2010 (12) TMI 1319 - AT - Income Tax

Summary

Issues Involved: Whether the disallowance of earnest money deposit as a capital expenditure is justified.

Summary:

Issue 1: Disallowance of Earnest Money Deposit

The assessee applied for two plots and paid earnest money, but later forfeited one amounting to Rs. 7,92,000. The Assessing Officer disallowed the claim as a penalty/fine not allowable under Section 37(1). The CIT(A) upheld the disallowance as a capital loss. The assessee contended that the forfeiture was not a penalty but a normal business loss, as the plot purchase was not viable. The Tribunal found that the forfeiture was as per agreement terms, not due to any legal violation, making it a business expenditure. Since the earnest money was for business purposes, not capital assets, the loss was allowable. The appeal was allowed, overturning the lower authorities' decision.

This judgment dealt with the issue of disallowance of earnest money deposit as a capital expenditure. The assessee's contention that the forfeiture was a business loss, not a penalty, was accepted by the Tribunal, emphasizing the business nature of the transaction and the absence of legal violations.