Case Note & Summary
The appellant, an individual assessee, filed his return of income for the assessment year 2009-2010 claiming a deduction of Rs.90,00,000/- as revenue expenditure. This amount represented an advance paid under a Memorandum of Understanding (MOU) dated 27/08/2008 entered into with Sunshine Enterprises for the purchase of a Suzlon-made windmill along with the land on which it was situated, referred to as the 'project'. The total sale consideration was Rs.5.71 Crores, comprising Rs.50,000/- for the land and the balance for the windmill. The assessee paid an advance of Rs.90 lakhs. However, the contract was abandoned and the advance was forfeited. The assessee claimed this forfeited amount as a revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer disallowed the claim, treating it as capital expenditure. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) confirmed the disallowance. The assessee then appealed to the High Court. The High Court framed two questions of law: whether the ITAT erred in confirming that the forfeited amount was capital expenditure, and whether the ITAT erred in not appreciating that the amount incurred under an abandoned contract is allowable as revenue expenditure under Section 37(1) read with Section 28(i). The court examined the terms of the MOU and noted that the assessee was in the business of trading and had entered into the MOU in the course of his business. The court observed that the forfeited amount was not for acquisition of any capital asset as no asset was ultimately acquired. The expenditure was incurred in the course of carrying on business and did not result in any enduring benefit to the assessee. The court relied on the principle that where an expenditure is incurred for the purpose of business and no capital asset is acquired, it is revenue in nature. The court held that the forfeited amount was a business loss and allowable as a deduction under Section 37(1) of the Act. Accordingly, the appeal was allowed, the questions of law were answered in favor of the assessee, and the impugned order of the ITAT was set aside.
Headnote
A) Income Tax - Capital vs Revenue Expenditure - Forfeited Amount under Abandoned Contract - Section 37(1) of Income Tax Act, 1961 - The assessee entered into an MOU for purchase of a windmill project and paid an advance of Rs.90 lakhs. The contract was abandoned and the advance was forfeited. The assessee claimed the forfeited amount as revenue expenditure. The Revenue treated it as capital expenditure. The High Court held that since no asset was acquired and the expenditure was incurred in the course of carrying on business, the forfeited amount is allowable as revenue expenditure under Section 37(1) of the Act. (Paras 1-14) B) Income Tax - Business Expenditure - Forfeiture of Advance under Contract - Section 37(1) r.w.s 28(i) of Income Tax Act, 1961 - The court held that the forfeited amount was not for acquisition of any capital asset but was a loss incurred in the ordinary course of business. The assessee was in the business of trading and the MOU was entered into in the course of business. The forfeiture did not result in any enduring benefit to the assessee. Therefore, the expenditure is revenue in nature and deductible. (Paras 10-14)
Issue of Consideration
Whether the amount forfeited by the assessee under an abandoned contract for purchase of a windmill project is capital expenditure or revenue expenditure allowable as deduction under Section 37(1) of the Income Tax Act, 1961.
Final Decision
Appeal allowed. The questions of law are answered in favor of the assessee. The impugned order of the ITAT is set aside. The forfeited amount of Rs.90,00,000/- is held to be revenue expenditure allowable as deduction under Section 37(1) of the Income Tax Act, 1961.
Law Points
- Forfeited amount under an abandoned contract for purchase of capital asset is revenue expenditure if no asset is acquired
- Section 37(1) of Income Tax Act
- 1961
- Business expenditure
- Capital vs revenue expenditure
