M/S. ZAMBAD MOUNT VIEW PROJECT PVT. LTD.,,AURANGABAD vs. INCOME-TAX OFFICER,,

आदेश / ORDER

PER VIKAS AWASTHY, JM :

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-2, Aurangabad dated 20-06-2016 for the assessment year 2012-13.

ITA No.1856/PUN/2016, A.Y. 2012-13

assessment year on 21-09-2012 declaring total income of Rs.2,395/-. The

case of the assessee was selected for scrutiny through CASS, accordingly,

statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter

referred to as “the Act”) was issued to the assessee on 23-09-2013. The

assessee had entered into a MOU with Deogiri Sahkari Sakhar Karkhana

Ltd. (Deogiri SSK Ltd.) for settling the claim of creditors. The assessee paid

Rs.1,51,00,000/- to the creditors of Deogiri SSK Ltd. The assessee had

purchased land of Deogiri SSK Ltd. through DRT for a consideration of

Rs.17,01,56,625/-. The said sale was cancelled by the Hon’ble High Court Rs.17,01,56,625/-. The said sale was cancelled by the Hon’ble High Court

in writ proceedings by interested parties objecting sale of land.

Consequently, the entire transaction with Deogiri SSK Ltd. failed. Though

by virtue of High Court order the assessee could recover sale consideration

paid for purchase of land, the assessee allegedly could not recover the

amount paid to settle the claim of creditors of Deogiri SSK Ltd.

Subsequently, the assessee sold interest in creditors to its group concern Subsequently, the assessee sold interest in creditors to its group concern

M/s. Zambad Infrastructure Limited for Rs.31,60,247/-. The balance

amount Rs.1,19,39,753/- was written off in the books by assessee and

offered Rs.31,60,247/- as income. The Assessing Officer held that the

amount written off by the assessee Rs.1,51,00,000/- is not acceptable as

no effort was made by the assessee to recover the same. Further, the

amount was paid with a motive to acquire a capital asset, therefore, all amount was paid with a motive to acquire a capital asset, therefore, all

expenses in relation thereto should be capitalized. The Assessing Officer

made addition of entire amount Rs.1,51,00,000/-.

Aggrieved against the assessment order dated 28-03-2015, the

assessee filed appeal before the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) vide impugned order in

principle upheld the findings of Assessing Officer in treating the amount

written off by the assessee as capital. However, the Commissioner of

ITA No.1856/PUN/2016, A.Y. 2012-13

Income Tax (Appeals) gave part relief in restricting the disallowance to

Rs.1,91,39,753/- i.e. after reducing the amount of Rs.31,60,247/-

recovered by the assessee on assigning the rights to recover the amount recovered by the assessee on assigning the rights to recover the amount

from creditors to M/s. Zambad Infrastructure Limited. Against the order of

First Appellate Authority, the assessee is in second appeal before the

Tribunal and has assailed the order of Commissioner of Income Tax

(Appeals) on following grounds :

“1. The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing the advance written off of Rs.1,19,39,753/- debited to Profit & Loss Account while off of Rs.1,19,39,753/- debited to Profit & Loss Account while computing taxable income of the Appellant.

that the assessee had purchased land of Deogiri SSK Ltd. through Debt

Recovery Tribunal (DRT) for a consideration of Rs.17,01,56,625/-. Apart

from above the assessee had agreed to settle the claim of creditors of

Deogiri SSK Ltd. amounting to Rs.1,51,00,000/- in order to seek consent

for sale of land. The creditors to whom payments were made include;

International Assets Reconstruction Co. Pvt. Ltd. (IARC) (Rs.40,00,000/-)

and Assistant Commissioner of PF (Rs.1,01,00,000/-). The said amount

was directly paid by the assessee to the aforesaid creditors of Deogiri SSK

Ltd. The DRT issued Sale Certificate in respect of the land in favour of

assessee and the assessee paid consideration fixed by DRT. The order of

DRT was challenged before the Hon’ble Bombay High Court by interested

parties. The Hon’ble High Court set aside the order of DRT confirming sale

of land to assessee. Resultantly, the amount paid by assessee towards

consideration for purchase of land along with interest was refunded to the

ITA No.1856/PUN/2016, A.Y. 2012-13

assessee. However, the amount of Rs.1,51,00,000/- directly paid by the

assessee to the creditors of Deogiri SSK Ltd. could not be recovered. The

assessee in order to avoid protracted litigation assigned the rights to assessee in order to avoid protracted litigation assigned the rights to

recover Rs.1,51,00,000/- from Deogiri SSK Ltd. to M/s. Zambad

Infrastructure Limited for Rs.31,60,247/- and claimed the balance amount

of Rs.1,19,39,753/- as loss. The said amount was written off as bad debt

by the assessee in its books. The ld. AR submitted that Deogiri SSK Ltd.

was under financial crunch and could not pay its liabilities, therefore, it

was before the DRT. The sugar factory was shut down and there was was before the DRT. The sugar factory was shut down and there was

remote possibility of restarting the same in near future. There were

pending recovery suits from the creditors in DRT. Thus, there was no way

the assessee could have recovered the amount of Rs.1,51,00,000/- paid on

behalf of the Deogiri SSK Ltd. to its creditors. The assessee paid the said

amount to clear encumbrances and to secure the transaction of Sale of

land through DRT. Since, the Sale of land executed in favour of the land through DRT. Since, the Sale of land executed in favour of the

assessee through DRT was set aside by the Hon’ble Bombay High Court,

the entire transaction could not materialize. The assessee suffered loss on

account of non recovery of payments made to the creditors of Deogiri SSK

Ltd. The ld. AR submitted that after the issuance of Sale Certificate by

DRT the name of assessee was entered in the revenue records. The ld. AR

referred to pages 77 to 85 of the paper book i.e. 7/12 extracts indicating referred to pages 77 to 85 of the paper book i.e. 7/12 extracts indicating

name of the assessee in the revenue records. The ld. AR submitted that

the loss suffered by the assessee in respect of payments made to creditors

of Deorigi SSK Ld. is on revenue account. To support his submissions the

ld. AR placed reliance on the following decisions :

i. Indo Rama Synthetics (I) Ltd. Vs. Commissioner of Income Tax, 333

ITR 18 (Delhi); ITR 18 (Delhi);

ii. Commissioner of Income Tax Vs. Priya Village Roadshows Ltd., 332

ITR 594 (Delhi);

ITA No.1856/PUN/2016, A.Y. 2012-13

iii. Commissioner of Income Tax Vs. Anjani Kumar Co. Ltd., 259 ITR

114 (Raj.);

iv. iv. Chemplast Sanmar Ltd. Vs. Assistant Commissioner of Income Tax, Chemplast Sanmar Ltd. Vs. Assistant Commissioner of Income Tax,

97 taxmann.com 347 (Madras);

v. Binani Cement Ltd. Vs. Commissioner of Income Tax, 380 ITR 116

(Calcutta);

vi. M/s. Pik Pen Private Limited Vs. Income Tax Officer in ITA No.

6847/Mum/2008 for assessment year 2005-06 decided on

28-01-2010; 28-01-2010;

vii. Aditya Birla Power Company Limited Vs. Assistant Commissioner of

Income Tax in ITA No. 1115/Mum/2012 for assessment year

2007-08 decided on 07-09-2018.

vehemently defended the order of Commissioner of Income Tax (Appeals) in vehemently defended the order of Commissioner of Income Tax (Appeals) in

holding the amount paid by the assessee to the creditors of Deogiri SSK

Ltd. as capital expenditure. The ld. DR submitted that in the first instance

the assessee cannot claim the amount as bad debt as the amount was paid

by M/s. Zambad Infrastructure Limited a sister concern of the assessee.

The assessee has not placed on record any agreement or MOU to show that

the assessee would become the owner of land after execution of Sale the assessee would become the owner of land after execution of Sale

approved by the DRT. The ld. DR further submitted that if at all the

contentions of the assessee are to be believed that the amount was paid on

behalf of the assessee, the same is capital in nature as it was paid to

acquire capital asset. If the assessee has suffered any loss in the

transaction it has to be capitalized. The assessee in no manner can be

allowed to claim the expenditure/loss on revenue account. allowed to claim the expenditure/loss on revenue account.

ITA No.1856/PUN/2016, A.Y. 2012-13

sides and have perused the orders of authorities below. The solitary issue

raised in the appeal by the assessee is against rejecting assessee’s claim of raised in the appeal by the assessee is against rejecting assessee’s claim of

writing off of Rs.1,19,39,753/- holding it to be capital in nature. Whether

the expenditure incurred by the assessee on payments made to creditors of

Deogiri SSK Ltd. as part of transaction for acquiring land is capital or

revenue is a mixed question of law and fact.

incorporated with a special purpose for generating funds and acquiring

land of Deogiri SSK Ltd. that was under litigation pending with DRT. The

DRT vide order dated 14-05-2010 granted permission for sale of land

owned by the Deogiri SSK Ltd. Since, Zambad Infrastructure Ltd. was

unable to generate funds requisite funds for purchasing land, the assessee

company were incorporated particularly with this object on 26-07-2010. A company were incorporated particularly with this object on 26-07-2010. A

perusal of certificate of sale dated 04-11-2010 issued by the Aurangabad

Bench of DRT at pages 68 to 70 of the paper book shows that the

certificate has been issued in favour of assessee for purchase of land

admeasuring 62H 52R. The possession of aforesaid land was handed over

to assessee vide Possession/Kabza Pavti dated 11-11-2010 at pages 71 to

73 of the paper book. The name of assessee was entered in Revenue 73 of the paper book. The name of assessee was entered in Revenue

records (7/12 extracts). In the meantime the order of DRT was challenged

before the Hon’ble Bombay High Court by the interveners/interested

parties. The Hon’ble High Court vide order dated 29-11-2011 set aside the

order of Tribunal in Writ Petition No. 10934 of 2010. Consequent to the

order of Hon’ble High Court the amount deposited by assessee/on behalf of

assessee in respect of the land in question Rs.17,01,56,625/- was paid assessee in respect of the land in question Rs.17,01,56,625/- was paid

back to the assessee along with interest thereon Rs.1,38,16,181/-. Thus,

the transaction of purchase of land by the assessee did not fructify.

ITA No.1856/PUN/2016, A.Y. 2012-13

Rs.1,51,00,000/- was paid by M/s. Zambad Infrastructure Limited directly

to the creditors of Deogiri SSK Ltd. which included IARC, Mumbai and to the creditors of Deogiri SSK Ltd. which included IARC, Mumbai and

Assistant Commissioner of Provident Fund. The said payment was made

for obtaining consent for sale of land from creditors. However, after

cancellation of transaction for sale of land, the assessee could not recover

the said amount from Deogiri SSK Ltd. as it was under financial distress.

The assessee relinquished its claim over the creditors and assigned the

rights to recover Rs.1,51,00,000/- rights to recover Rs.1,51,00,000/- from Deogiri SSK Ltd. against from Deogiri SSK Ltd. against

consideration of Rs.31,60,247/- to Zambad Infrastructure Ltd., its parent

company. The assessee thereafter claimed loss of Rs.1,19,39,753/-

(Rs.1,51,00,000/- - Rs.31,60,247/-) and decided to write off the same. The

Department disallowed assessee’s claim holding the expenditure/loss on

capital account. The dispute in present appeal is whether the

expenditure/loss of Rs.1,19,39,753/- is on capital or revenue account. expenditure/loss of Rs.1,19,39,753/- is on capital or revenue account.

incurring expenditure of Rs.1,51,00,000/-. As is evident from the order of

DRT the aforesaid payment is not part of consideration fixed for sale of

land. The assessee paid Rs.1,51,00,000/- over and above the price fixed

by DRT for sale of land. The assessee paid said amount to the creditors to by DRT for sale of land. The assessee paid said amount to the creditors to

ensure that the transaction for purchase of land is carried out without

objection from any quarters. The aforesaid amount was paid by the

assessee to discharge statutory liabilities of Deogiri SSK Ltd. The amount

was paid to IARC Rs.40,00,000/- and Assistant Commissioner of Provident

Fund Rs.1,01,00,000/- and Deogiri SSK Ltd. Rs.5,00,000/- to pay some

other creditors. The said amount was paid in furtherance of the object of other creditors. The said amount was paid in furtherance of the object of

acquiring land but not as part of consideration for acquiring capital asset.

No capital asset was acquired by the assessee by virtue of such payment.

ITA No.1856/PUN/2016, A.Y. 2012-13

The assessee paid the amount for unhindered execution of transaction of

sale of land. In our considered views, the amount of Rs.1,51,00,000/- paid

by assessee is not capital in nature and is allowable u/s. 37(1) of the Act. by assessee is not capital in nature and is allowable u/s. 37(1) of the Act.

Deogiri SSK Ltd. to its parent company Zambad Infrastructure Ltd. for

Rs.31,60,247/- and has offered the same to tax, the remaining amount i.e.

Rs.1,19,39,753/- is allowable as business expenditure u/s. 37(1) of the

Act. Act.

(supra), where the assessee had paid advance for acquiring land to set up a

factory but failed to recover the said advance, as the transaction failed to

materialize the Hon’ble Rajasthan High Court held that when land was not

acquired, no capital asset had come into existence, therefore, the payment acquired, no capital asset had come into existence, therefore, the payment

of advance is to be allowed as business loss.

Similar view was taken by the Mumbai Bench of the Tribunal in the

case of M/s. Pik Pen Private Limited Vs. Income Tax Officer (supra)

following the ratio laid down in Commissioner of Income Tax Vs. Anjani

Kumar Co. Ltd. (supra).

Vs. Commissioner of Income Tax (supra) has held that the expenditure

incurred on construction of new factory which was subsequently

abandoned, is allowable u/s. 37 of the Act.

pedestal, as the payment made by assessee to the creditors of Deogiri SSK

9 ITA No.1856/PUN/2016, A.Y. 2012-13

Ltd. was not part of consideration for acquiring capital asset. Thus, in view of the facts of the case and various case laws discussed above, the appeal of assessee deserves to be allowed. The impugned order is set aside appeal of assessee deserves to be allowed. The impugned order is set aside and the appeal of assessee is allowed.

Order pronounced on Monday , the 14th day of January, 2019.

Sd/- Sd/- (R.S. Syal) (Vikas Awasthy) VICE PRESIDENT JUDICIAL MEMBER पुणे/ Pune; �दनांक/ Dated : 14th January, 2019 RK आदेश क� ��त�ल�प अ�े�षत/ Copy of the Order forwarded to : अपीलाथ� अपीलाथ�/ The Appellant. 1. ��यथ�/ The Respondent. 2. आयकर आयु�त (अपील) / The CIT(A)-2, Aurangabad 3. 4. The Pr. Commissioner of Income Tax-2, Aurangabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, 5. पुणे/ DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल/ Guard File. 6. //स�या�पत ��त// True Copy// आदेशानुसार/ BY ORDER,

�नजी स�चव / Private Secretary, आयकर अपील�य अ�धकरण, पुणे/ ITAT, Pune