Loading judgment…
No AI summary yet for this case.
Before: SHRI J. SUDHAKAR REDDY & SMT SUCHITRA KAMBLE
This appeal is filed by the Revenue against the order dated 24/06/2009 passed by CIT (A) XVI, New Delhi.
The grounds of appeal are as follows:-
“1. On the facts and circumstances of the case as well as in law, the Ld. CIT (A) has erred in deleting the addition of Rs.50,00,000/- made on account of disallowance of loss on forfeiture of earnest money(forfeiture of shop) without appreciating all the facts of the case as brought out, very clearly and elaborately, in the assessment order. Such facts/reasons, inter alia includes: i. Abnormal mature of entire series of transaction beginning with the agreement to sell dated 26/12/2005 and ending with the eventual cancellation thereof dated 6/3/2006 apparently made to adjust the unexpected profit generated due to acquisition of land in the year under consideration. ii. Assessee’s utter failure to justify its capacity to arrange a huge amount of Rs. 3 crores within 35 days particularly when it was having meager capital base of RS.1,00,000/- only without any other liquid assets/reserves, coupled with its failure to give any evidence in support of efforts made by it for arranging such amount. iii. Assessee’s utter failure to produce evidence of efforts made by it to recover the amount in question. iv. Vendor’s utter failure to produce even a single example of an agreement of purchase/sale containing similar terms and conditions as in the agreement with the assessee company.
2. While granting relief to the assessee on the above counts, reliance made by the Ld. CIT(A) Vs. Vishal Builders Ltd, 164 Taxman 615 appears to be misplaced as agreement in that case was with government body where as in the instant case it is between two private parties.
During the course of hearing, the Ld. DR submitted that he will press only Ground No.1. The other ground is, therefore, dismissed.
The assessee claimed a sum of Rs.54,58,554/- as “Administrative & Other Expenses”. The breakup of expenses shows that the said amount includes an amount of Rs.50,00,000/- which was claimed as “Loss on Forfeiture of Shop”. The assessee was asked to furnish a note on the said loss and to explain as to how the same is an allowable deduction by the A.O. The assessee furnished the requisite information vide written explanation dated 13/6/2008.
The important dates having a bearing on the issue are as follows: a) 25.08.2005: The Government of Delhi acquired and took possession of a portion of land (in Village Pooth Khurd) owned by the assessee. The land was notified u/s 4 of the Land Acquisition Act, 1894 vide notification dated 21.03.2003. The declaration u/s 6 of the said Act was issued vide notification dated 19.03.2004. b) 21.09.2008, 18.11.2005 & 21.12.2005: Compensation of Rs.82,81,266/- was paid by the Govt. of Delhi, resulting into a profit of Rs.67,32,537/- to the assessee company. c). 26.12.2005: An “Agreement to Sell” was entered into by the assessee with M/s Aerens Builders Pvt. Ltd. (which belongs to the Aerens Group of companies engaged in the business of real estate and has since been renamed as Aerens Jai Realty Pvt. Ltd.) where the assessee company undertook to purchase land measuring approximately 16 Acres at Village Rasalu, Tehsil & Distt Panipat (Haryana) for a sum of Rs. 4 Crore. The assessee company paid a sum of Rs. 1 Crore as earnest money and undertook to pay the balance consideration of Rs.3 Crore on or before 31.01.2006. In terms of clause 3 of the said “Agreement to Sell” it was laid down that… “time is the essence of this Agreement” and that on failure by the assessee to pay the sale consideration the vendor “shall forfeit the full earnest money received under this Agreement” and the assessee company “shall have no objection to it..” d) 28.01.2016: A letter dated 28/01/2006 was addressed by the Vendor company to the assessee company in the following terms:-
“Please refer to our Agreement to sell dated 26/12/2005. You are requested to pay us the balance amount of Rs.300 lac on or before 31.01.2006. Time is of the essence of this Agreement. Therefore, you are requested to kindly make the payment immediately.” e) 15.02.2006: The vendor company sends a notice for forfeiture of the earnest money in the following terms:
“Please refer to our Agreement to Sell dated 26.12.2005, thereafter our letters, meeting and telephonic discussion. We hereby inform you that you had to make the final payment to us on before 31.01.2006 but you have not yet paid any amount. Time was the essence of this Agreement, therefore, we have forfeited your entire earnest money and our Agreement to Sell dated 26.12.2005 stands cancelled”. f) 06.03.2006: A deed “Cancellation of Agreement to Sell” was executed between the parties where the assessee company and the vendor agree to the forfeiture of 50% of the earnest money i.e. Rs. 50 Lac. The remaining 50 Lac was refunded to the assessee company (Rs.37.50 lac on 06.03.2006 and Rs. 12.50 lac on 17.03.2006). g) 31.03.2006: Entries of loss and corresponding gain are passed in the books of the parties.
The assessee company owns some land which was acquired by it in the financial year 1998-99 and held by it as “inventories” (valued at Rs.88,03,288/- as per the balance sheet as on 31.03.2006). No further purchases were made in the subsequent years. Nor has there been any activity by way of sale of land. The only year (except for the year under assessment) during which sales have taken place is the Financial Year 2000-01 (Land costing Rs.25,18,850/- was acquired by the Govt of Rs. 60,66,667/-. During the said year, the assessee suffered a loss of Rs.24,87,345/- as “ Loss on Sale of Investment”). In the Financial year 2002-03 Land worth Rs.6,29,649/- was sold to private parties and Financial Year 2004-05 Land worth Rs.8,13,387/- was sold to private parties. During the course of the assessment proceedings, notices u/s 131 of the Act were issued to the Principal Officers of the assessee company and M/s Aerens Jai Realty Pvt. Ltd. The assessee company authorized (vide board resolution dated 5/8/2008, copy of which was produced and is placed on record). Sh. Vinod Garg, the majority share holder and being the person looking after the affairs of the company, to appear in compliance with the notice. The statement of Sh.Vinod Garg was recorded u/s 131 on 25/08/2008 and that of Sh. Kamlesh Gupta, Director, M/s Aerens Jai Realty Pvt. Ltd was recorded on 16/9/2009. While Sh. Vinod Garg stated (in response to question no. 7) that the assessee company came to know about the offer for sale of the said land by the vendor “through Newspaper advertisements given by M/s Aerens Group”, the Director of the vendor company categorically denied (in response to question no. 7) having put up any advertisement inviting offers to purchase the land. In response to the question no. 8 seeking to know the purpose for which the said land was proposed to be purchased, it was replied by Sh. Vinod Garg that “the company was purchasing the land for the purpose of either developing it or selling it for the purpose of earning some income.” Considering that the assessee company had a share capital of Rs.1,00,000/- and neither any reserves (as on 1/4/2005) nor any other liquid assets, the assessee company was asked to explain as to how it proposed to arrange a sum of Rs. 4 Crore within the short period of one month (between 26/12/2005 and 31/01/2006, the date by which the payment was required to be made to the vendor) and the efforts made to come up with funds. It was replied vide answer to question no. 13 that “…some unsecured loans were received….as per books accounts”. However, on examination of the details of loans and the books of accounts, it was notice that the assessee had not received any unsecured loans between the period 26.12.2005 (the date on which the agreement to sell was entered into) and 31/1/2006 (the date by which the payment of balance Rs.3 Crore was required to be made, failing which the forfeiture clause would stand triggered). Both the persons were asked whether such a forfeiture clause (where Time of payment has been made of essence) has been incorporated in any transaction involving immovable property with any other party. The reply on behalf of the assessee company (Answer to question No. 17) was that “no land was purchased by it during the year under assessment or in the past but it is a regular practice to incorporate forfeiture clause in the agreement”. The Director of the vendor company also stated (vide answer to question no. 8) as follows:” Normally such clause is provided for in the agreements. However, for exact details of other deals containing such clauses, I shall have to refer to the agreements…” He was, therefore, asked to furnish copies of such agreements. Vide its letter dated 13/10/2008, the vendor company sent a copy of the papers purporting to be “Application Form” issued by the group companies to prospective applicants for registration and provisional allotment of residential plots in a proposed residential colony. The relevant clause (Clause no. 12 in the portion laying down the “basic terms and conditions of allotment” cited by the vendor company as being a proof of comparable conditions (time is of essence) reads as under:
“The time for timely payment of the installments is the essence of this contract. It shall be incumbent on the applicant to comply with the terms of the payment and all other terms and conditions of the allotment/sale, failing which the applicant shall have to pay interest @ 18% p.a. on the delayed payments for the first________ months from the due date. If the due amount of interest is not paid by the applicant within this grace period of _______months. Company reserves the right to forfeit the earnest money and cancel the booking.”
As mentioned above, in the P &L account, the loss of Rs.50 Lac was described as “Loss on Forfeiture of Shop”. Since the loss turned out to be a loss on account of forfeiture of earnest money for the proposed purchase of land, the assessee company was asked to explain as to how the nature of the “loss” has been described as “loss on forfeiture of shop”. It was sought to be explained that the loss was described as such in the P & L account on account of “Clerical mistake”.
The A.O, therefore, disallowed the loss of Rs.50,00,000/- as claimed by the assessee on account of forfeiture of earnest money.
The assessee filed appeal before the CIT (A). The CIT (A) held that the A.O was not justified in disallowing the loss claimed by the assessee on account of forfeiture of advance merely on suspicion without bringing any concrete evidence on record. The CIT (A) also observed that there was no irregularity in the claim of the assessee and the transaction entered by the assessee is a genuine transaction and is allowable as revenue expenditure in the hands of the appellant. The CIT (A) finally held that the assessee company was engaged in the business of Real Estate and sale and purchase of land since its inception and thus deleted the disallowance of forfeiture loss of Rs.50,00,000/- made by the Assessing Officer.
The Ld. DR submitted that the forfeiture of the contract agreement were just an attempt of the assessee to run away from the tax liability and the A.O has categorically given its reasoning while disallowing the said loss. The Ld. DR further submitted that the CIT(A) has not given an opportunity to the Assessing Officer to take cognizance of any kind of additional evidence and whole and sole rested the entire burden of proving the said transaction as sham and bogus on the Assessing Officer which is not just and proper. The Ld. DR relied upon the judgment of CIT vs. Ganasamparna Advertising 2015 TOIL 600 Delhi High Court. The Ld. DR further submitted that the decision of the CIT (A) is perverse because the genuineness of the transaction was always doubted. There was no money with the assessee to purchase the land and the substantial evidence shows that the assessee was not in a position to fulfill the transaction at its threshold and, therefore, should have not take the forfeiture as its business loss. The Ld. CIT(A) should have remitted back the matter to the Assessing Officer for taking additional evidence to prove that the transaction was not genuine instead he has allowed the appeal of the assessee.
The Ld. AR submitted that the Assessing Officer has given its finding mainly on presumptions and assumptions and no efforts have been taken by the Assessing Officer to prove that the transaction was not permissible or the transaction was not genuine. The Ld. AR also produced all the documents related to the sale. The Ld. AR further submitted that the assessee was very much interested and was trying to finalize the said deal but could not do so because of financial difficulty. The Ld. AR submitted that the evidence was on record that the initiation of transaction took place and there was proper justification given by the assessee to the Assessing Officer about the said loss with the support of the documents. Therefore, there is no need of remitting back the matter to the Assessing Officer by the CIT (A). The CIT (A) has taken cognizance of all the factors placed before the Assessing Officer as well as all the submissions of the assessee and with due diligence and proper application of mind has allowed the appeal of the assessee.
We have perused all the records and heard both the parties. The Assessing Officer has elaborately quoted the relevant portion of the agreement of the assessee with the other company. There was nothing on record to show that the transaction was not a genuine transaction. Merely by saying that the transaction is not genuine cannot result in a just and proper transaction in the eyes of law being held as not a genuine transaction. When the parties agreed to certain terms and conditions in a contract, the same are binding on the parties and it is not for the A.O. to say otherwise. One has to look into the aspect that under certain circumstances, if the parties cannot fulfill the terms of the agreement, the agreement provides certain mechanism to save the party who will suffer from the monetary loss. The genuineness of the agreement cannot be doubted by the Assessing Officer by simply giving one general statement to that effect. The Assessing Officer has to make out through the terms and conditions of the contract between the parties and the circumstantial evidences that the agreement was deliberately not fulfilled by any of the parties. There was nothing to show on record to that effect in this particular case. All these aspect was taken into account by CIT (A), therefore, the CIT (A) has rightly given a finding in favour of the assessee. In view of the above discussion, we do not find any necessity to interfere into factual findings given by the CIT(A). Hence we uphold the CIT(A)’s order.
In result, the appeal filed by the Revenue is dismissed.
The order is pronounced in the open court on 20th of May, 2016.