON FACTS. IN ALL THE DECISION RELIED UPON, THE ADVANCE WERE G IVEN IN THE COURSE OF CARRYING ON OF THE REGULAR BUSINESS LIKE PURCHASE O F RAW MATERIAL OR OTHER BUSINESS EXPENSES, ETC. WHERE THE LOSS INCURRED DUE TO TERMINATION OF CONTRACT. THE EXPENSES WERE INCURRED IN THE REVENUE FIELD. I N THE PRESENT CASE, THE 7 ITA NO.867/PN/2013 AMOUNT WAS PAID WITH A VIEW TO BRINGING INTO EXISTE NCE AN ASSET AND THEREFORE CLEARLY IS IN A CAPITAL FIELD. OUR AFORESAID VIEW IS SUPPORTED BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF NARANG INDUSTRIES LTD. VS. CIT REPORTED IN 66 ITR 316 (DELHI). IN AFORESAID VIEW OF THE MATTER, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDINGLY, WE ARE NOT INCLINED TO INTERFERE. THUS, THE GROUNDS OF APPEAL RAISED BY T HE ASSESSEE ARE DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED ON THIS 16 TH DAY OF OCTOBER, 2015. SD/- SD/- ( SUSHMA CHOWLA ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 16 TH OCTOBER, 2015. & ' ()* +*( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-II, PUNE; 4) THE CIT-II, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE