INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Addition on account of forfeiture of advance - Revenue or capital expenditure - Allowability

During assessment, AO noticed that entire capital gain and interest income was offset with an amount claimed as forfeiture of advance for purchase of property. Assessee was asked to justify the offset and to show cause as to why forfeiture of advance should not be treated as capital expenditure. The explanation offered by assessee was not accepted and AO observed that forfeiture of advance given was a colourable device to adjust capital gains. He accordingly characterised forfeiture as capital expenditure. CIT(A) and Tribunal reversed the order of AO. Held: In order to claim deduction, assessee has to satisfy requirements of section 37(1) which lays down several conditions, such as-the expenditure should not be in the nature described under sections 30 to 36. The main object of business of assessee was development of real estate. It made a payment as advance for purchase of land to construct commercial complex for the development of real estate. Since it did not make payment of the balance amount for whatever reason, the advance given was forfeited. Therefore, forfeiture of advance could not be categorised as capital expenditure.

REFERRED : Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) : 1995 TaxPub(DT) 1173 (SC), McDowell & Co. Ltd. v. CTO 1986 AIR 649 (SC), CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) : 1971 TaxPub(DT) 0375 (SC), ITO v. Frontiner Land Development Pvt. Ltd. [ITA No:-5947/Del/2016, dt. 28-5-2019], Rekhi Lamba Realtors v. ITO [ITA No. 888/Mum/2009, dt. 20-12-2010]

FAVOUR : In assessee's favour

A.Y. :

INCOME TAX ACT, 1961

Section 14A Rule 8D

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