Sum Forfeited by land owners in the course of Land Business allowed as Business expense: ITAT Delhi

Fact and Issue of the case

The assessee in this case is engaged in the business of real estate development and allied activities. During the year assessee ha written off an amount of Rs. 10 lacs in respect of the amount refunded to the broker Sh. Jagdish Nain. It was submitted that Sh. Jagdish Nain, broker had paid a sum of Rs. 10,00,000/- to the farmers for purchase of 15.60625 acres of land in village Badshahpur. As the farmers were unwilling to sell the land, the amount of Rs. 10 lacs paid by the broker to the farmers remained unrealized. This amount of Rs. 10 lacs was claimed as amount written off. Assessing Officer opined that the above claim of the company was not genuine. He opined that assessee has not produced any communication / receipt from Jagdish Nain that he paid Rs. 10 lacs to the farmers on behalf of the company. Assessing Officer further opined that it was not clear that Sh. Jagdish Nain had paid a sum of Rs. 10 lacsa to the farmers. Assessing Officer concluded as under:-

“Even if the amount is to be written off then the assessee is required to prove that the sum of Rs. 10 lacs has been included in the income for any previous year only the amount can be eligible for deduction u/s. 36(1)(vii) r.w.s. 36(2) of the I.T. Act, 1961, but the assessee has failed to prove the same.

The amount of Rs. 10 lacs paid is not allowable u/s. 37(1) as the assessee has not proved that such expenditure has been made wholly and exclusively for business purposes.

In view of the above facts, the claim of Rs. 10 lacs being amount written off is disallowed and added back to the total income of the assessee company.

Against the above order the assessee is in appeal before us.

Observation of the Tribunal

The court has carefully gone through the submissions and documents made by the assessee. Court finds that it is undisputed that assessee was engaged in the purchase and sale of land through brokers. In one such dealing Sh. Jagdish Nain had paid a sum of Rs. 10 lacs to the land owners on behalf of the assessee. The said deal did not materialize as no agreements could be reached regarding the rate of sale. The land owners to whom a sum of Rs. 10 lacs was paid, forfeited the same and did not return it. In these circumstances, assessee company had to reimburse Shri Jagdish Nain a sum of Rs. 10 lacs. The same amount was duly paid through the account payee cheque. In these circumstances, in our considered opinion, the payment made by the assessee has to be allowed as business expenditure u/s. 37(1) of the I.T. Act. In this regard, we find that ld. Counsel of the assessee has placed reliance upon the decision of the Hon’ble Delhi High court in the case of C.I.T. vs. New Delhi Hotels Ltd. passed in I.T.A. No. 1258/2010 dated 22.3.2012 wherein it has been held as under:-

“Claim of bad debt – Business or Capital loss – In the assessment order dated 29.8.2006, the Assessing Officer disallowed bad debt of Rs. 44,28,000/- on the ground that provisions of Section 36(1)(vii) read with Section 36(2) of the Act were not satisfied as the amount had not been taken into account in computing income of the earlier years – it is not in dispute that the assessee is also in the business of constructing and developing buildings – The amount of Rs. 44,28,000/- receivable from M/s Gulmohar Estate Ltd. paid towards purchase of flats were shown under the head ‘loans and advances’ in the balance sheet as on 31.3.1991 – It is also an admitted position that the possession of the fats agreed to be purchased by the assessee was not given to the assessee and, thus, the transfer of flats within the meaning of Income tax Act was not given to the assessee and, thus, the transfer of flats within the meaning of Income Tax Act was not completed – the transaction to purchase property form M/s Gulmohar Estate Ltd. was related or incidental to the assessee’s business. After taking into account the intention of the assessee, it is well settled that it is the intention of the assessee which would matter in deciding as to whether the property purchased were intended for carrying on business or to hold it as an investment coupled with the line of the business carried on by the assessee – Decided in favor of the assessee.”

Court finds that the ratio from the above High Court decision is also applicable on the facts of the case. A sum of advance of Rs. 10 lacs which was paid by Shri Jagdish Nain was on behalf of the assessee and the payment was related and incidental to the assessee’s business. The loss of the amount paid and the consequential reimbursement to Sh. Jagdish Nain was also incidental to the business of the assessee. In these circumstances, in the background of the aforesaid discussions and precedents, we set aside the orders of the authorities below and decide the issue in favour of the assessee.