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2016 (5) TMI 30 - ITAT CHENNAI

2016 (5) TMI 30 - ITAT CHENNAI - [2016] 48 ITR (Trib) 310 - Capital loss V/S business loss - nature of loss - Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land - Held that:- The assessee, for the reasons best known to it, decided not to proceeded with the project and accordingly abandoned the project which resulted in forfeiture of the advance amount of ₹ 50 lakhs by the vendors of the la .....

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iness was forfeited. Therefore, this Tribunal is of the considered opinion that the assessee has suffered the loss in the regular course of business. The Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land. The Assessing Officer has also found that if the land was retained and sold, the assessee would have earned more gain than incurring loss. We are unable to uphold the reasoning of the authorit .....

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the project after paying advance of ₹ 50 laks, that cannot be a reason for treating the loss claimed by the assessee as capital loss.

An asset may be a capital asset in the hands of the seller and it may be a stock-in-trade in the hands of the purchaser. It all depends upon the transaction. For example, when a manufacturing industry purchases a machinery for its manufacturing activity from the industry which manufactures the machinery, the machinery purchased by the manufacturi .....

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s of the land cannot be a determining factor to allow the claim of the assessee either as revenue loss or as capital loss. It has to be decided whether the loss has occurred in the course of the business activity for acquiring a stock-in-trade in the hands of the assessee. In this case, admittedly, the assessee acquired a stock-in-trade for construction of residential flats at Ambattur in Madhavaram Vilalge. Therefore, the loss, if any, suffered in the course of the acquisition of the stock-in-t .....

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Obtaining proper voucher from such kind of unorganized laboruers is something beyond the control of the assessee. Therefore, the assessee has to necessarily make self-made vouchers to evidence the payment of salary to such labourers engaged in the construction activity. Therefore, the Assessing Officer has to examine whether there was any inflation of the expenditure claimed by the assessee after comparing the nature of the work carried out by them. In the case before us, it is nobody’s case th .....

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3% of the total expenditure is not called for. Accordingly, the orders of the lower authorities are set aside and the disallowance made by the Assessing Officer @ 3% to the extent of ₹ 37,37,206/- is deleted.

Allowability of interest on borrowed funds - Held that:- This Tribunal is of the considered opinion that the entry in the books of account is irrelevant for the computation of taxable income. The income is computed as per the Income-tax Act, 1961 irrespective of the entries .....

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is not the case of the Revenue that the assessee is not constructing any other flats or residential complex at the relevant point of time. When the assessee is constructing residential complexes during the relevant period of time and also proposed to commence a project at Thaiyur, this Tribunal is of the considered opinion that the expenditure on the borrowed funds has to be necessarily allowed. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the o .....

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directed against the order of the Commissioner of Income-tax (Appeals)-11, Chennai, dated 26.2.2015 and pertains to assessment year 2010-11. 2. Shri D.Anand, ld. Counsel for the assessee submitted that the first issue arises for consideration is disallowance of ₹ 50 lakhs. According to the ld. Counsel, the assessee-company engaged itself in the business of real estate, construction of residential complexes etc. In the course of its business activity, the assessee entered into an agreement .....

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s are non-resident Indians and software employees. Financial crisis in US, affected the real estate market in India since the assessee is targeting mainly software employees and non-resident Indians. Therefore, the assessee-company could not make any progress in respect of the land purchased at Ambattur, Madhavaram Village and hence, the Board of Directors decided to abandon the project. The land owners, however, forfeited the advance given by the assessee. Therefore, the advance given by the as .....

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vance. The sellers of the land have also not treated the advance forfeited by them as income in their hands. Therefore, the loss suffered by the assessee is a capital loss hence, it cannot be allowed as business loss while computing the total income. According to the ld. Counsel, merely because the sellers treated the amount in question as capital asset in their hands that does not automatically be treated as capital asset in the hands of the assessee-company. Admittedly, the assessee-company is .....

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e order of the Assessing Officer. 3. On the other hand, Shri P. Radhakrishnan, ld. Departmental Representative submitted that the assessee is engaged in the real estate and construction of residential complexes. The assessee is also one of the reputed builder in the city of Chennai and purchasing huge track of land with an intention of exploit the same in the business of construction of flats. According to the ld. DR, there was substantial increase in the land prices in an around the urban areas .....

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of the land. According to the ld. DR, the advance given by the assessee even though it was forfeited cannot be treated as business loss. Therefore, the CIT(A) has rightly upheld the order of the Assessing Officer. 4. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee engaged itself in the business of real estate and construction of flats/residential apartments. The contention of the ld. DR is that the assessee has .....

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rder to promote the construction of flats, the assessee intended to purchase 6.68 acres of land at Ambattur, Madhavaram Village. After entering into an agreement, the assessee has also paid ₹ 50 lakhs as advance. The payment of ₹ 50 lakhs as advance for purchase of 6.68 acres of land is not in dispute. The assessee, for the reasons best known to it, decided not to proceeded with the project and accordingly abandoned the project which resulted in forfeiture of the advance amount of &# .....

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stock-in-trade in the course of the business was forfeited. Therefore, this Tribunal is of the considered opinion that the assessee has suffered the loss in the regular course of business. The Assessing Officer treated the loss as capital loss on the ground that the land in question was treated as capital transaction by the vendors of the land. The Assessing Officer has also found that if the land was retained and sold, the assessee would have earned more gain than incurring loss. We are unable .....

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t merely because the assessee abandoned the project after paying advance of ₹ 50 laks, that cannot be a reason for treating the loss claimed by the assessee as capital loss. 5. The next reason for the Assessing Officer to treat the loss as capital loss is that the vendors of the land treated the transaction as capital transaction. This Tribunal is of the considered opinion that the land may be a capital asset in the hands of the vendors. However, when the land comes to the possession of th .....

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-trade in the hands of the company which manufactures machinery. However, it is a capital asset in the hands of the company which purchases the machinery for using the same in its manufacturing activity. Similarly, when the land owners sell the land to a real estate dealer, the land is a capital asset in the hands of the land owner. However, the same land purchased by the real estate dealer becomes a stock-in-trade. Therefore, the treatment in the hands of the vendors of the land cannot be a det .....

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lowed a revenue loss, hence, it has to be allowed as business loss while computing the total income. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow ₹ 50 lakhs as business loss while computing the taxable income of the assessee. 6. The next ground of appeal is with regard to disallowance of labour expenditure. 7. Shri D. Anand, ld. Counsel for the .....

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ey by the individual labour therefore, the assessee has prepared self-made vouchers. According to the ld. Counsel, without making payment, the assessee could not have completed the project. The ld. Counsel further submitted that the labourers used to move from one place to another, therefore, locating the labourers who actually received the money is difficult. When the work was carried on by the assessee, according to the ld. Counsel, the assessee has to necessarily make the payment. Therefore, .....

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assessee claims that all labourers were unskilled labourers with high mobility and scarcity of labour force on day today basis, the Assessing Officer keeping in view the fact that the labourers were uneducated, disallowed the expenditure at 3% of the total claim made by the assessee. According to the ld. DR, when the vouchers were not verifiable, the Assessing Officer has reasonably estimated the disallowance at 3%. Therefore, the assessee cannot have any grievance. 9. We have considered the ri .....

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nized laboruers is something beyond the control of the assessee. Therefore, the assessee has to necessarily make self-made vouchers to evidence the payment of salary to such labourers engaged in the construction activity. Therefore, the Assessing Officer has to examine whether there was any inflation of the expenditure claimed by the assessee after comparing the nature of the work carried out by them. In the case before us, it is nobody s case that the assessee has inflated the expenditure. In t .....

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ordingly, the orders of the lower authorities are set aside and the disallowance made by the Assessing Officer @ 3% to the extent of ₹ 37,37,206/- is deleted. 10. The next ground of appeal is with regard to disallowance of brought forward losses and unabsorbed depreciation to the extent of ₹ 86,84,479/-. 11. Shri D. Anand, ld. Counsel for the assessee submitted that the during the financial year 2008-09 the assessee has borrowed loan for housing project at Thaiyur, Chennai. There was .....

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s closing stock as per the Accounting Standard 7. The ld. Counsel further submitted that necessary adjustments were also made in computing the taxable income in the year in which the project was fully accounted. According to the ld. Counsel, the interest on the borrowed fund has to be allowed to be carried forward as claimed in the return of income. 12. On the contrary, Shri P. Radhakrishnan, ld. DR submitted that the assessee claimed deferred revenue expenditure in respect of the interest on bo .....

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taining regular books of account for construction of the flats. When the assessee is maintaining regular books of account and claiming the expenditure after commencement of the project on the interest payment, there is no reason to deviate from the same while computing the taxable income. According to the ld. DR, the interest on the borrowed fund before commencement of the project cannot be allowed as expenditure either for assessment year 2009-10 or for assessment year 2010-11. Therefore, the C .....

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as revenue expenditure. Since the construction of flats was not commenced due to delay in getting approvals from multiple authorities, the assessee carried forward the deferred revenue expenditure and claimed the same during the year under consideration. The question arises for consideration is when the assessee is in the business of construction of residential flats and borrowed funds for the purpose of business, whether the interest on such borrowed funds is an allowable expenditure or not? T .....

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