Facts of the Case

The appellant-assessee, M/s ICS Systems Private Limited, was engaged in manufacturing activities and filed its return for Assessment Year 2001–02 declaring income of ₹10,81,790. During scrutiny under Section 143(2), a dispute arose regarding deduction of ₹3,93,327, which had been forfeited by Haryana State Industrial Development Corporation (HSIDC).

The assessee had applied for an industrial plot in Gurgaon and deposited ₹10.87 lakhs (25% of cost). However, the allotted plot was smaller than applied for, leading the assessee to refuse acceptance and seek a refund. HSIDC refunded ₹6,94,173 and forfeited the remaining ₹3,93,327.

The assessee claimed this forfeited amount as revenue expenditure.

Issues Involved

  1. Whether forfeiture of advance paid for acquisition of an industrial plot constitutes capital loss or revenue expenditure.
  2. Whether such loss is deductible as business expenditure under the Income Tax Act, 1961.

Petitioner’s Arguments

  • The assessee contended that:
    • No capital asset was actually acquired.
    • The forfeiture was incidental to business operations.
    • The loss should be treated as revenue expenditure, being part of business activity.
  • Reliance was placed on judicial precedents where similar forfeitures were treated as revenue losses.

 Respondent’s Arguments

  • The Revenue argued that:
    • The payment was made with the intention of acquiring a capital asset (industrial plot).
    • Even though the transaction failed, the nature of the expenditure remained capital.
    • Therefore, forfeiture resulted in a capital loss, not allowable as revenue deduction.

Court Order / Findings

The Delhi High Court held:

  • The deposit was made for acquisition of a capital asset, i.e., industrial land.
  • The forfeiture occurred in the course of a transaction aimed at acquiring a capital asset.
  • The loss was not related to the profit-earning process of the business.
  • Therefore, the forfeited amount constituted capital loss and not revenue expenditure.

The Court answered the substantial question of law in favour of the Revenue and against the assessee, dismissing the appeal.

Important Clarification

  • The Court emphasized the distinction:
    • Revenue expenditure → Related to day-to-day business operations and profit generation.
    • Capital expenditure/loss → Related to acquisition or attempt to acquire a capital asset.
  • Even if the asset is not ultimately acquired, the purpose of expenditure determines its nature.

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 143(2) – Scrutiny Assessment
  • General principles relating to capital vs revenue expenditure under Income Tax Act, 1961

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:193-DB/SKN10012019ITA1322009.pdf

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