Advance Forfeited in Ordinary Course of Business: Allowability under Income Tax

Facts of the Case

• Assessee, being a real estate company, had given an advance of ₹5 crores in 2004 for purchase of land to construct commercial complex to Housing Development & Infrastructure Ltd (HDIL). In 2011, HDIL forfeited the entire advance due to non-payment of balance amount.
• In A.Y. 2012-13, assessee off-set the entire forfeited amount with his business income. Assessing Officer (AO) initiated assessment proceedings and disallowed the forfeited amount.

Contention of the Department

• Forfeiture of advance was a colorable device, created by the assessee to adjust short-term capital gains earned due to sale of another property against forfeiture of advance.
• Document furnished by the assessee in support of forfeiture of advance was a self-serving document.
• Assessee as well as the intending seller had taken advantage of the Income Tax provisions and there is no explanation as to why the forfeiture was claimed in the year in which short term capital gain had arisen for the assessee.

Contention of the Assessee

• When the transaction (forfeiture of money to be categorized revenue or capital expense) is accepted by the AO himself, then no question arises to label the same as colorable device. Accordingly, it was allowable business expenditure under section 37(1) of the Act.
• Since the assessee is engaged in business of real estate, documents in support of the forfeiture, such as the copy of the agreement to sell, letter requesting for extension of agreement, letters granting extension from HDIL, letter granting final opportunity, and letter of forfeiture of advance proves the genuineness and authenticity of business expenditure.

Decision held High Court of Delhi

• Delhi High Court held that the genuineness of the transaction is not disputed since the AO himself accepted the transaction and was unable to find any cogent ground or reason for the same to be considered as colorable device.
• It agreed with the assesee’s treatment as business expenditure since the main object of the business of Assessee is development of real estate and he has satisfied the conditions laid down by the provisions of the Income Tax Act, 1961 and provided sufficient requisite documents in this regard.

Conclusion

An expenditure in the ordinary course of business will be considered as the business expenditure, if the assessee justifies that it is related to its ordinary course of business and has all supporting documents related to the transaction. Since, the assessee discharged its onus of proving that the same is an expenditure in the ordinary course of business, therefore, the onus shifted to the AO, to prove it otherwise, who failed to discharge the same.

Source: [2020] 114 taxmann.com 688 (Delhi), Principal Commissioner of Income-tax-3 v. Frontier Land Development (P.) Ltd.