INCOME TAX ACT, 1961

Section 28

Business loss - Allowability - Earlier income from project declared as capital gain -

Assessee company engaged in real estate business development had various subsidiaries through which it had acquired pieces of land/plots, and they hand over such land and plot for development and give all the development rights to assessee company to develop projects, townships, commercial establishments, etc. Assessee thereafter as a part of its business venture applied for Change Land Use 'CLU' and other permission from Government to start development project. Assessee in pursuance of its business objects made investment in one of its subsidiary companies, Silver Town Inn and Resorts Pvt. Ltd. for Rs. 18,47,45,452 as it owned agricultural/plot of land. The assessee was to undertake development of said land and CLU was to be obtained for commercial use, i.e., for Motel/Restaurant by assessee and not by Silvertown. Since assessee company as a part of business venture decided to dispose-off said investment and negotiated with investors who were interested in making the investment even though asset of the company was merely 2.53 acres of agricultural land. However, aggregate consideration as agreed between the parties was totally depended upon the condition that if the assessee could get CLU and other clearances by government, then only price would be paid which was agreed at Rs. 93 crores. Since, aggregate consideration of Rs. 93 crores was subject to various conditions, that assessee would comply, apply and obtain valid and legal permission for change in land use and other requisite permission for FSI and development of project on said land. As per agreement with buyer for sum Rs. 93 crore, Rs. 15 crore was initially payable and balance amount of Rs. 77,98,88,400 was payable, subject to assessee getting various permission. Since, agreement for transfer of shares was entered in the financial year 2009-10, assessee offered entire amount of Rs. 93 crores on accrual basis under the head long-term capital gains. There were certain turn of events that the adjacent land and part of land under assessee's project was acquired by government for widening of national highways and certain areas were declared as green belt. Due to this governmental order, entire project had failed and CLU and other legal permission ostensibly could not be obtained. Later on, said piece of plot/land was sold at a meagre sum of Rs. 5,60,00,000 as compared to aggregate consideration of Rs. 93 crores, had all the conditions would have been fulfilled and project could have been started by the buyer. In the relevant financial year 2012-13, i.e., relevant for the assessment year 2013-14, it became clear that buyer would not pay the amount and since assessee had already declared said income in the assessment year 2010-11, the same has been claimed as business loss/written off as bad debt. AO held that once character of income declared by the assessee was on capital account and assessee offered the income under the head 'long-term capital gain', then loss claimed on the same very transaction could not be allowed as business loss and was, therefore, assessable as capital loss. Held: Assessee company was carrying out purely real estate business and getting of CLU/FSI on land and project and other governmental clearance, is part of its core business activities. Hence, any such income or loss arising from such activities ostensibly is assessable under the head 'business or profession'. The substance of the transaction of shares was the underlying asset of sale value of agricultural land and more importantly, services of CLU which made the asset more valuable. The sale consideration of shares in assessment year 2010-11 was, in fact, profit/income for the services rendered in connection with obtaining the CLU and other clearance because value of agricultural land of Rs. 2.53 acre could not have fetch price of Rs. 93 crores, as its value was only dependent upon obtaining CLUs for commercial use and other governmental permission. The said land could have been changed for commercial use only by getting CLU for which such a huge price was negotiated which was almost 20 times the value of actual land, because as brought on record ultimately the said land was sold later on at Rs. 5.6 crores only. Further, claim of income or loss or any deduction has to be examined afresh in the year in which it is claimed without disturbing earlier assessment which had attained finality, and therefore, claim of loss made in concerned year was allowable as business loss.

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