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the order of ld. Commissioner of Income-tax (Appeals)-52, Mumbai [ld.
Commissioner (Appeals)] dated 01.09.2015, which in turn arises from the assessment order dated 30.03.2014 passed by the assessing officer under section 143(3) of the Act for Assessment Year 2012-13.
The facts of the case discussed in brief. The assessee is a Private Limited Company and is engaged in the business civil construction, real estate and & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. property development. A search and seizure action under section 132 of the Act was carried out on 26.05.2011 by DDIT (Investigation) –III, Mumbai at the registered office of the company and again on 22.09.2011 by Unit-IV at the business premises of assessee-company as well as on residential premises of the Directors of the assessee-company. During the course of search, unaccounted cash and jewellery and incriminating documents allegedly indicating undisclosed income were found and seized. The assessee filed its regular return of income for assessment year 2012-13 on 30.03.2013 declaring total income at Rs. Nil under the normal provision of the Act. The assessment for the AY 2012-13 was completed on 30.03.2014 under section 143(3). The Assessing Officer while passing the assessment order made various additions and disallowances including disallowance of claim for write off of loss of Rs. 19 Crores relating to a project situated at Fort and disallowance of claim for write off of loss of Rs. 15 Crores relating to a project situated at Powai. In the appeal filed before the ld. Commissioner (Appeals), the disallowance of write off of Rs. 19 Crores relating to project at Fort was deleted. However, the disallowance of write off of Rs.15 crores relating to Powai project was sustained by Ld CIT(A).
Therefore, aggrieved by the order of ld. Commissioner (Appeals), both the parties have filed their respective appeals on the issues decided against each of them. & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
We shall first take up the appeal filed by the assessee. The assessee has raised following effective ground of appeal: 1. The learned Commissioner (Appeals) has erred in law and in fact in confirming disallowance of loss of Rs. 15,00,00,000/- on account of project situated at Powai, Mumbai, paid to M/s. Sai Lee Developers.
We have heard the ld. Authorized Representative (AR) of the assessee and Ld. Departmental Representative (DR) for the Revenue and perused the materials available on record. The facts relating to the above said issue are discussed in brief. The AO disallowed the claim of write off of Rs.15.00 crores relating to Powai project and the Ld CIT(A) has confirmed the same.
The ld. AR of the assessee submits that in the year 2008, the assessee company paid Rs.12 Crores to M/s Sai Lee Developers and Rs.3.00 Crores to M/s Sai Lee Infotech, an associate concern of Sai Lee Developers for the purpose of acquiring development rights in a SRA project situated at Powai. Thus the assessee paid a sum of Rs. 15 Crore in aggregate in anticipation for a formal Joint venture agreement. According to the assessee, M/s Sai Lee Developer also acknowledged receipt of case 15 Crores for Powai project.
The above said plot was originally owned by M/s Forbes Forbes & Campbell Ltd in the year 1964. The development rights of the plot changed hands from time to time and in the year 2001, M/s Sai lee Developers got the right to develop the plot. Accordingly, it submitted a & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. proposal to Slum Development Authority (SRA) for development of the plot. After allocation of area for welfare purposes, it was entitled to a saleable area of approximately 5,50,000 sq.ft. Till 2007, M/s Sai lee Developers executed the project on its own. Later it entered into a joint venture agreement with M/s Chandiwala Enterprises on 08-08-2007 for continuing development work of the plot. As per the joint venture agreement, M/s Sai Lee Developers and M/s Chandiwala Enterprises would share the profit in the ratio of 47.50% : 52.50%. At that point of time, it was agreed that they are legally obliged to construct and handover 2,83,000 sq.ft., to other stake holders and the saleable area available with them was 3,15,500 sq.ft. In the mean time, M/s Chandiwala Enterprises assigned its rights to M/s Great Deal Developers P Ltd on 18-01-2008, as per which M/s Great Developers claimed that it is the assignee for the entire project.
The claim so made affected the rights of M/s Sai Lee developers and hence it disputed the same and accordingly issued notice of termination of Joint venture agreement it entered with M/s Chandiwala Enterprises. Arbitration petition was also filed by M/s Sailee Developers against the above said two parties. At this stage, the assessee stepped into this project and paid a sum of Rs.15 crores to M/s Sai lee group in the year 2008, as stated above, in anticipation of a joint venture agreement.
However, on 18th June 2009, M/s Sai lee Developers filed a police complaint against the assessee company alleging that assessee has forcibly & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. taken the possession of Powai property. The Police protection was requested claiming that the right of exclusive possession of the said property belongs to Sai Lee Developers. A similar Police complaint was filed again on 1st July 2009 alleging that the assessee had sent some men to forcibly occupy the said property. Thereafter on 3rd July 2009, M/s Sai Lee Developers withdrew the suit filed against M/s Chandiwala Enterprises and M/s Great Deal Develoopers P Ltd and instead, filed a Civil Suit against the assessee company claiming that the assessee has paid the sum of Rs. 12 Crores for a joint-venture project at Thane and not for Powai property. In the suit, M/s Sai Lee Developers pleaded that total consideration to be paid by the assessee for Thane project was Rs. 125 Crores and the assessee has so far paid Rs.12 crores only. M/s Sai Lee Developers also disputed the receipt given by it acknowledging the money of Rs.12 crores received by it, by contending that the assessee had fraudulently obtained signature on the receipt voucher, which mentioned Powai project. Thus the case of M/s Sai Lee developers was that the advance amount was paid by the assessee for Thane project and not for Powai Project and further the assessee is trying to obtain forcible possession of the Powai property.
The ld. AR for the assessee further submits that the Powai project is still under litigation and the court has ordered Status quo. M/s Sai Lee was also not ready to return the amount paid by the assessee. In such circumstances the assessee company obtained a legal opinion from M/s P.S Legal, ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. Advocates and Solicitors. The aforesaid Solicitors, vide their letter dated 05-12-2011, expressed opinion that the recovery of Rs. 12.00 Crores and the additional amount of Rs. 3.00 Crores which are subject matter of dispute is doubtful. It was further opined that the project is laden with stringent ULC conditions and further many stake holders are having rights over constructed areas. Since the project was approved by SRA, it would not be possible for the assessee to enter into any arrangement with M/s Sai Lee Developers without obtaining permission from SRA authorities, it was opined by Solicitors. The Solicitors further opined that only recourse now open to the assessee is to continue with existing litigation and also file a fresh civil suit praying for a decree against Sai Lee Developer and Sai Lee Infotech that a formal agreement be directed to be executed by them in favour of the assessee. On the basis of Legal advice, the assessee company came to the conclusion that, unless a clear title to Powai Property and SRA approval for the change of developer is obtained, the project cannot be proceeded with. The case of the assessee is that it had spent money on the said project in the course of its business, i.e. to acquire the property with the intention to develop and sell the same. However, due to the circumstances prevailing in this case, there was great deal of uncertainty in obtaining rights over the Powai project and accordingly it was felt that the money spent for the above said project was irrecoverable and completely lost. Therefore, in the best fitness of the business, the assessee company & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. decided that it would not be rational to consider the amount of Rs. 15.00 Crores spent on Powai as recoverable. Even if the claim of M/s Sai Lee developers that the above said amount was paid towards Thane Project is accepted as correct for a moment, the assessee is not in a position to pay the balance amount of Rs.115 crores as alleged to be payable. The Ld A.R submitted that M/s Sai Lee developers was also not ready to return the above said amount of Rs.15 crores. Accordingly a conscious decision was taken by the Board of directors to write it off as business loss. It was submitted that all the documentary evidences were furnished before the lower authorities in support of the claim.
The Ld A.R submitted that the lower authorities have failed to consider the documents and explanations placed before them explaining the real dispute. The observation of learned Commissioner (Appeals) that there is nothing to suggest that amount is irrecoverable from Sai Lee Developers is wholly untenable. The assessee cannot wait for an indefinite period, i.e., till the issue/dispute is finally decided by Supreme Court to take a decision in this matter. Hence the assessee, in its Board of Directors meeting held on 4th January 2012, has decided to write off the advance amount as business loss. The copy of the Board Resolution is also placed on record. The observation of learned Commissioner (Appeals) that the assessee never tried to recover the amount from the said party or the decision of assessee to write-off the amount is premature is absolutely untenable. It was ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. submitted that the revenue authority cannot be allowed to sit on the chair of businessman and regulate the manner of conducting business. It was further submitted that the lower authorities has not doubted the genuineness of transaction or the payment made to Sai Lee developer/infotech. The said parties are also not related parties. The amount was spent in the ordinary course of business. Accordingly, the Ld A.R contended that the claim for deduction of Rs.15.00 crores pertaining to Powai project loss should be allowed. In support of his contentions, the landed AR of the assessee relied upon the decision of Bombay High Court rendered in case of CIT Versus Wackhardt International Ltd [2009] 314 ITR 11(Bombay), CIT Versus Goodlass Nerolac Paints Ltd [1990] 188 ITR 1(Bombay) and the decision of Tribunal in Kyati Realotrs Private Limited Versus ACIT in dated 4th March 2016.
On the other hand the ld. DR for the revenue supported the order of the authorities below passed on this issue. The ld. DR for the revenue further submits that the assessee could not substantiate its claim before the lower authorities. He submitted that the assessee has not filed any documentary evidence to substantiate his claim even before Tribunal. The assessee claims to have not entered into any agreement when the payment of Rs.15 crores was made. The various decisions cited by assessee are distinguishable on the facts of the present case. The assessee has not given any compelling reason or circumstances to write off the claim. The amount ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. was written-off by the assessee only to avoid the legitimate tax to the revenue. The dispute between the assessee and M/s Sai Lee Developer is still pending in the Court of law and not finally concluded. Hence the claim of the assessee is premature. In support of his submissions the ld DR for the revenue relied on the following decisions (a) Embassy Classic P Ltd vs. ACIT (7 ITR (T) 287)(Bang.) (b) Maddi Venkatraman & Co. Vs CIT (SC dated 02.12.1997) (c) Indian Aluminum Company Vs CIT (AIR 1972 SC1880) (d) CIT Vs Nainital Bank Ltd (AIR 1965 SC 1227) (e) Assam Pesticides and Agro Vs CIT (227 ITR 846) (Gau).
10. In the rejoinder, the Ld A.R submitted that the assessee has paid the advance amount of Rs.15 crores in the year 2008 and till date nothing has been received back. No further development has also taken place. He further submitted that M/s Sai Lee Developers/infotech are not related parties in order to doubt the genuineness of the deal. In fact, the tax authorities have not doubted the genuineness of the deal at all. The Ld A.R submitted that the claim of the assessee can be viewed from another angle. He submitted that, since the assessee is engaged in real estate business, the right over the land is actually “Stock in trade” for the assessee. Accordingly, as per the Accounting standard for Valuation of Inventories, the stock in trade should be valued at the year end at cost or market value, whichever is less. In the instant case, in view of the disputes and stringent ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
SRA regulations, the Solicitors have expressed the view that the right of the assessee over the project cannot be said to have been created. Further, they have expressed the view that the very purpose of payment is being disputed by M/s Sai Lee Developers, it can never be said that the said sum would either be recovered or preserved in project. Under these circumstances, the market value of the right of the assessee should be taken as NIL, in which case also the entire amount of Rs.19 crores would have been allowed as deduction. The Ld A.R further submitted that the Board of Directors usually review the status and viability of all it projects in their meeting.
Accordingly, in their meeting held on 04-01-2012, the Board of directors has reviewed the status and viability of all pending projects. Inviting our attention to the copy of Minutes of Board Meeting, the Ld A.R submitted that the Board has altogether examined the status of 44 projects. Inviting our attention to the copy of Minutes of Board Meeting, he submitted that many projects were considered to be good. However, investments aggregating to Rs.117.08 crores were considered to be not recoverable.
The Board took note of the fact that the applicable Accounting standards mandate that an enterprise must ensure that its assets are carried at no more than their recoverable amount. Accordingly the Board decided to write off the amount of Rs.117.08 crores. The Ld A.R submitted that the assessing officer has accepted the write off to the tune of Rs.83.08 crores and did not accept the write off of Rs.34 crores (15 crores + 19 crores). However, the & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. Ld CIT(A) has deleted the addition of Rs.19 crores. Accordingly, the Ld A.R submitted that it is a conscious decision taken by the Board of directors on commercial considerations. Accordingly he contended that the loss of Rs.15.00 crores claimed by the assessee should be allowed.
11. We have considered the rival submissions of the parties on this issue and have gone through the orders of the lower authorities. The assessing officer has taken the view that, in the business of real estate, such kind of disputes in property dealing is very common. The AO has further taken the view that the project would commence in future, if the on-going dispute is settled in favour of the assessee. The assessing officer also took the view that the writing off of the whole project merely because of a dispute/litigation would not be a prudent business practice. He also observed that the dispute is with regard to the project and not with regard to payment made by the assessee. He also took the view that, even if the assessee loses its claim over Powai Property, it could still have right over Thane property.
Accordingly the assessing officer took the view that, till the conclusion of the litigation, the amount paid by the assessee cannot be treated as Loss.
Accordingly the AO disallowed the claim for deduction of loss of Rs.15.00 crores relating to Powai Project.
12. Before ld. Commissioner (Appeals), the assessee urged the similar contentions as submitted before us. The learned Commissioner (Appeals) accepted the fact that the amount of advance of Rs.15 crores paid by & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. assessee was not questioned by M/s Sai Lee Developers. The learned Commissioner (Appeals) also took the view that there is nothing to suggest that M/s Sai Lee Developers has refused to return the amount or it is not the case that it does not have any asset from which recovery of above said amount could be made through legal channels. The Ld CIT(A) also took the view that the assessee does not appear to be making efforts to recover the above said amount of Rs.15.00 crores. According to Ld CIT(A), what the assessee is trying to say is that they need to shell out a further amount of Rs.110 crores to acquire development rights in Thane Project. According the ld CIT(A), given the fact that the real estate projects are usually complicated, the assessee cannot simply write off any such advance the way it wants, especially in the absence of any compelling circumstances or reasons. The Ld CIT(A) further observed that the writing off of entire amount as expenditure during the year has impact upon the net taxable income of the year and hence this issue becomes an important issue from taxation point of view. The Ld CIT(A) accepted the contentions of the assessee that it is prerogative of the assessee to decide the manner in which a business is to be conducted. However he took the view that the business cannot be run in a way to deliberately reduce the taxable income.
Accordingly the ld CIT(A) concluded that the claim of the assessee is premature. Accordingly the Ld CIT(A) has confirmed the disallowance made by the AO. & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
In the present case, the tax authorities have not disputed the payment of Rs. 15 Crores made by the assessee to Sai Lee Developers. There is also no dispute that the assessee has made the payment in the ordinary course of its business activity for acquiring the development right. We have noted that the assessee has explained all the facts in detail before ld. Commissioner (Appeals) as narrated/extracted by him in para-14 of the impugned order.
For the sake of convenience, the relevant contentions made by the assessee before Ld CIT(A) are extracted below:-
“61. Vide the aforementioned agreement, the said parties agreed to share the profits from the project in the following ratio: Particulars Percentage Profits M/s. Sai Lee Developers 47.5% M/s. Chandiwala Bnierorises 52.5%
Further, in the said joint venture agreement the parties have agreed that they are under legal obligation to construct and hand over certain built area to the following parties: Sr. Name of Party Area (Sq.ft.) 1 Manoranian Builders & 156,000 Developers Pvt. Ltd. Shree Siddhiuinauak Developers 20,400 Yarshraj Realtors Pvt. Ltd. 53,300 Shri. Bhaatuaniibhai Bhanushali 20,500 Acme Sthapati Ltd. 32,800 Total 2,83,000
Thus, vide the said agreement it was agreed by the parties that due to the above, the said plot of land has encumbrances to the extent of approx. 2,90,000 sq. ft. Further, they agreed that the commercially exploitable area available with them was approx. 3,15,500 sq. ft.
Later, vide deed of assignment dated 18th January 2008, M/s. Chandiwala Enterprises assigned their rights of development to M/s, Great Deal Developers Private Limited. Consequently, by virtue of the said assignment, M/s. Great Deal Developers Private Limited claimed to be assignee of the 13 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
entire project. However, M/s. Sai Lee Developers disputed the same and issued notice of termination of the Joint Venture agreement between itself and M/s. Chandiwala Enterprises.
M/s. Sai Lee Developers also filed an Arbitration Petition No. 213/2009 against M/s. Chandiwala Enterprises and M/s. Great Deal Developers Private Limited.
In the meanwhile, the appellant had paid Rs. 12 crores to M/s, Sai Lee Developers and Rs. 3 crores to M/s, Sai Lee Infotech. (being the associate concern of M/ s. Sai Lee Developers) for acquiring the development rights of the said project situated at Powai. Further, the said sum was paid in anticipation of a formal Joint Venture agreement. The receipt acknowledgment from M/s. Sai Lee stating that the payment is received towards Powai project is enclosed herewith for your perusal (copy enclosed). It may be noted that in the receipts M/s. Sai Lee Developers have acknowledged that they have received the said sum towards Powai projects.
On 18th June 2009, M/s. Sai Lee Developers filed a police complaint against the company alleging forcible possession of the said property. The police protection was requested claiming that the right of exclusive possession of the said property belongs to M/s. Sai Lee Developers. Also, similar police complaint was filed against the appellant on 1st July 2009 alleging that they had sent some men to forcibly occupy the property under consideration.
On 3rd July 2009, M/s. Sai Lee Developers withdrew the suit filed against M/s. Chandiwala Enterprises and M/ s. Great Deal Developers Pot. Ltd and filed a suit against the appellant company.
In July 2009, M/s. Sai Lee Developers filed suit against the company claiming that the appellant had paid the said Rs. 12 crores towards a joint venture project at Thane. It was alleged that the total consideration to be paid by the appellant towards the Thane project was Rs. 125 crores. In the said suit M/s. Sai Lee Developers claimed that the said amount was payable by the company to various plot owners out of which only Rs. 12 crores was paid so far. Further, it was alleged that the appellant had fraudulently acquired the signature on the receipt voucher claiming it to be towards Powai project. Also, in the said suit M/s. Sai Lee Developers have admitted receipt of Rs. 12 crores but denied that it was towards the Powai project. Also, there is no infallible documentary evidence as there is no formal Memorandum of Understanding or Agreement for the Powai project between the Appellant and the said party (copy of City Civil Court Suit No 1480 of 2009).
& 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
Thus, to conclude, M/s. Sai Lee Developers have alleged that the company is trying to obtain forcible possession of the Powai property whereas they have received the money for Thane project.
In response, Mr. Shailesh Ajgaonknr, the General Manager of the company, vide affidavit in reply dated 22M July 2009, has stated on oath that all the allegations, contentions and claims of M/s. Sai Lee Developers are false. Further, he categorically stated that money was paid by the company to M/s. Sai Lee Developers towards the Powai property. He has stated that M/s. Sai Lee Developers have also issued a receipt acknowledging the fact that the payment is received towards Powai property.
It may please be noted that the Powai property is still under litigation as court has maintained the STATUS-QUO order.
Accordingly, for want of analysing the further course of action for the Powai project, the appellant obtained legal opinion of P S Legal, Advocates & Solicitors. Accordingly, vide letter dated 5th December 2011, the aforesaid Solicitors submitted their opinion mentioning facts of the present case (copy enclosed). Extracts of the said opinion is reproduced herein below for Your Honors' ready reference and perusal:
“9. The said M/s Sai Lee Developers however has disputed the same and has filed in Bombay City Civil Court a civil suit bearing No. 1480/ 2009 against SVPL therein praying for an order of mandatory and permanent injunction against SVPL from entering into the said property. In the said suit, in para (22) it has been categorically averred by M/s Sai Lee Developers that the said sum of Rs. 12 Crores has been paid by SVPL as project advance not for Powai Project but for another project of Sai Lee which is at Thane. M/s Sai Lee Developers has also alleged that the project investment for Thane project was to be of Rs. 125 Crores and the said sum of Rs 12 Crores is SVPL's part contribution. Also, it has been alleged that there does not exist any agreement between Sai Lee Developers and SVPL which can show that the said investment is for Powai Project. It appears that various interim applications made in the said suit are still pending. It is also learnt that no order has yet been passed in favour of SVPL in the said suit.
Thus, at once, it would be noted that the consideration of Rs.12 Crores paid by SVPL to M/s Sai Lee Developers has come under challenge from Sai Lee on the said vital ground that it was "Project Advance for Sai Lee's property located at Thane and not for Powai land at all. We also have to point out that SVPL making payment of sums to Sai Lee or to its sister concern Sai Lee Infotech Ltd. could not have fetched any rights to SVPL in as much as the property was admittedly handed over by Sai Lee into Joint Venture with Chandiwala. When the said arrangement existed, and now is subject matter of litigation, such direct payment to a single party to the joint venture cannot create any rights in the project at all. In addition 15 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
thereto Sai Lee has pointed out lack of any formal agreement with SVPL and has claimed that Powai Land is not the subject of SVPL's investment.
11. As noted above the very purpose of the said payment has been disputed by Sai Lee and the same is a subject matter of the pending civil suit. In due course of time as and when the suit will be heard the court shall decide upon the said issue. However, at this stage the brute fact is that the payment is subject matter of dispute and it can never be said that the said sum would either be recovered or preserved in project. The only recourse now open to SVPL is to continue with the said existing litigation and also to file a fresh suit praying for a decree against M/s. Sai Lee Developers and Sai Lee Infotech Ltd. that a formal agreement be directed to be executed by them in favour of SVPL.
12. At the same time we seek a discussion on whether SVPL shall gain any rights in the project at all. Kindly note that the project is laden with stringent ULC conditions, it has valid and existing claims for constructed areas by Society and its 31 Members, it has claims by former developers such as Yashraj and others, also third parties such as Great Deal have a claim on the property by virtue of registered deed of assignment, further the claims of Zoom are also pending. In such circumstances, so far as SVPL gaining clear development rights is concerned, the situation is nothing short of chaotic. Further, since SRA has approved the said project under DCR 33 (14), it would not be possible for SVPL to enter into any arrangement with Sai Le unless the said authority specifically permits change of developer. Hence we have to urge SVPL to take a fresh look at the situation and take appropriate decision"
On perusal, Your Honor may note that, in the aforesaid opinion it is clearly mentioned that the payment of Rs. 12 crores by the company itself is the subject matter of dispute. Further, he has stated that the recovery of the said sum is doubtful. It is also mentioned in the aforesaid reply that as there are a lot of litigations/ claims by the society, 31 members, the former developers, etc., it is highly uncertain for the company to obtain clear title on the said Powai property. More so, as the project is under the already approved SRA scheme, any change in the developer requires specific permission from the SRA authority. Thus, there was further uncertainty with respect to the said project.
Accordingly, in view of the said opinion, the appellant ascertained that unless a clear title towards the Powai property and SRA approval for the change in developer is obtained, the project cannot be proceeded with.
It is further submitted that, the amount was spent by the company towards the project. Thus, the said amount, per se, is given in the ordinary course of the business of the company i.e. to acquire the property with the intention to develop and to sell the same. It is further respectfully submitted that, due to the circumstances prevailing in the present case, there was a great deal of & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
uncertainty in obtaining the rights of the Powai project. It is submitted that the money already spent for the aforesaid project was irrecoverable and completely lost. More importantly, on perusal of the facts of the case, it is abundantly clear that the whole fact that the amount is paid by the company for the said project is a subject matter of litigation.
It is respectfully stated and submitted that such losses is a typical feature of real estate industry. At times money is spent/ advances are given even before the finalization of the deal. Further, if the deal becomes unviable due to likely litigation or such other problems, then the projects have to be given up. Thus, loss arising due to the same is nothing but business loss.
It is further respectfully submitted that the money spent by the appellant in the present case was not recoverable any more. It may also be noted that the company has already made long drawn efforts to salvage the situation and only thereafter, the said loss was claimed.
Hence, considering the present litigations, disputes, claims etc. the claim of the company over the said Powai project is become very uncertain and the chances to obtain a favourable decision is very remote. Therefore, in the best fitness of business, the company decided that it would be rational to consider the unsalvageable amount of Rs. 15,00,00,000/- spent for the Powai Project as irrecoverable business losses.”
From the explanations furnished by the assessee, we notice that the assessee-company has taken a conscious commercial decision for writing off the amount on the basis of facts and circumstances surrounding the case. Even though the tax authorities have expressed the view that there is chance of recovery, the Ld A.R, during the course of arguments submitted that the said amount could not be recovered till date. We have also noted that during the assessment proceedings, the Assessing Officer has called the Director of the assessee-company M/s Sai Lee Developer, Shri Mangesh Sawant who had confirmed that the litigation with the assessee is pending.
In our view, one cannot compel a businessman to take a commercial 17 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. decision in a particular manner, i.e., in the instant case, tax authorities cannot force the assessee to wait for indefinite period before writing off the amount as irrecoverable, when the chance of recovery of amount is remote as per the advise given by the legal experts. It is well settled proposition of law that the Revenue authorities should not sit in the arm chair of business man and dictate the manner of conducting the business, i.e., they should not interfere in the reasonable decision taken by the businessmen, particular when the decision was taken on prudent basis on commercial considerations and also by considering surrounding circumstances. We have also noticed that there is difference of opinion between the assessee and M/s Sai Lee developers with regard to the project for which the impugned advance was given, i.e., while the assessee has claimed that it has given the advance for Powai Project, which is supported by the receipt given by M/s Sai Lee Developers, the other party is contending that the same was given for Thane project. Subsequently, M/s Sai Lee developers has also alleged that the receipt given by it acknowledging the payment given by the assessee is forged one. Police complaints have also been filed against the assessee two times. We notice that the dispute is going on between the assessee and M/s Sai Lee Developers since 2008 onwards. The Ld A.R has also clarified that the above said party is not related to the assessee. Further M/s Sai Lee Developers is also not showing interest to return back the money. Hence the inference drawn by the tax authorities ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. that the dispute is with regard to the land and not with regard to the advance payment does not appear to be correct. In view of the sequence of events narrated above, the assessee has entertained a doubt about its right in the Powai land and also about recovery of advance given. Hence the assessee has taken legal opinion from M/s P.S Legal, Advocates & Solicitors, about the prospects of its right over Powai Property and also about the prospects of recovering money. The advocates have noticed that the right over Powai property was vested with two persons, viz., M/s Sai Lee Developers & M/s Chandiwala Enterprises. However, the assessee has entered into an agreement with only one person, viz., M/s Sai Lee Developers. In the mean time, M/s Chandiwala Enterprises have also transferred its right to M/s Great Deal Developers P Ltd, which has not been accepted by M/s Sai Lee Developers. Hence M/s Sai Lee Developers has initiated legal proceedings against M/s Chandiwala Enterprises and M/s Great Deal Developers P Ltd. Further, M/s Sai Lee developers has also stated that the agreement with the assessee was with regard to Thane Property and not for Powai Property.
Hence the Solicitors have expressed the view that the prospects of having any right over Powai property as well as prospects of recovering money from M/s Sai Lee Developers are bleak. By considering all these facts, the assessee in its Board of Directors meeting held on 4th January 2012 has decided to write of the advance amount as business loss. As submitted by Ld A.R, the assessee has reviewed all its ongoing projects and has decided & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. to write off Rs.117.08 crores. As noticed earlier, the AO has accepted write off of Rs.83.08 crores and disallowed Rs.34 crores, of which the Ld CIT(A) has allowed Rs.19 crores. We notice that the assessee has followed a proper and systematic procedure for arriving at its decision to write off various amounts, including the impugned amount of Rs.15 crores given M/s Sai Lee group. The Comments furnished to the Board of directors in the Board meeting in respect of M/s Sai Lee Developers are extracted below, for the sake of convenience:-
“Mr. Mangesh Sawant, the key person in Sailee Developers & Sailee
Infotech refuses to acknowledges that the money was paid for powai and has made to the statement to the effect in the court. Looking to the complexity of the matter, the profile of Mr. Mangesh Sawant, the litigation, the legal opinion in the matter, its prudent not the purse the matter any further. Recommended to write off.” 15. The Hon’ble Bombay High Court in CIT Vs Goodlass Narolac Paints Ltd.
(supra) held that when two facts are proved, namely, that that the debt is trade debt and that it has become bad, the court should not interfere with the decision of the assessee in writing off the amount in particular year unless it is anything patently wrong with the assessee’s decision. Further in CIT Versus Wockhardt International Ltd the Hon’ble Bombay High Court held that when the assessee wrote the amount in the year of account the court was entitled to presume that the amount became irrecoverable when & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. the assessee wrote off it in its books of account and, therefore, the assessee was entitled to claim the amount.
Further, the co-ordinate bench of Tribunal in Kyati Realtors Pvt. Ltd. vs. ACIT (supra) held that when the assessee advanced money in the course of its business of real estate development, the loss of such money on account of non-recoverability of advance made in the course of business is required to be allowed under section 28/37 of the Act as Business Loss. It was further held that the fact that advance was made in the ordinary course of business was not denied by the Assessing Officer. The advance so given could not be recovered, is also a matter of record, under these circumstances, the assessee has written off the amount in its books of account. Such amount is required to be allowed as a business loss under section 28/37 of the Act.
Under the set of facts, we notice that the Board of directors have decided to write off the advance of Rs.15.00 crores given to M/s Sai Lee group. As noticed earlier, the assessee has taken this decision as a prudent business man in the facts and circumstances surrounding the case and we are of the view that the tax authorities are not entitled to question the wisdon of the assessee in this regard. Accordingly, in our view, the claim of the assessee- company in writing off Rs. 15 Crore cannot be considered to be premature one and accordingly we are of the view that the Ld CIT(A) was not justified in rejecting the claim of business loss.
ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
In our view, the ratio of various decision relied by ld. DR are not applicable on the facts of the present case. In the case of Indian Aluminum Company vs. CIT (supra), the issue before the Apex Court was related to whether the wealth tax paid by the assessee, a trading company is deductable as expenditure or not. In CIT vs. Nainital Bank Ltd. (supra) the issue before the Hon’ble Court was whether the loss occurred on account of robbery was incidental to the business activity or not. The Hon’ble Court held that every loss is not deductible in computing the income of business unless it is incurred in the course of carrying out the operation of business and is incidental to the operation. In Maddi Venkataraman & Co. (P.) vs. CIT (supra), the assessee-company claimed deduction of Rs. 2,95,000/- incurred in penalty proceeding initiated under Foreign Exchange Regulation Act (FERA), wherein the said expenditure was remitted to a private party in Singapore for violation of law. In Assam Pesticide and Agro vs. CIT (supra), the question before the Hon’ble High Court was related with the commission paid by assessee without any commercial consideration or business expediency. The decision rendered by Bangalore bench of Tribunal in the case of Empress Classic P Ltd (supra) was related to the claim of bad debts. The assessee wrote off the debt and claimed deduction on the strength of the decision rendered by Hon’ble Supreme Court in the case of TRF Ltd (323 ITR 397). However, it was noticed that the debt itself was recovered before the date of filing of return of return and & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. hence the Tribunal held that the decision rendered in the case of TRF Ltd (supra) will not apply to the facts of the case. Therefore, in our view, none of the case law relied by ld. DR has relevance with the grounds of appeal
raised by assessee.
19. In view of the foregoing discussions, we are of the opinion that the view taken by the tax authorities is not justified. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of Rs.15.00 crores claimed by the assessee as business loss. In the result, appeal filed by assessee is allowed.
20. The Revenue in its Cross Appeal (ITA No.5613/M/2015) has raised the following grounds of appeal:
1. "on the facts and circumstances of the case and in law, ld. Commissioner (Appeals), erred in directing the AO to delete the disallowance of Rs. 19,00,00,000/- which was made by the assessing Officer on account of wrong claim of loss made by the assessee. 2. "On the facts and circumstances of the case and in law, ld the Commissioner (Appeals), erred in directing the AO to delete the disallowance of Rs. 19, 00,00,000 which was made by the Assessing officer on account of wrong claim of write-off made by the assessee even when the recoverability of the amount did not reach to its dead end and neither the party refused to pay”.
The facts relating to the claim of Rs.19.00 crores made by the assessee are stated in brief. A plot of land bearing CTS No.1463 of Fort division, Mumbai admeasuring 7901.40 sq. mtrs., was owned by the State Government and was partly reserved for Education department as college 23 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. reservation. Apart from the above, the said land consisted of 138 slums. The slum members jointly formed a Society named as “Siddhivinayak Co- op Hsg. Society. The said society submitted a proposal to a concern named M/s Sreelekha Enterprises to undertake re-development of the property under the provisions of SRA. Later M/s Sreelekha Enterprises decided to develop the property jointly with M/s Shree Kedar Infra Projects P Ltd (hereinafter referred as “Sree Kedar”). Later Sree Kedar entered into MOU with the assessee and accordingly, the assessee also became a party for the redevelopment project. Accordingly, the assessee infused a sum of Rs.19.00 crores as its initial contribution for the said project. It was agreed that the assessee would get right over 70% of free sale area of the property.
However, the project did not proceed as envisaged by the parties. The property was not declared as Slum nor the State Government of Maharashtra granted permission to develop the said property. Hence the above said two parties terminated the original agreement entered by them with Sidhdhivinayak co-op Hsg. society for development of property. In view of the above said development, the assessee demanded back its money from the above said two parties. The assessee received cheques for Rs.12.00 crores from M/s Shreelekha Enterprises as against the advance of Rs.19.00 crores given by the assessee. At this stage itself, there was reduction of Rs.7.00 crores. However, all the cheques were dishonoured. It was stated that the assessee held several meetings with the above said ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. parties and also sent various correspondences to the above said parties. But there was no response from them. Hence the assessee obtained a legal opinion from Solicitors and Advocates, who has observed that the land belonged to the State Government and the Slum development authority has not yet granted clearance for the development of land. It was also observed that such kind of permission could be obtained on the strength of decision to be taken at cabinet level. Further the the said land is already inhibited with various concrete structures of government establishments. Under these set of facts, the Solicitors expressed the view that the chances of obtaining approval may become remote. Further the Solicitors have categorically stated that the documents executed between the Sidhdhivinayak co-op hsg Society and the aforesaid parties did not create any right in favour of any person towards the said property. It was opined that, unless and until the State Government and the SRA approved the project, no right with respect to the said property could be created. Since the original parties did not get right over the property, it became clear to the assessee that it is also not having any hold over the property. The efforts taken by the assessee to recover the amount also did not yield any result.
Accordingly it was decided by the assessee with business prudence to write off the unrecoverable amount of Rs.19 cores as business loss.
The AO, however, took the view that merely because the cheques were bounced, the whole project cannot be written off and treated as business & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. loss. During the course of assessment proceedings, the AO examined Shri Vijay B Masurkar, the director of M/s Shree Kedar Infra projects p Ltd, who stated that though the agreement with Shree Lekha has been terminated, the later has not abandoned the project. Hence the AO took the view that the project has not been abandoned yet. The AO also took the view that the right of the assessee to receive the payment from M/s Sreelekha Enterprises has not extinguished merely because the cheques were dishonoured. The AO also took note of the fact that the assessee has not filed any suit to either recover the amount or any suit u/s 138 of the Negotiable Instrument Act against dishonour of cheques have been filed.
Accordingly, the AO took the view that the assessee has not lost hope and the possibility of recovery has not reached dead end. Accordingly the AO took the view that there is no merit in the claim of business loss of Rs.19 crores and accordingly disallowed the same.
The Ld CIT(A), however, allowed the claim and hence the revenue has filed this appeal.
The Ld. DR for the Revenue submitted that the ld. Commissioner (Appeals) erred in directing the Assessing Officer to delete the disallowance. He submitted that the assessee has not proved that it has carried out due diligence exercise to verify the title of land. The land belonged to the State Government and hence no businessman would give advance of such a huge amount without verifying the right over the & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. property. He also submitted that both M/s Shreelekha Enterprises and M/s Kedar Infra may be the sister concerns of the assessee and the assessee appears to have created/stage managed the impugned loss. Further he submitted that the ld. Commissioner (Appeals) has not appreciated the fact that M/s Shreelekha Enterprises has never refused to refund the money. In fact, M/s Shreelekha Enterprises issued cheques for Rs. 12 Crore, which itself shows that M/s Shreelekha Enterprises was interested to refund the assessee’s money. The assessee has not initiated any legal proceedings against M/s Shreelekha Enterprises. The assessee has also not initiated any recovery proceeding or filed any suit under section 138 of Negotiable Instrument Act on dishonoring of the cheque. The assessee failed to prove either during the assessment proceeding or in First Appellate Proceeding that money cannot be recovered in future. The observation of ld. Commissioner (Appeals) that in case the assessee is able to recover the amount in future, the same will be taxable in the hand of assessee cannot make the impugned claim allowable, unless the assessee is able to show that the loss so claimed is actual loss. It is so possible that the department may not come to know of the recovery at all, if the settlement takes place between the parties outside the books.
The ld. DR further submits that the assessee made the payment for a project to be constructed in the land belonging to State Government, but the State Government was not involved anywhere in the transaction. Therefore, the ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. expenses of Rs. 19 Crore so incurred by assessee cannot be held as wholly and exclusively incurred for the purpose of business. He submitted that the it is the responsibility of the assessee to prove that the expenses claimed by it is allowable, as held by Hon’ble Bombay High Court in the case of Goodlass Nerolac Paints (137 ITR 58)(Bom). He submitted that the losses are not considered as expenditure as per the decision of Hon’ble Supreme Court in the case of Walfort Shares & securities (326 ITR 1)(SC). Relying on the decision of Nainital Bank (supra), the Ld D.R contended that each and every loss is not deductible. He also placed his reliance on the decisions reported in the case of Swadeshi Cotton Mills (63 ITR 57) to contend that the expenses, which are incurred wholly and exclusively for the purposes of business alone are deductible. The Ld D.R, by placing reliance on the following observations made by Hon’ble Rajasthan High Court in the case of Jaipur Electro P Ltd (134 CTR 237)(Raj.) submitted that the principle that the businessman is the best judge does not affect the duty of the AO to examine as to whether the expenditure was incurred wholly and exclusively for the purposes of business:-
“11. The general principle underlying s. 37(1) of the Act is that an expenditure which is found to have been wholly and exclusively made or laid out by a businessman for purpose of his business is to be allowed. There can hardly be any dispute to the proposition that the businessman is the best judge to determine the business expediency and, therefore, when he claims to have incurred a 28 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. certain expenditure for business expediency his version should ordinarily be accepted. This principle, however, does not debar the assessing authorities to enquire and investigate as to whether such expenditure was actually incurred by the businessman and if incurred whether the same was incurred wholly and exclusively for business consideration. The doctrine that the businessman is the best judge of business expediency does not affect the right, nay duty, of the assessing authorities to know whether it was incurred for business purposes and not for other extraneous considerations.” He further relied upon the decision rendered by Hon’ble Madras High Court in the case of T.S.Hajee Moosa & Co.(153 ITR 422) and the decision rendered by Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd (166 ITR 836) and submitted that the expression “wholly and exclusively” used in sec. 37(1) of the Act have been explained to mean that the term “wholly” refers to the quantum of expenditure and “exclusively” refers to the motive or objective of expenditure. He submitted that the business loss claimed by the assessee are not incurred wholly and exclusively for the business within the provisions of section 37(1) and hence the same should not qualify for deduction. The title of land was neither with assessee nor with the person to whom the assessee paid the money. Hence it can be said that the assessee has claimed an expenditure which is an offence or prohibited by law. In support of his submission, the ld. DR relied upon the CIT vs. Mamta Enterprises [135 Taxman 393 (Kar)]. & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. The ld. DR also relied upon the submissions made by him in assessee’s appeal. He submitted that the Ld CIT(A) has granted relief to the assessee without properly analysing the facts of the case. Accordingly he contended that the order passed by Ld CIT(A) on this issue should be reversed.
On the other hand, the ld. AR of the assessee supported the order of ld. Commissioner (Appeals). He submitted that the assessee was attracted by the project, since it is located in the prime location of Mumbai and was lucrative. Since the plot was inhabited by slum people, the same would qualify under SRA scheme and hence the developers have shown interest in the offer made by the co-op hsg society consisting of those slum developers. In view of the lucrative nature of project, the assessee has made the impugned payment of Rs.19 crores to get right over the property.
After passage of some time, when the things were not moving ahead as per the original plan, it was realised that it would be difficult to clear all the encumbrances surrounding the property. It also came to light that the land was not declared as slum nor the State Government has granted permission to develop the said property. It was also noticed that M/s Shreelekha Enterprises and M/s Kedhar infra has terminated the original agreement entered with M/s Sidhdhivinayak co-op housing society for developing the property. In this situation, the assessee has demanded its money back. As noticed earlier, M/s Shreelekha Enterprises gave a cheque of Rs. 12 Crore against the payment of Rs. 19 Crore initially advanced, but the cheque was & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. dishonored. Hence the assessee obtained legal opinion form the Solicitors about this project, who expressed the view that the assessee has got no right over the property and further the chances of recovering back the advance amount is also bleak. Therefore, the assessee decided to write off the amount paid for Fort project in the Board of Directors meeting.
Accordingly, it was written off and the loss was claimed as business loss.
The Ld A.R submitted that it is not the case of the AO that the transactions were not genuine. The AO has only opined that the dishonouring of cheque cannot be a ground to write off whole of the advance given. He submitted that the AO has presumed that the money could be recovered by the assessee and his presumption is not based on any material. He further submitted that neither M/s Shreelekha Enterprises nor M/s Kedar Infra are related to the assessee, as doubted by Ld D.R. He submitted that this payment so made could be viewed from another angle, i.e., the same constitute “stock in trade” for the assessee and hence the same is required to be valued at cost or market value, whichever is less. In the instant case, the assessee has determined that the market value as at the year end is NIL. He submitted that M/s Shreelekha enterprises only acquired right to develop the property in the year 2006 and not ownership rights. The question of transfer of ownership does not arise at all. When the assessee entered into this transaction in the year 2008, it was also aware that it is acquiring only development rights and not ownership rights.
ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. Hence the contentions of Ld D.R that the assessee has entered into the transaction without carrying out due diligence is untenable. The assessee also came to know that there are no asset with M/s Shreelekha Enterprises and M/s Kedar Infra has also suffered loss due to this project, i.e., both these persons were also in financial difficulties. Accordingly, the Ld A.R submitted that the assessee has taken a conscious decision to write off the advance amount after obtaining legal opinion from the Solicitors. He submitted that the Ld D.R is trying to improve the case of the AO by expressing that the transaction itself may not be genuine and the parties may be related to the assessee. The Ld D.R also expressed the view that the impugned loss may be a created/ stage managed one. The Ld A.R submitted that the Ld D.R is not entitled to impose his own views over that of the AO. In this regard, he placed his reliance on the decision rendered by the Tribunal in the case of Aishwarya Rai (127 ITD 204 @ 209) and also on the decision rendered in the case of Mahindra & Mahindra (313 ITR (AT) 263) @ 322). The Ld A.R further submitted that the various case laws relied upon by Ld D.R is not applicable to the facts of the present case. He submitted that the issue in the case of Goodlass Nerolac was related to the year of allowability of expenses. All other cases were related to “expenditure” allowable u/s 37 of the Act. He submitted that the Hon’ble Rajasthan High Court’s observations made in the case of Jaipur Electro P Ltd (supra) only mean that the AO cannot be precluded from obtaining all & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. the relevant facts only on the reasoning that the decision has been taken from businessman point of view. He submitted that the assessee, in the instant case, has fully furnished all the relevant details to the AO. The ld. AR of the assessee relied on the decisions which were referred in assessee’s appeal.
We have considered the rival submission of the parties and have gone through the orders of authorities below. We notice that the Ld CIT(A) has rendered his decision after analysing the facts surrounding the issue. Hence we feel it pertinent to extract below the operative portion of the order passed by Ld CIT(A) on this issue:-
“10. I have considered the facts of the case, submission and contentions of the appellant, as also the order of the AO. It is gathered that Government of Maharashtra (Department of Education) had a plot admeasuring 7901.40 sq. mtrs. at Fort, Mumbai, known as "State Teachers College Compound", which was in a very dilapidated condition and was declared as slum by the Addl. Collector of District of Mumbai. The occupants of the above premises collectively formed a housing society named 'Siddhivinayak Co-operative Housing Society', which executed a development agreement dated 21/4/2006, appointing M/s. Shreelekha Enterprises as the developer, and a Power of Attorney was executed in their favour for development of this property. Later, M/ s. Shreelekha Enterprises entered into a joint venture agreement dated 28/5/2007 with M/s. Shree Kedar Infra Projects Pvt. Ltd., as per which, Shree Kedar agreed to become a joint venture partner and agreed to pay a sum of Rs.25 Crores to Shreelekha and also to bear the cost of obtaining approvals, sanctions of the plans, development charges and cost of construction, etc. Later, Shree Kedar and Shreelekha approached the appellant company with a proposal to co-develop the said property and obtain 70% sale rights of free sale area. As consideration for acquiring such rights, the appellant was required to bear all the expenses relating to the above project, and a Memorandum of Understanding 33 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. dated 19/2/2008 was entered into, among three parties, in this regard. In terms of the said MOU, the appellant company paid a sum of Rs.18 Crores to Shree Kedar and Rs. l Crore to Shreelekha (totaling to Rs.19 Crores), towards the above project. It is gathered that some of the employees of G.T. Hospital were living in the quarters in the same complex and there were a hostel, a gymnasium, as also a temporary accommodation of the Education Department, including a temple and an open-air stage, etc., which needed to be vacated before construction/development of property could begin. Therefore, the appellant requested Shree Kedar to obtain necessary approvals from the concerned Government authorities, as early as possible, so that the construction could be proceeded with. However, apparently, no progress could be made by Shree Kedar, till March, 2009, as the matter was complicated and they were finding it difficult to make progress. Later on, it was noticed by the appellant that out of the total area of 7901.40 sq. mtrs., only a portion of 4,056 sq. mtrs. was declared as slum, and not the remaining area. It was also noticed that consent of the employees of G.T. Hospital, who were occupying the major portion of the remaining land, was also necessary. In this background, Shree Kedar found it extremely difficult to obtain approval for the development of the said area. Later, Shree Kedar communicated to the appellant that the original developer, Shreelekha, was not co-operating with them. However, in a swift development, in May, 2010, it was gathered that the original development agreement between M/s.Shreelekha Enterprises and M/s.Shree Kedar Infra Projects Pvt. Ltd. was being considered for termination, and Shree Kedar also communicated to the appellant company that they had convinced Shreelekha to refund the money paid by the appellant company towards the project. Accordingly, the appellant received cheques worth Rs.12 Crores from Shreelekha, as full and final settlement, but the cheques got dishonoured on account of insufficient funds. The appellant company again insisted to Shree Kedar to refund the money, but Shree Kedar expressed their inability, as Shreelekha had no assets left. In the above background, the appellant company sought legal opinion from an advocate, who, vide his opinion dated 3/1/2012, mentioned that Shreelekha and Shree Kedar had neither the authority of the State Government, nor the Government had granted them any permission, to redevelop the said property and, therefore, the appellant company could claim & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. no rights of development therein. It was in this background that the appellant chose to write off the sum of Rs.19 Crores, in its books and claim relevant loss in this regard.
I have considered the facts of the case. It appears that the appellant entered into a joint development agreement with Shree Kedar on 19/2/2008, with a view to co-develop the property "State Teachers College Compound" at Fort, Mumbai. Prior to that, Shree Kedar had entered into an agreement dated 29/5/2007 with Shreelekha, the original developer of this property. It is further relevant to mention over here that Shreelekha had entered into an agreement dated 21/4/2006 with Siddhivinayak Co-op. Housing Society, a society of the residents of the particular area of land. However, later on, it was gathered that this land was owned by the Government of Maharashtra, which was nowhere a party to any of these development agreements, nor did it grant any permission for any joint development agreement to be entered into by any party on its behalf. Therefore, the rights acquired either by Shreelekha or by Shree Kedar or by the present appellant were on a shaky wicket. These facts have been very clearly spelt out by Shri Abhijit Z. Parab, Advocate, High Court, in his legal opinion dated 3/1/2012 given to the appellant, in respect of recovery of Rs.19 Crores. For clarity, the relevant portion of the legal opinion is reproduced as under: - “We have perused the said copies of the documents. It appears that the State Government of Maharashtra is the owner of the large captioned property wherein certain structures are standing. Some of the structures are duly constructed by the State Government of Maharashira for its various departments and the remaining scattered structures are in the possession of various occupants. It appears that the occupants have formed a Co-operative Housing Society namely 'Siddhi Vinayak Co-operative Housing Society' and, with a view to re- develop the said property under the said re-development scheme, the said society has executed a Development Agreement dated 21st April, 2006 in favour of the above named Shreelekha Enterprises Pvt. Ltd. which was then a sole proprietary firm. It also appears that the said Shreelekha Enterprises Pvt. Ltd. executed an agreement dated 29th May, 2007 in favour of the above named Shree Kedar Infra Projects Pvt. Ltd. and therein has agreed to re-develop the same land jointly with the said Shree Kedar. Relying on the said agreement as entitling it to certain rights, Shreelekha has approached Shivalik Ventures Pvt. Ltd. and has offered to admit Shivalik as a co-developer with a promise that the said property shall be jointly co-developed by three developers, Shreelekha, Shree Kedar and Shiualik: The said Shree Kedar has formalized the said understanding by executing in favour of 35 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
Shiualik: by a further agreement dated 19th February, 2008. From the above narration it is clear that the rights of Shivalik are dependent on those claimed by Shree Kedar through the above referred commitments made by Shreelekha under the said original agreement dated 29th May, 2007. It appears that, during the said period Shivalik has paid to Shree Kedar a sum of Rs.18 crores during February 2008 to July 2008 and has paid to Shreelekha a further sum of Rs.1 crore on 12th May, 2008, thereby investing in the said project a sum of Rs.19 crores.
Thereafter it appears that somewhere in the month of May 2010 the said transaction has been jeopardized leading to the termination of the arrangement. In view of the termination it appears that Shreelekha had committed to refund the money and had issued cheques directly to Shiualik: ostensibly to refund the monies received by it. These cheques however bounced and you have informed us that, inspiie of the said commitments, no refund has been received by Shivalik as yet and thereby a loss has been caused.
From the file perused by us, it is immediately been seen that the re- development of the said property is hinged on the Slum Development Authority declaring the said property as a slum land. It appears that certain applications were made by the said society to the said authority to initiate the re-development process. However the said authority has not granted any clearance for the development of the said land. Since the said land is owned by State Government of Maharashtra and already houses various Government establishments, according to us there is no immediate material on record to accept that such a land can be declared as slum land under the existing norms as formed under Maharashtra Slum Improvement Act 1971. We however point out that our observation is entirely general and is based on the documents we have perused. Further, according to us grant for permission for development of said land through the re-development scheme would be possible on the State Government if only the highest/cabinet level clears the said proposal since on the said land an educational establishment has its premises and also in the development plan the said entire land is for college/ education purposes. To remove the said educational institutions from the said plot and to de-reserve from the development plan shall require amendment of the development plan and the same shall intend laying the proceedings under Maharashtra Regional Town Planning Act.
On this background it can be seen that the documentation executed by the society, Shreelekha, Shree Kedar and Shivalik do not create any rights to any per se. At the most it can be said that, by resolving to re-development the property under the said scheme, the said society granted to Shreelekha the rights to make development application to Slum Re-development Authority. As 36 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. can be seen neither the Authority nor the State Government of Maharashtra granted any permission to re-develop the said property and hence, according to us, Shivalik can claim no right of development therein. So far as payment of Rs.l crore to Shreelekha and Rs.18 crores to Shree Kedar is concerned, Shivalik paid the sum of Rs.19 crores to obtain co-development rights. In our opinion since these two entities did not have co-development rights, the matter of recovery of the said sum, Shivalik cannot claim any reliefs pertaining to the said land or the alleged development right held by Shreelekha. In our opinion the said payment does not create any equity in favour of Shivalik either since the said sum was paid with an expectation that necessary permission shall be obtained. In view of Shreelekha cancelling the whole arrangement in 2010, the last stages of rights that Shivalik could have claimed have come to an end and hence according to us Shivalik cannot call itself a co-developer on the said project.
In view of the above, we advice you to take peremptory steps to file recovery proceedings against Shreelekha Enterprises Put. Ltd. and Shree Kedar Infra Projects Put. Ltd. As stated above, in the said recovery proceedings, no relief can be claimed against the said Government land."
From the above legal opinion, it is quite clear that as the agreement between the appellant company on the one hand and Shreelekha Enterprises and Shree Kedar Infra Projects Pvt. Ltd. on the other created no legal rights in favour of the assessee, as it was based on approval, etc. from the Government authorities, which never came. The land was in any case owned by the Government, which was not a party to any of these agreements. Further, the base agreement between Shreelekha and Shree Kedar had already been terminated in the year 2010, therefore, there was no possibility of the appellant getting any development rights in the so-called construction project at Fort. It is gathered that Shreelekha gave cheques worth Rs.12 Crores to the assessee with a view to settle this dispute, but such cheques got bounced. It is further gathered from the communications between the parties that Shreelekha had no assets for recovery of money. It is in this background that recovery of funds became pretty difficult for the appellant. Further, Shree Kedar also refused to pay money to the assessee, as it also lost lot of money in the project. Therefore, the appellant company thought it necessary and appropriate to write off the amount, as neither & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. it was getting the development rights in the property, nor was it getting the money back.
The learned AO in this regard has relied upon the statement given by Shri Vijay B. Masurkar, Director of Shree Kedar, that he was hopeful of revival of the project, but it is a far-fetched thing, especially when the original agreement had already been terminated and there was no express permission or consent from the Government towards redevelopment of the particular land. In my opinion, the appellant had made reasonable efforts to recover the money and since it was unsure of getting back the money, it chose to write it off in accordance with the provisions of law, which is permissible under the provisions of I.T. Act. If in future the appellant recovers any such amount from the parties, the same is liable to be taxed in the hands of the appellant, in the year of receipt. However, as stated by the appellant, so far, they have not made any recovery in respect of the sum of Rs.19 Crores paid to Shreelekha and Shree Kedar. Accordingly, taxing such amount in the hands of the appellant was neither reasonable nor justified. The Hon'ble ITAT, Mumbai, in case of Prema Real Estates P. Ltd. vs. ITO held that the AO cannot step into the shoes of the businessman and decide as to what should a businessman do. Similar view was taken by ITAT, Mumbai, in case of Savom Remedies Put. Ltd. vs. ITO, wherein it was held that the AO cannot step into the shoes of the businessman and decide whether a particular expenditure should be written off. Accordingly, considering the overall facts of the case, I feel that claim of the appellant towards write off of Rs.19 Crores should be allowed. Consequently, the disallowance of claim of loss of Rs.19 Crores made by the AO is directed to be deleted. This ground of appeal
is, accordingly, allowed.”
30. During the course of hearing, the Ld D.R contended that the assessee should have carried out due diligence exercise to find out the title to the land, as the land belonged to the Government. He further submitted that the earlier parties have also not entered into any agreement with the Government. Accordingly the Ld D.R expressed the view that the loss may be a stage managed or created loss. On the contrary, the Ld A.R submitted & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. that it is not the case of the AO that the transaction is not genuine one. The Ld A.R also submitted that the Ld D.R is trying to improve the case, which he is not permitted to do so.
31. We also notice from the assessment order that the AO has not doubted the genuineness of the transactions. Further the sequence of events narrated above by us as well as by Ld CIT(A) would show that there were agreements between M/s Shreelekha Enterprises and Sidhdhi Vinayak co- op Housing Society. There is no dispute that the land was occupied by slum dwellers and they have formed the Siddhi vinayak co-op Housing Society. Since the rights of slum dwellers and the development of slums are quiet common in Mumbai, M/s Shreelekha Enterprises has ventured into this project, as the same looked lucrative. There after M/s Shree Lekha has joined hands with M/s Shree Kedhar Infra. Afterwards the assessee has been roped in. Thus we notice that three builders are involved in this project on the one side and about 138 slum people are involved in the other side. As rightly pointed out by Ld A.R, we notice that these parties have entered into agreement with slum inhabitents for development of the land only, i.e., what they propose to acquire was only development rights and not ownership rights. Hence the fact that the land belonged to Government may not be relevant, when the fact that the said land was occupied by slum people is not disputed. The project was started way back in 2007 and the parties are said to be not related to each other. Hence, we are unable to ITA No. 5407 & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. agree with the contentions of the Ld D.R that the loss claimed by the assessee may be a managed or created one, as the time gap between the payment and write off is almost four years. In any case, it is not the case of AO at all. We notice that the Ld D.R has not brought on record any material to support his various contentions, in which case, they are only his presumptions, which cannot be taken cognisance of at this stage.
The Ld D.R placed his reliance on various case laws to contend that it is the responsibility of the assessee to prove the claim for deduction. Most of those decisions have been rendered in the context of expenditure claimed u/s 37(1) of the Act. On the contrary, the assessee herein is claiming deduction of business loss (akin to trading loss) u/s 28 of the Act. We notice that the assessee has furnished all the relevant details relating to the claim before the AO. We have also noticed that the assessee has obtained legal opinion about its right over the property and the Advocates have expressed the view that the assessee does not have any right over the property. With regard to the recovery of amount, it has been stated that M/s Shreelekha Enterprises does not have any assets and M/s Shree Kedar Infra has also suffered heavy loss. Hence, in the board of directors meeting, it has been stated to the directors as under:-
“It is neither expected to earn any return nor expected to recover the amount spent. It is not viable to put in more money in the project. Recommended to write off.”
& 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd. Accordingly the Board of directors have recommended for write off of the impugned amount of Rs.19 crores. As noticed earlier, the Board of directors have recommended write off of Rs.117.08 crores and the AO has accepted write off of Rs.83.08 crores. We also notice that the assessee has followed a due process in arriving at this decision to write off and hence, in our view, the business prudence and wisdom of the assessee should not have been doubted with. The ld. Commissioner (Appeals) has also expressed the view that in case the money is recovered in future, the same is liable to be taxed in the hand of assessee in the year of receipt. The ld. Commissioner (Appeals) has also referred to the decision of Mumbai Tribunal in Prerna Real Estate P. Ltd. vs. ITO and Savon Remedies Pvt. Ltd. vs. ITO on the principle that the Assessing Officer cannot step into shoes of businessman and decide whether any particular expenditure should be written off or not. We notice that the ld. Commissioner (Appeals) has duly considered the legal opinion obtained by assessee in this regard. We have noted that there is no dispute that assessee paid the amount in the course of its business. The case law relied by ld. DR in Mamta Enterprises (supra) has no relevance on the fact of present case. In the said case, the expenditure was incurred by assessee to defend an action which is an offence and is not deductible. The other case law relied by ld. DR has already been distinguished by us while deciding the appeal of assessee (supra). & 5613 Mum 15 - Ms Shivalik Ventures Pvt. Ltd.
In view of the foregoing discussions, we do not find any infirmity in the order passed by Ld CIT(A) on this issue and accordingly affirm the same.
In the result, appeal of the Revenue is dismissed and the appeal of the assessee is allowed.