INCOME TAX ACT, 1961

Section 143(3) read with Section 41(1)

Assessment - Addition to income - Disallowance of forfeiture of earnest money deposit made by assessee - Ascertainment of liability, whether dependent on order of higher Court

Assessee was a real estate developer carrying out its operations under its proprietorship concern. Assessee acquired interest in property owned by certain concern and paid earnest money against purchase consideration. Said amount was forfeited as assessee failed to comply with terms and conditions of MoU. Assessee claimed deduction for said sum in relevant assessment year, which was disallowed by AO on allegation that six months from date of the MoU lapsed and therefore, liability on account of forfeiture arose in subsequent assessment year. Held: Under mercantile system of accounting, a deduction can be claimed when liability to pay amount is incurred. As against a statutory liability becoming deductible only against the notice of demand, a contractual liability is incurred when enforceable liability to pay is created against assessee. View point by CIT(A) that assessee could get deduction only when matter was finally decided by Supreme Court, was neither here nor there. It was so for reason that insofar as question of deduction was concerned, same depended on ascertainment of liability, which event already happened in relevant year. If, suppose, at a later point of time, higher Courts decide issue in favour of assessee and forfeiture of earnest money was reversed, assessee would be obliged to include such amount in total income of such later year by virtue of provisions of section 41(1). Therefore, assessee was entitled to deduction in relevant assessment year.

Followed:National Agricultural Co-operative Marketing Federation of India Ltd. v. CIT (2011) 338 ITR 36 (Del) : 2012 TaxPub(DT) 0489 (Del-HC)

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2012-13

SUBSCRIBE FOR FULL CONTENT