Assessee pointed out that the property in question was intended to be purchased for the purpose of constructing office premises and was directly related to the business of the assessee and therefore the deduction claimed should be allowed. As in the present case the Assessee did not acquire any capital asset and merely paid advance for acquiring capital asset for business purpose which was not refunded so is a business loss and had to be allowed as deduction.
1. The assessee entered into an agreement dated 11.08.1999 with M/s. Hooghly Mills Ltd for purchase of the property owned by Ws. Hooghly Mills Co.Ltd at at Raja Santosh Roy Road, Kolkata. The assessee paid a sum of Rs.3 crores as advance at the time of the agreement for sale. It is the plea of the assessee that the property in question which was agreed to be purchased by the assessee was a land on which the assessee wanted to construct a building to be used as its office premises. However due to disputes the ultimate sale did not fructify. In full and final settlement, Ws. Hooghly Mills Co.Ltd., refunded only a sum of Rs.85 lacs, by way of refund of advance paid under the agreement of sale. The assessee thus incurred a loss of Rs.2,15,00,000/-. The cancellation of the agreement and repayment of Rs.85 lacs was in the month of May, 2004 and therefore the loss of Rs.2,15,00,000/- was written off in the books of account and claimed as a deduction while computing the total income of the assessee.
2. The AO was of the view that the loss in question was a capital loss and cannot be allowed as deduction as the advances in question was given for acquiring the capital The AO in this regard made a reference to the decision of the Hon’ble Supreme Court in the case of Hashimara Industries Limited 230 ITR 927 (SC) wherein it was held that the deposit made by the assessee in connection with a leave and license agreement to work in a mill and loss due to irrecoverability of such deposit was to be regarded as a capital loss and not a business loss.
3. Before CIT(A) the assessee submitted that deduction u/s 28 or 37(1) of the Act is admissible for loss incidental to business and the only test to be satisfied is that the loss must arise from or spring directly from carrying on business. In other words, in order that loss occasioned from non-realisation of the advances should be allowed as business loss, there must be nexus between the business and the loss which has been incurred by the assessee. The assessee pointed out that the property in question was intended to be purchased for the purpose of constructing office premises and was directly related to the business of the assessee and therefore the deduction claimed should be allowed. The assessee also distinguished the decision relied upon by the AO in the case of Hashimara Industries Ltd. (supra). The assessee pointed out that in the aforesaid decision the assessee deposited Rs.20,00,000/- and the property was handed over to the assessee on which the mills were run. The seller went into liquidation and subsequently the amounts were written off as bad debts by the assessee on account of incapacity of the seller to pay the same. The court held that by making a deposit of Rs.20,00,000/- the assessee had acquired licence of the cotton mill due to which the assessee was able to carry on the cotton business. Hence the loss suffered was on capital account and cannot be deducted as a business loss. It was pointed out that in the present case the Assessee did not acquire any capital asset and merely paid advance. The assessee also placed reliance on the decision of the Hon’ble Rajasthan High Court in the case of CIT vs Anjani Kumar Co. Ltd. 259 ITR 114 (Raj.) wherein it was held that advances made to agriculturist for purchase of land which was not refunded was a business loss and had to be allowed as deduction. Reliance was also placed on the decision of ITAT Mumbai in the case of Pik Pen Pvt. Ltd. Vs ITO in ITA No.6847/Mum/2008 order dated 28.01.2010 laying down the identical proposition.
4. The CIT(A) was of the view that the decisions relied upon by the assessee before him directly supported the plea of the assessee that the loss in question was a loss incidental to the business and was not a capital loss. He therefore held that the disallowance made by the AO cannot be sustained. Aggrieved by the order of CIT(A) the revenue has raised ground no.4 before the Tribunal.
5. We have heard the submissions of the ld. DR, who relied on the order of AO. The Counsel for the assessee relied on the order of CIT(A).
6. We have given a very careful consideration to the rival submissions. We are of the view that order of the CIT(A) does not call for any interference. The decision of the Hon’ble Rajasthan High Court in the case of Anjani Kumar Co. Ltd. (supra) and the decision of ITAT, Mumbai in the case of Pik Pen Pvt. Ltd. (supra) clearly support the conclusions arrived at by CIT(A). As far as the decision of the Hon’ble Supreme Court in the case of Hashimara Industries Co.Ltd. (supra) is concerned, as rightly contended by the ld. Counsel for the assessee, in the aforesaid decision the assessee acquired right to carry on the business which itself was on capital account and the loss suffered on such capital account was also held to be a capital loss and not a business loss. In the present case the Assessee did not acquire any capital asset and merely paid advance for acquiring capital asset. We are therefore of the view that there is no merit in ground 4 raised by the revenue and the same is dismissed.