Amount forfeited on default of installment for purchase of property held capital in nature

Amount forfeited on default of installment for purchase of property was capital in nature as the amount was fixed irrespective of which installment the assessee failed to pay – High Court

ABCAUS Case Law Citation:
ABCAUS 2833 (2019) (03) HC

Important Case Laws Cited/relied upon by the parties
Commissioner of IncomeTax Vs. Anjani Kumar Co. Ltd. [2003] 259 ITR 114  (Raj.), 
B. M. World Trade Corporation Vs. Commissioner of Income­ Tax, [1990] 186 ITR 412 (Bom.)

Commissioner of Income ­tax Vs. Mahalaxmi Textile Mills Ltd. [1967] 66 ITR 710 (SC), 

In the instant case, the appeal was filed by the assessee to challenge the judgment of the Income Tax Appellate Tribunal (ITAT) in confirming that the amount forfeited towards abandoned of project was capital expenditure and was not allowable as Revenue Expenditure.

The assessee desired to start a new business of generation of power. He entered into an agreement /Memorandum of Understanding with a party for purchase of plant along with land on which the same was  situated. This entire asset i.e. the land along with installed plant thereon, was referred in the said MOU as the ‘project’. The MOU contained a clause providing for cancellation of the contract and forfeiture if the assessee did not make full payment towards purchase price as per the schedule.  

After making initial payment, the assessee defaulted in making further payments, upon which the said MOU was cancelled by executing a further deed of cancellation.

The seller, out of the initial payments, forfeited 90% of the amount and returned the rest 10% to the assessee. The assessee claimed the amount forfeited as deduction claiming it as revenue loss. 

However, the Assessing Officer held that the loss was a capital loss. The Tribunal in the impugned judgment observed that the payment was made pursuant to the said MOU, which was by way of advance for acquisition of plant. The assessee had entered into new business of generation of power. The advance was therefore in the nature of capital advance or capital investment. The loss did not arise during the course of business but from the investment in capital asset. 

The Hon’ble High Court observed that as per the MoU, various clauses envisaged the transfer of the title only upon the full payment of the sale consideration. Even otherwise, title in the immovable property would not pass otherwise than under a registered document which is compulsorily registerable. 

The Hon’ble High Court noted that as per the MoU, till the final payment, the assessee could at best be a permissive user of the plant and the title in the property had never passed on to the assessee under the MOU.

The Hon’ble High Court opined that the sum forfeited by the seller could not be treated as lease rental as the agreement provided that in case of any failure to pay the agreed amount within the agreed time on the part of the assessee, the seller would withdraw or cancel the contract and in such event, the seller would be entitled to forfeit the said amount and return the balance out of the sum already paid. The salient feature of the relevant clause was that the specified sum to be retained by the seller was fixed irrespective of which installment the assessee failed to pay, for how long the possession and use of the asset is retained by the assessee and under what  circumstances  the payment could not be made.

The Hon’ble High Court opined that linking of forfeited sum to be retained by seller on account of default of payment by the assessee, to the lease rental charges was opposed to the forfeiture clause having no relation to the period for which such asset was put to use by the assessee. In a given  case, the asset might have remained with the assessee for only one month before the forfeiture  clause might kicked in and in a given case, the assessee might have defaulted in the last instalmentand  till then continue to use the plant. In either case, the forfeiture of the amount would have remained the same.­

The Hon’ble High Court also noted that relevant clause referred to forfeiture of the amount and not a lease rental, nor such intention could be gathered from any other clause contained in the MOU. The MOU was one integrated contract for sale of the asset and permissive user of the asset till payment of full installments. The lease rental if at all was embedded in the contract terms. There was no separate lease rental envisaged, none could be culled out from the terms of the contract.

Referring to the case law relied upon by the assessee, the Hon’ble High Court clarified that the said decision was rendered in the background of the fact where the assessee had agreed to acquire a property on lease and in the process suffered loss. It was in that background the Court had held that the loss was of revenue nature and the   Court was of the opinion that the lease for a particular period would not amount to advantage of enduring nature and even if it results into any advantage of enduring nature, same would not always result in capital outlay.

Accordingly,  the Income Tax Appeal was dismissed.

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