THE ACIT, CIRCLE-4(1)(2),, AHMEDABAD vs. M/S. VYAPTI INFRABUILD PVT. LTD.,, AHMEDABAD

आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER: ITA Nos. 2120/Ahd/2017 & 2505/Ahd/2017 filed by assessee for A.Y. 2013-14 to 2014-15, ITA No. 2688/Ahd/2017 filed by revenue and Cross Objection 22/Ahd/2017 filed by assessee arise from order of the CIT(A)-8, Ahmedabad, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

First we take two appeals vide ITA Nos. 2120 & 2505/Ahd/2017 involved common issue on identical facts 3. The fact in brief is that return of income declaring income of Rs. 2,05,84,525/- was filed on 14th August, 2013. The case was subject to scrutiny assessment. Assessment order u/s. 143(3) of the act was passed on 12 Feb, 2016 and total income was determined at Rs. 2,38,21,080/- after making disallowance of Rs. 5,885/- u/s. 2(24) r.w.s. 36(1)(va), disallowance of foreign travel expenses of Rs. 1,10,000/- and addition on account of income from house property of Rs. 31,20,700/-. The assessee has not pressed the ground no. 1 pertaining to disallowance of Rs. 5,885/- on account of delay in making employee’s contribution to provident fund and ESIC, therefore, this ground of appeal of the assessee is dismissed as not

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pressed. Other grounds of appeal pertaining to the aforesaid additions are adjudicated as under:-

Ground No. 1 (Disallowance of travelling expenses of Rs. 1,10,000) 4. During the course of assessment, the assessing officer noticed that assessee has claimed an amount of Rs. 1,10,000/- as foreign travelling expenses. The assessing officer asked the assessee to justify its claim of incurring of foreign travel expenses for business purpose. The assessee replied that foreign travelling was made by directors along with their relatives for the business purpose and it is the general practice of the company that directors travel for the business purpose. The assessing officer has not accepted the reply of the assessee stating that the assessee has failed to justify that foreign travel expenditure was incurred for the business purpose, therefore, the ld. CIT(A) has confirmed the disallowance of foreign travel expenses.

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Ground No. 2 (Income from House Property) 6. During the course of assessment, the assessing officer observed that assessee has shown closing stock/WIP at Rs. 38,16,12,833/- pertaining to the different real estate projects taken for development. The assessing officer noticed that assessee has not declared any property u/s. 22 of the act. The above WIP includes WIP of Vandemataram Prime Rs. 14,02,77,599/-. WIP of Vandemataram Icon at Rs. 23,87,68,273/- and proposed project at Rs. 25,66,961/-. It is perused that eh B.U. Permission of Vandemataram Prime is received on 09-11-2012 i.e. the said buildings was ready for possession and use as complete units. The assessing officer was of the view that as per section 22 of the act the annual value of the property consisting of any building or land appurtenant thereto of which the assessee is owner is chargeable to tax under the head “income from house property”. The assessee has contended that the scheme developed by the assessee are not the property of the assessee but in the nature of stock in trade. The assessing officer has not agreed with the assessee and adopted 8% as ALV(Annual Let out Value) of the property of Vendemataram Prima at Rs. 1,12,22,207/- and worked out at pro rata basis income from house property at Rs. 31,20,700/-.

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Vendematram Prima. The assessee has shown the unsold units in the stock in trade as work in progress as per balance sheet as on 31st March, 2013. The assessee has also submitted that in respect of stock in trade there is no question of addition on account of income from house property and no notional rent can be attributed to the vacant flats. During the course of appellate proceedings before us, the assessee has placed reliance on the following judicial pronouncements:- Sr. No. Particulars

We observed that the Hon’ble Jurisdictional High Court of Gujarat in the case of CIT vs. Neha Builders Pvt. Ltd. (2007) 164 taxman 342 (Guj) held that if property is used as stock in trade, then, said property would become partake character of stock and any income derived from stock would be income from business and not income from house property. We have further noticed that on identical issue on similar fact, the Co-ordinate Bench of the Bombay ITAT vide ITA No. 5408 & 5409/Mum/2016 in the case of M/s.

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Runwal Constructions Runwal & Omkar Esquare Vs. ACIT dated 22-02- 2018 after following the decision of High Court of Gujarat in the case of Neha Builders has held as under:- “10. In the case on hand before us it is an undisputed fact that both assessees have treated the unsold flats as stock in trade in the books of account and the flats sold by them were assessed under the head 'income from business'. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head 'income from business' when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head 'income from house property.” Thus, we direct the addition made under Section 23 of the Act as income from house property.”

Respectfully following the decision of Hon’ble High Court and Co- ordinate Bench of Mumbai ITAT as cited above, we direct the assessing officer to delete the addition on account of notional annual letting value made u/s. 23 of the act as income from house property, therefore, this ground of appeal of the assessee is allowed.

ITA No. 2505/Ahd/2017 filed by assessee 9. The ground no. 1 of the appeal of the assessee pertaining to disallowance of Rs. 28,430/- on account of delay in depositing employees contribution to PF and ESIC is dismissed as not pressed. The second ground of appeal of the assessee is against the addition on account of adopting 8% of the ALV of the properties as income of the assessee. This ground of appeal is based on similar facts on identical issue as adjudicated above in this order vide ITA No. 2120/Ahd/2017. On the similar reasons after applying the findings of the ITA No. 2120/Ahd/2017, the impugned addition is deleted. Accordingly, this ground of appeal is allowed.

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ITA No. 2688/Ahd/2017 filed by revenue and Cross Objection No. 22/Ahd/2019 filed by the assessee 10. All the grounds of appeal of the revenue and cross objection of the assessee are inter connected to the common issue of disallowance of forfeited amount as trade loss, therefore, for the sake of convenience, these grounds of appeal are adjudicated together by this common order.

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added back to the total income of the assessee. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of decision of ld. CIT(A) is reproduced as under:- "7. We have heard both the parties and gone through the material available on record. The assessee has made -deposit of earnest money in order to get export quota. The assessee was allotted quota on the basis of past performance/projected figures submitted by the exporters and had to give EMD/guarantee for the purpose of execution of allotted quantity of quota to the extent of 90 per cent of the quota allotted. From these facts it is clear that the quota was allotted to the assessee on the basis of past performance in respect of exports made by the assessee. The EMD in the form of DD/fixed deposit/bank guarantee was in respect of execution of export quota allotted to the assessee. Therefore, the quota was allotted on the basis of past performance of the assessee as an exporter and not on the basis of earnest money deposited. The quota was allotted during the course of export activities of the assessee and when the assessee did not execute the full quota allotted, EMD was forfeited by AEPC. Thus the forfeiture of EMD has occurred during the course of business activities carried on by the assessee. Hence, it is a case of business loss. The AO has disallowed the amount on the ground that it was in the nature of penalty. Forfeiture of EMD on account of nonfulfillment of quota allotted to the assessee cannot be treated penal in nature, as held by the AO. In the case of Tarun Commercial Mills Co. Ltd. (supra) the assessee executed a bond towards shortfall in export obligations. Under the terms of bond executed with the Government the assessee had option to either achieve the target or pay for the shortfall. The terms of the bond clearly indicated that the auction with the manufacturer assessee of paying for the shortfall could be for variety of reasons in the interest of commercial expediency. Hon'ble Gujarat High Court has held that the exercise of option of the assessee for payment on account of shortfall was not in the nature of penalty. In the case of CIT v. Surya Prabha Mills (supra) the assessee company was running a textile mill, was a member of cotton mill association, which allotted quota of foreign cotton to its members. The allotment was made on the basis of number of spindles working on higher counts. The assessee did not import the allotted quantify of cotton, but paid the agreed guarantee amount for the non-import of the cotton. Hon'ble Madras High Court held that payment made was not for penalty for infraction of any law, but was an expenditure laid out exclusively for the purpose of business. From the above decisions it is clear that payment of amount on account of non-fulfillment of quota cannot be treated as penalty as held by the AO. The learned CIT (A) has, however, confirmed the disallowance on the ground that the EMD was in the nature of capital expenditure as the assessee got allotment of quota because of EMD. This, in our' view, is not correct appreciation of facts. As discussed earlier, the assessee got quota allotted on the basis of past performance of export business and not on the basis of the earnest money deposited. The earnest money was paid on percentage basis of quota allotted. Therefore, the payment of earnest money was in the course of business activities and hence, cannot be treated as capital in nature. Hon'ble Allahabad High Court in the case of Sugar Dealers case (supra) has held that forfeiture of earnest money due to non-performance of contract to purchase rice was loss attributable to the assessee and was allowable as deduction. Similarly, in the case of Thackers H.P. & Co. case (swprajforfeiture of security by the Forest Department on account of non- fulfillment of contract obligation was held to be business loss allowable as deduction by Hon'ble Madhya Pradesh High Court. Similarly in the case of Narandas Malhuradas & Co. case (supra) Hon'ble Bombay High Court has held that making deposit by way of security for carrying out a contract of supply of goods was not for acquiring the business, but incidental to carrying on business. Therefore, forfeiture of deposit was held to be allowable as business loss. Likewise, Tribunal, Cuttack Bench in the case of Dhirajlal Raghavji & Co. case (supra) has held the forfeiture of earnest money and security deposit as deductible from the income. The amount was held to have been paid for \ securing right to purchase stock-in-trade and hence was not in the

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nature of capital expenditure. In the instant case, the quota has been allotted on the basis of past performance in the field of export and payment of earnest money is incidental to fulfillment of the quota so allotted and, therefore, it cannot be said to have been deposited for acquisition of the quota. Therefore, forfeiture of security deposit is in the nature of business loss and has to be allowed as deduction. Accordingly, neither the AO was justified in treating neither the forfeiture of security deposit as penal in nature nor the learned CIT(A) was justified in holding the security deposit in the nature of capital expenditure. Accordingly, we set aside the order of the learned CIT(A) and direct the AO to allow the claim of the assessee." 11.7. Now in the present case, the appellant is engaged in the business of development of properties and also buying and selling of the properties. The appellant has shown the revenues from sale of properties. Thus, in connection with the business, the appellant entered into a contract for the purchase of certain shopping area which was under development from Shukam Properties Private Ltd. and the amount was shown in the balance sheet under note 10 as advance given. The appellant company explained that in the Profit & Loss Account for the year ending 31.03.2014, under the head "Expenses -Trading Loss - Forfeited amount as per Arbitration Award, an amount of Rs.3,50,00,000/- has been claimed as Revenue Expenditure and in Note No.25(HI) forming part of audited accounts, under the head " Loss on cancellation of Agreement", the appellant explained the said facts. Thus, the appellant company is into the business of real estate activities of purchasing and selling of immovable properties and building and developing real estate project and in the normal course of its business activities, as the company incurred the losses on cancellation of the agreement and therefore, claimed allowable as a trading loss u/s. 28 of the I.T. Act, 1961. The case Pyyoginam vs. Addl. CIT [2010] 127 TTJ 7 (Delhi) discussed above is directly applicable here. The forfeiture of advance in a transaction which was entered into in the normal course of business activity is in the nature of business loss and hence has to be allowed as deduction under section 28 in view of various other judicial pronouncements discussed above. Following judicial pronouncements are also relevant: The Hon'ble Supreme Court in the case of RamchanderShivnarayan V. CIT (1978) 111 ITR 263 (SC) Assessee firm carried on business in gold, silver and gunnies and also derived income form investment in Government securities -Certain cash was brought to business place of assessee for buying securities -Part of said amount was lost by theft - Hon'ble SC held that " if there is a direct and proximate nexus between the business operation and the loss or it is indicated to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such loss is considered to be trading one and becomes deductible from total income". It is clear that the business loss, though they fall outside the purview of any of the section 30 to 43C, are allowable on commercial principles on computing profits provided the loss are of a revenue nature and they are not merely connected with the trade but are really incidental to the trade itself. CIT V. S.N.A.S.A. ArmamalaiChettiar (1972) 86 ITR 607 (SC). Here in course of money lending business of HUF certain properties were taken over in settlement of debts - On partition of HUF, assessee received some of those properties in Malaya and continued to carry on money-lending business. During war, assessee suffered damages to those properties on account of Japanese bombing and, claimed such loss as business loss. Supereme Court held that taking into consideration the facts and circumstances of the case the loss occurred must be held to be a loss incidental to the business carried on by the assessee in Malaya.during the war. iii] That a trade loss is considered deductible because it comes in the process of ascertainment of chargeable income by way of profits and gains of the business/profession. Section 28 of the Income-tax Act refers to profits and gains of business/profession and such profits can be only the net profits and not the gross receipts of the business/profession [CIT Vs. S.C. Kothari (1971) 82 ITR 794 (SC,)] 1 l.8. In the normal course of business by paying the advance and also by entering into an agreement the assessee had acquired right to purchase the property as per the terms and schedule mentioned in the agreement for sale entered by the appellant. The property was being purchased for its normal business as stock-in-trade. Later, on realizing that price of the property was very high, the appellant choose to cancel the transaction. Due to cancelling deal, there was possibility

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of whole advance getting forfeited. The assessee, by way of arbitration proceeding, could reduce its losses and got a refund of part of the advance and balance was claimed as a trading loss allowable under section 28. As already stated, the ratio of Pyyoginam vs. Addl. CIT [2010] 127 TT.I 7 (Delhi) discussed above is directly applicable here. The forfeiture of advance in a transaction which was entered into in the normal course of business activity is in the nature of business loss and hence has to be allowed as deduction under section 28. The addition made is, therefore, deleted and the related grounds of appeal are allowed. In result, the appeal is partly allowed.” 12. During the course of appellate proceedings before, the ld. departmental representative has contended that the assessee has shown advance which cannot be claimed as business loss. On the other hand, the ld. counsel has referred memorandum of association containing the detailed object of the company placed at page no. 172 to 180 of the paper book. It is contended that sale/purchase of land and buildings etc. are also included in the main object to be pursued by the assessee company. The ld. counsel has also referred page no. 89 to 93 which pertained to the registered agreement for sale without possession of built up area-1 in Dev Arc Properties Pvt. Ltd. The ld. counsel has also referred clause 9 of the agreement which state that the parties shall approach to the arbitrators to resolve the dispute. The ld. counsel has vehemently contended and supported her cross objection in supporting the decision of ld. CIT(A).

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undividable multiple right title and interest in the land directly unearthed, premises Dev Arc from the vendor for a fixed consideration of Rs. 13 crore and the assessee company had paid Rs. 5 crore to the vendor while executing the agreement for sale without possession dated 30th March, 2012 and the same was shown as advance in the balance sheet of the company for the ended 30th March, 2012. Further payment of Rs. 8 crore was to be made to the vendor as per the terms of agreement to sale dated 30th March, 2012. However, due to market condition which was deteriorating in the real estate business and particularly the price of the property in Dev Arc Mall was also getting deteriorated, the assessee company made proposition to the vendor to revise the sale consideration of Rs. 13 crore as agreed upon in the agreement for sale without possession on 30th March, 2012 to a reduced sale consideration at Rs. 8 crore. However, the vendor did not agree to the proposal of the company, therefore, the vendor has decided to forfeit the advance payment of Rs. 5 crore already made to the vendor in pursuance of the agreement for sale without possession dated 30th March, 2012. The assessee was of the view that if the assessee company purchases the said property at a price consideration of Rs. 13 crores in the subsequent sale, the company would not fetch more than Rs. 8 crores and there was likely loss to the company as the assessee could not find out buyer of the said property as the real estate market was in a deteriorated condition as well as marketability of the property in the Dev Arc Mall was also of doubtful nature. Therefore, the dispute arose between the company and the vendor was referred to the arbitrator as per the direction of the arbitrator, the vendor has forfeited the amount of Rs. 3.5 crore out of advance amount of Rs. 5 crores paid by the assessee company to the vendor. The assessee has treated the aforesaid

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advance of Rs. 3.5 crore as loss incurred in the normal business activity of the company of buying and selling of the property and the same amount has been debited in the profit and loss account for the year ended on 31st March, 2014. In the light of the above facts, we find substance in the findings of the ld. CIT(A) that as per the normal course of business the assessee has entered into an agreement and the impugned property was being purchased as stock-in-trade and subsequently expecting loss on selling the property in future, the deal was cancelled, therefore, forfeiture of advance in a transaction which was entered in the normal course of business is in the nature of business loss. Accordingly, the appeal of the Revenue is dismissed.

Order pronounced in the open court on 19-11-2019

Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 19/11/2019

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आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद