ASHOKKUMAR PARMAR,,PUNE vs. INCOME-TAX OFFICER, WARD - 5(5),, PUNE

The only issue raised in this appeal is challenge to the echoing by the ld. first appellate authority of the disallowance of forfeiture of earnest money deposit amounting to Rs.46,40,000/-.

Succinctly, the factual panorama of the case is that the assessee is a Real Estate Developer carrying out its operations under its proprietorship concern, Parmar Developers. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had entered into a Memorandum of Understanding (MoU) on 05-02-2003 with M/s Greaves Limited for acquiring interest in the property owned by the latter. The purchase consideration was settled at Rs.4.64 crore. A sum of Rs.46,40,000/- was paid by the assessee as earnest money. The money was forfeited by M/s Greaves Limited as the assessee failed to comply with the terms and conditions of the MoU. The assessee claimed deduction for the said sum in its account for the year under consideration. The AO observed that six months from the date of the MoU lapsed on 05-08-2003 and therefore, the liability on account of forfeiture arose in the financial year 2003-04 relevant to assessment year 2004-05. He, therefore, disallowed the claim of deduction in the year under consideration. The assessee remained unsuccessful before the ld. CIT(A) as well.

We have heard both the sides through Virtual Court and gone through the relevant material on record. It is observed that the assessee entered into MoU with M/s Greaves Limited on 05-02- 2003 for acquisition of land, for which he paid earnest money of Rs.46,40,000/-. Copy of the MoU dated 05-02-2003 between the assessee and M/s Greaves Limited has been placed on page 22 onwards of the paper book. Clause 2 of the MoU provides for payment of Rs.46,40,000/- by the assessee as earnest money. Clause 3 states that the assessee shall obtain all the requisite permissions from the Collector of Pune or Government of Maharashtra for disposal of the said plot within six months from the date of execution of the MoU as the Government of Maharashtra had acquired and handed over the land for the use and benefit of M/s Greaves Limited. Default clause has been set out at serial no. 6. Clause 6 (c) of the MoU provides that if the assessee commits breach of any terms and conditions, the MoU shall automatically stand cancelled and the earnest money of 10% paid by the assessee, will be forfeited . There is no dispute on the fact that the assessee failed to fulfill his part of conditions inasmuch as he could not obtain the requisite permissions from the Collector of Pune or Government of Maharashtra, as a result of which the assessee incurred default in terms of clause 6(c) of the MoU. The assessee requested M/s Greaves Limited to extend time for meeting the requirement. This went on for three years. It was on 01-02-2006 that M/s Greaves Limited intimated the assessee of having forfeited the earnest money since the assessee could not obtain the requisite permissions. Thereafter, the assessee filed Civil Suit for Specific Performance of the MoU. It was on 02-02- 2012 that the Civil court dismissed the suit for specific performance. Pursuant to the decision of the Civil court, the assessee claimed deduction of the earnest deposit in his accounts for the year ending 31-03-2012. The only dispute is about the timing of allowing the deduction and not the actual incurring of liability by means of forfeiture of deposit. Where the AO has made out a case that the assessee ought to have claimed deduction within six months from the date of execution of the MoU when he failed to obtain the requisite permissions, the ld. CIT(A) has opined at per para 22 of his order that the deduction of forfeiture should have been claimed when M/s Greaves Limited communicated the fact of forfeiture of earnest money vide their letter dated 01-02-2006. In the alternate, the ld. CIT(A) held that since the assessee had filed appeal against the order passed by the Civil court dismissing his petition for Specific Performance, the assessee could claim deduction only when the matter attains finality by the judgment of the Hon‟ble Supreme Court, which event had not taken place yet. In our considered opinion, the course of action adopted by the authorities below is not in accordance with law. The view point of the ld. CIT(A) that the assessee should have claimed deduction in its accounts for the year ending 31-03-2006 does not stand anywhere because at that time the assessee was pursuing the matter with M/s Greaves Limited and was still hopeful of some succor.

Under the mercantile system of accounting, a deduction can be claimed when liability to pay the amount is incurred. As against a statutory liability becoming deductible only against the notice of demand, a contractual liability is incurred when enforceable liability to pay is created against the assessee. We are confronted with a situation in which the assessee was contesting his liability arising out of the MOU with M/s Greaves Ltd. It became enforceable on the dismissal by the Civil Court of his suit for specific performance. It was at that point of time that the liability got crystalised and became enforceable against the assessee. The Hon‟ble Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. vs. CIT (2011) 338 ITR 36 (Del) noted that albeit the award was made by the arbitrator on 15th Nov., 1989 but it was: `only with passing of the decree by this Court on 28th Jan., 2000, that the award being made rule of the Court, became enforceable‟. The legal position which emerges is that once the award is made a rule of the Court, its further stay by the Court cannot mar the incurring of liability, which becomes enforceable on the award having been made rule of the Court earlier. This proposition has been laid down by the Hon‟ble Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. (NAFED) vs. CIT (2017) 393 ITR 666 (Del).

Testing the factual scenario on the touchstone of the above principles, it is manifested that the enforceable liability against the assessee was created in the extant year on the dismissal of the assessee‟s suit for specific performance by the Civil Court. The view point by the ld. CIT(A) that the assessee can get deduction only when the matter is finally decided by the Hon‟ble Supreme Court, is neither here nor there. It is so for the reason that insofar as the question of deduction is concerned, the same depends on ascertainment of liability, which event has already happened in the instant year. If suppose, at a later point of time, the higher Courts decide the issue in favour of the assessee and the forfeiture of earnest money is reversed, the assessee will be obliged to include such amount in the total income of such later year by virtue of provisions of section 41(1) of the Act. We, therefore, hold the assessee to be entitled to deduction of Rs.46,40,000/- in the year under consideration. The impugned order is overturned and the deduction is allowed.

In the result, the appeal is allowed. Order pronounced in the Open Court on 14th August, 2020.

Sd/- Sd/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पपणे Pune; ददनधांक Dated : 14th August, 2020 सतऩश आदेश की प्रनतनिनप अग्रेनषत/Copy of the Order is forwarded to:

Date of dispatch of Order. *