NANDKISHOR MOTILAL SHAH vs. THE COMMISSIONER OF INCOME TAX-I

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ITXA/1346/2016HC Bombay13 March 2019Author: HON'BLE SHRI JUSTICE AKIL KURESHI, HON'BLE SHRI JUSTICE SARANG VIJAYKUMAR KOTWAL14 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the title to the property did not pass to the assessee under the MOU. Clauses of the MOU indicated that the transfer of title was contingent upon full payment. The assessee was at best a permissive user until full payment. The court rejected the argument that the forfeited amount of Rs. 90,00,000 could be treated as lease rental. The forfeiture clause was a fixed amount irrespective of the period of use or the installment defaulted, and it was clearly labelled as forfeiture, not rental. The court distinguished the cited judgments, finding them not applicable to the present facts. The IBM World Trace Corporation case involved a lease, and Anjani Kumar Co. Ltd. had brief reasoning without laying down a specific legal proposition applicable here. The court concluded that the forfeited amount was not a revenue loss but related to a capital investment that did not materialize due to default. The appeal was dismissed.

What were the facts?

The assessee, Shri Nandkishor Motilal Shah, filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2009-2010. The assessee had claimed a deduction of Rs. 90,00,000. This arose from a Memorandum of Understanding (MOU) dated August 27, 2008, with Sunshine Enterprises for the purchase of a windmill and land for Rs. 5.71 Crores. The assessee paid Rs. 1 Crore but defaulted on further payments. The MOU was cancelled on February 28, 2009, and the seller forfeited Rs. 90,00,000, returning the balance. The assessee claimed this forfeited amount as a revenue loss, but the Assessing Officer and the ITAT held it to be a capital loss.

What were the issues?

1. Whether, on the facts and circumstances, the ITAT erred in confirming the action of the CIT(A) that the forfeited amount was a capital expenditure and not allowable as revenue expenditure, in the absence of any concrete asset acquired by the appellant? 2. Whether, on the facts and circumstances, the ITAT erred in holding that it was capital expenditure without appreciating that when an assessee incurs a liability under a contract (abandoned project) and no amount is receivable, the said amount incurred is claimable as expenditure in implementing the contract under Section 37(1) read with Section 28(1)? Assessee's Contentions: - The MOU was an agreement to sell. - The assessee was put in possession and no separate rent was charged. - The assessee had commenced power generation operations and offered receipts to tax. Therefore, title vested in the assessee, and depreciation should have been granted. The cancellation of the MOU should be seen as a sale of a capital asset, with adjustments for balancing allowance. Alternatively, if title had not passed, the forfeited amount should be treated as rental charges, a revenue expenditure. - Relied on CIT v. Anjani Kumar Co. Ltd. ([2003] 259 ITR 114 (Raj.)) and IBM World Trace Corporation v. CIT ([1990] 186 ITR 412 (Bom.)), and CIT v. Mahalaxmi Textile Mills Ltd. ([1967] 66 ITR 710 (SC)). Revenue's Contentions: - No specific contentions recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 28(1)

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Cause title — parties, addresses and appearances
1 / 14  904­ITXA­1346­16.odt IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1346 OF 2016 Shri Nandkishor Motilal Shah Ramtanay, Shantishila Society, Erandavane, Law College Road, Pune – 411004. .... Appellant versus The Commissioner of Income Tax, I PMT Building, Shankarsheth Road, Swargate, Pune – 411037. ... Respondent ….... • Mr.V. Sridharan, Senior Counsel a/w Paras Savla a/w Mr.Ravi Sawana a/w S. Sriram i/b. Ashok Gade, Advocate for  Appellant. • Mr.Sham Walve, Advocate for Respondent. CORAM :  AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE :  13th MARCH, 2019.

JUDGMENT : (PER : AKIL KURESHI, J.)

1.

This Appeal is filed by the assessee to challenge the judgment of Income Tax Appellate Tribunal. Following questions are presented for our consideration; “1. Whether on the facts and circumstances of the   case   and   in   law,   the   Hon'ble   ITAT   erred   by Nesarikar CNR No : HCBM020083532016 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

2 / 14 confirming the action of the Ld. CTD(A) that the amount got  forfeited during the course  of  carrying  on  of the business was capital expenditure and not allowable as Revenue Expenditure in the absence of any concrete asset acquired by the appellant ?

2.

Whether on the facts and circumstances of the   case   and   in   law,   the   Hon'ble   Tribunal   erred   in holding   that   it   was   capital   expenditure   without appreciating the legal position that when assessee incurs a liability under a contract (Abandoned project) or in pursuance   of   contract,   no   amount   is   receivable   the assessee is entitled to claim said amount incurred as expeditious   in   implementing   contract   S.   37(1)   r.w.s 28(1) ?”

2.

Brief facts are as under;

The Appellant is an individual. The Appellant had filed the   return   of  income   for  the   year  2009­2010,   in   which the assessee had claimed deduction of a sum of Rs.90,00,000/­. This claim arises in following background;

3.

The assessee had entered into an agreement titled as Memorandum Of Understanding dated 27/08/2008 with one Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

3 / 14 Sunshine   Enterprises   for   purchase   of   Suzlon­made   Windmill along with land on which the same was situated. This entire asset i.e. the land along with installed windmill thereon, was referred in the said MOU as the 'project'. We shall take note on various terms of this MOU at a later stage. For the time being sufficient   to   record   that   the   total   sale   consideration   agreed between  the  parties was Rs.5.71  Crores which  comprised of Rs.50,000/­   towards   the   land   and   rest   towards   the   cost   of windmill and its accessories and parts. The assessee had to make payment in the installments. In the meantime, the assessee was to   be   put   in   possession   of   the   asset   and   would   be   able   to generate   the   electricity   from   the   same.   No   separate   rental charges for this purpose were envisaged. This MOU contained clause   (10)   providing   for   cancellation   of   the   contract   and forfeiture for a sum of Rs.90,00,000/­, if the assessee did not make full payment towards purchase price as per the schedule.

4.

After making initial payment of a sum of Rs.1 Crore, the assessee defaulted in making further payments, upon which the said MOU dated 27/08/2008 was cancelled. The parties Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

4 / 14 executed a further deed of cancellation of MOU on 28/02/2009. The seller forfeited the sum of Rs.90,00,000/­ and returned the rest to the assessee. The assessee contended that the sum of Rs.90,00,000/­ was his revenue loss. The Assessing Officer held that the loss was a capital loss. The Tribunal in the impugned judgment observed that the payment was made pursuant to the said MOU,  which was by way of advance for acquisition of Windmill. The assessee entered into new business of generation of power. The advance was therefore in the nature of capital advance or capital investment. The loss in the present case did not arise during the course of business but from the investment in capital asset.

5.

In   background  of  such  facts,   Mr.   V.   Sridharan, the Counsel   appearing   for   the   Appellant   raised   following contentions; (i) The MOU in question was in nature of agreement to sale; (ii) The assessee was put in possession of the asset Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

5 / 14 pursuant   to   such   MOU.   No   separate   rent   was charged from the assessee. (iii) The assessee had already commenced operation of generating power. In fact receipt from such activity was offered to tax. In such circumstances if as per the agreement, the title can be seen to have   been   vested   in   the   assessee.   The depreciation on such capital asset ought to have been granted, whether the assessee claimed it or not. The cancellation of MOU, can be seen as sale of capital asset, at which time by virtue of the provision   for   balancing   allowance,   adjustment towards written down value and the sale price would   be   adjusted.   On   the   other   had,   if   the agreement in question is seen as one under which the   title   has   not   passed   to   the   assessee,   the amount   of   Rs.90,00,000/­   must   be   treated   as rental charges, clearly a revenue expenditure. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

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6.

In this context, the learned Counsel relied on following judgments ­

(i) In the case of  Commissioner of Income­ Tax Vs. Anjani Kumar Co. Ltd., reported in [2003] 259 ITR 114 (Raj.),  in which Division Bench of Rajasthan High Court had examined a case where the assessee had written off a sum of Rs.52,489/­ on account of advance made to agriculturist for purchase of land. The intention of the assessee was to acquire the   land  to   set   up  a   boilder   factory.   This   however   did   not materialize and the agriculturist refused to return the amount. When the assessee claimed such amount by writing it off in the books of accounts, the Assessing Officer rejected the claim, the Tribunal allowed the claim of the assessee on the ground that since a new project had never matured, the expenditure was in the nature of revenue expenditure. The High Court confirmed the view of tribunal.

(ii) In   case   of  I.   B.   M.   World   Trace Corporation   Vs.   Commissioner   of   Income­Tax,   reported   in Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

7 / 14 [1990]   186   ITR   412   (Bom.),  in   which   Division   Bench   of Bombay High Court considered a case where the assessee had entered into an agreement with one person, who undertook to construct the factory and lease it to the assessee. To facilitate such   construction,   the   assessee   had   advanced   a   sum   of Rs.1,08,088/­   to   the   landlord.   In   the   meantime,   the   person undertaking the construction went bankrupt and the assessee lost the entire advance and claimed it as a business loss. The High Court allowed the claim of the assessee on the ground that the lease would not give advantage of enduring nature and in any   case   what   is   to   be   seen   is,   whether   the   advantage   of enduring nature is in the capital field.

(iii) Reference   was   made   to   the   decision   of Supreme Court in the case of in the case of Commissioner of Income­tax   Vs.   Mahalaxmi   Textile   Mills   Ltd.   reported   in [1967] 66 ITR 710 (SC),  to contend that if a claim of the assessee can be granted under a provision different from one on which such a claim is made, the same should be allowed. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

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7.

We   may   first   summarize   the   relevant   facts.   The assessee desired to start a new business of generation of power through windmill. For such purpose, the assessee entered into an agreement with the seller for acquiring a windmill plant situated on a plot of land. For such purpose, assessee would pay a   total   sum   of   Rs.5.71   Crores.   This   agreement   envisaged   a payment schedule, under which assessee would pay a sum of Rs.30,00,000/­ immediately on execution of the agreement and the balance in installments as provided in the agreement. The assessee would pay interest at the rate of 14% per annum on the outstanding   balance.   In   case   assessee   failed   to   make   such payment, the contract would be terminated and as per clause (10)   of   the   agreement,   the   seller   would   forfeit   a   sum   of Rs.90,00,000/­   out   of   the   payment   already   made   by   the assessee. This clause (10) of the agreement reads as under; “10. It   is   expressly   agreed   between   the   parties that payment terms are the essence of contract.  In case of   any   failure   to   pay   the   agreed   amount   within  the agreed time, the party of the FIRST PART has a right to Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

9 / 14 withdraw / cancel the contract and in such event, the party of the FIRST PART shall be entitled to forfeit an amount of Rs.90 Lacs [Rs. Ninety Lacs Only] and the balance amount, out of total payments received from the party of the SECOND PART, shall be refunded to the party of SECOND PART within one month of withdrawal / cancellation of the contract, with no interest / other costs.   The party of the FIRST PART may condone any delay in the payments made by the party of the SECOND PART and in that case, the party of the SECOND PART shall pay to the party of the FIRST PART interest @ 14 % p.a. on the amount paid after the due date for the period for which the payment is delayed.”

8.

Other   relevant   terms   of   the   said   agreement   are   as follows; “14. The party of the SECOND PART will bear the stamp duty expenses as well as all other expenses related to the transfer of the project.

15.

The party of the FIRST PART shall sign all the documents required to transfer The Project in the name of the party of the SECOND PART on receipt of the initial payment of 30 Lacs as mentioned above. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

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16.

The party of the FIRST PART shall hand over all the original documents in his possession related to The Project to the party of the SECOND PART on receipt of the full and final payment.

17.

The   party   of   the   FIRST   PART   shall,   on receipt   of   the   final   payment,   put   the   party   of   the SECOND PART in possession of The Project and the party of the SECOND PART shall acknowledge having received the possession of The Project from the party of the FIRST PART.”

9.

The analysis of these terms would suggest that title of the property in  question, was  not  to  pass  to  the  assessee  till full payment. As per clause (14), the assessee would bear the stamp duty expenses and other related expenses for transfer of the project. In terms of clause (16), the first party would hand over   all   original   documents   relating   to   the   project   to   the assessee 'on receipt of full and final payment'. As per the clause (17),   the   seller   on   receipt   of   such   final   payment,   put   the assessee in possession of the project and the assessee would acknowledge  having  received  the   possession   from  the seller. Thus, all these clauses envisaged the transfer of the title only Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

11 / 14 upon the full payment of the sale consideration as per the MOU. Even otherwise, title in the immovable property would not pass otherwise   than   under   a   registered   document   which   is compulsorily registerable. It may be that the assessee was put in possession   at   the   time   of   execution   of   the   agreement   and allowed the use of the project also. Clause (17) reiterates that the seller would put the assessee in possession upon payment of the   final   installment.   This   clause   necessarily   refers   to   the possession with ownership. Till then, the assessee can at best be seen as a permissive user.

10.

Under   such   circumstances   we   are   not   required   to consider  the  alternative  scenario  presented  before   us by the learned Counsel for the assessee, as to what will be the position if the title in the asset had passed on to the assessee. Even then, one would briefly comment on such hypothetical situation. In this   case,   in   order   to   claim   depreciation,   the   assessee   must establish basic facts. Any such claim is necessarily based on facts and law. Whether the original owner in the meantime claimed Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

12 / 14 depreciation, when was the asset installed, when was the asset put to use are some of the factual aspects needed to be gathered before the claim of depreciation could have been granted. Such a claim is raised for the first time before us. The assessee cannot raise such a contention for the first time before the High Court, when no factual foundation was laid before the authorities below.

11.

Proceeding now on the basis of our conclusion that the title in the property had never passed on to the assessee under the MOU, the question to be answered is whether the sum of Rs.90,00,000/­ retained or forfeited by the seller can be treated as lease rental. The question has to be answered in the negative. Clause (10) of the agreement provides that in case of any failure to pay the agreed amount within the agreed time on the part of the assessee, the seller would withdraw or cancel the contract and in such event, the seller would be entitled to forfeit an amount of Rs.90,00,000/­ and return the balance out of the sum already paid. The salient feature of this clause is that the sum of Rs.90,00,000/­ to be retained by the seller is fixed irrespective of which installment the assessee failed to pay, for how long the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

13 / 14 possession and use of the asset is retained by the assessee and under   what   circumstances   the   payment   could   not   be   made. Linking of sum of Rs.90,00,000/­ to be retained by seller on account of default of payment by the assessee, to the lease rental charges, would be opposed to the forfeiture clause having no relation to the period for which such asset was put to use by the assessee. In a given case, the asset may remain with the assessee for only one month before the forfeiture clause may kick in and in a given case, the assessee may default in the last installment and till then continue to use the asset for generation of power. In either case, the forfeiture of the amount would remain the same   i.e.   Rs.90,00,000/­.   Quite   apart   from  this,   clause   (10) refers to forfeiture of the amount and not a lease rental, nor such intention can be gathered from any other clause contained in the MOU. The MOU was one integrated contract for sale of the asset and permissive user of the asset till payment of full installments. The lease rental if at all was embedded in the contract terms. There was no separate lease rental envisaged, none can be culled out from the terms of the contract. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43

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12.

The decision of this Court in case of  I. B. M. World Trace Corporation (supra) was rendered in the background of the fact where the assessee had attempted to acquire a property on   lease   and   in   the   process   suffered   loss.   It   was   in   this background the Court had held that the loss was of revenue nature.   The   Court   was   of   the   opinion   that   the   lease   for   a particular period would not amount to advantage of enduring nature and even if it results into any advantage of enduring nature,   same   wold   not   always   result   in   capital   outlay.   This judgment is therefore clearly distinguishable. The decision of Rajasthan High Court in case of Anjani Kumar Co. Ltd. (supra) records brief reasons for dismissing the revenue's appeal against Income   Tax   Appellate   Tribunal.   It   does   not   lay   down   any proposition in law, which can be applied in the present case. In any case, we have given our detailed reasons for arriving at our conclusions in law.

13.

In the result, the Income Tax Appeal is dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:34:43 Powered by TCPDF (www.tcpdf.org)

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