Advances Retained as Book Liabilities Not Taxable Under Section 56(2)(ix) in Absence of Actual Forfeiture: Karnataka HC
Summary: The Karnataka High Court in PCIT Vs Ravi Shankar Shetty dismissed the Revenue’s appeal and upheld the Tribunal’s deletion of the addition of ₹21.11 crore made under section 56(2)(ix). The Court observed that section 56(2)(ix) applies only where both conditions are fulfilled, namely that a sum is received as an advance in the course of negotiations for the transfer of a capital asset and that the sum is forfeited after the negotiations do not result in such transfer. It found that the amounts received by the assessee from Metro Corp and M/s Metro Corp Infrastructure Ltd. under the agreement dated 10.02.2006 were entrusted for identifying, procuring and acquiring lands for their business projects and were not advances received for transfer of a capital asset belonging to the assessee. The Court further noted that the advances continued to be reflected as liabilities in the assessee’s books as on 31.03.2015, stood confirmed by the concerned parties, and there was no material establishing forfeiture. It rejected the Revenue’s contention that the mere lapse of time amounted to virtual forfeiture and found no reason to interfere with the Tribunal’s order.
Facts:
The assessee/respondent herein is involved in the business of procurement of lands and real estate. A return of income was filed by the assessee declaring total income of Rs.25,74,540/- for the AY 2015-16. The assessee’s case for AY 2015-16 was selected for scrutiny and notices under sections 143(2) and 142(1) of the Act were issued to the assessee. The issue before the assessing officer pertained to advances received by the assessee to the tune of Rs.21,89,22,200/-, outstanding as on 31.03.2015, which is money received from Metro Corp and M/s Metro Corp Infrastructure Ltd., for procuring lands at Doddaballapur and Chikkaballapur, vide agreement dated 10.02.2006. The assessment order under section 143(3) of the Act was passed by the AO on 28.12.2017, wherein, an addition of Rs.21,11,00,000/- was made under section 56(2)(ix) of the Act.
Challenging the assessment order passed by the AO, the assessee preferred an appeal before the Commissioner of Income Tax, which came to be dismissed vide order dated 25.11.2019. Challenging the order of the CIT(A), the assessee filed an appeal before the Tribunal. The Tribunal allowed the appeal filed by the assessee vide impugned order dated 08.10.2020, holding that the conditions prescribed under section 56(2)(ix) of the Act are not satisfied and consequently, the addition under the said section cannot be allowed to stand. Aggrieved by the Order of the Tribunal, the Revenue is in appeal under section 260A of the Act
Issues:
Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse by deleting the addition of Rs.21,11,00,000 made by assessing authority in the hands of
the assessee without appreciating the fact that the Advance received by the assessee was utilized for purchase of assets in his name and not for procuring land on behalf of promoter and said amount is shown as outstanding in the books of assessee without any claim being made by promoters for nearly 8 years regarding advance given to the assessee which invariably amounts to forfeiture, thus satisfying the condition laid down under Section 56(2)(ix)(a) of the Act?
Whether on the facts and in the circumstances of the case and in law, the impugned order is perverse in Tribunal failed to appreciate that assessing authority rightly made addition in terms of section 56(2)(ix)(a) of the nature as Act as assessee utilized the sum advanced for purchase of assets in own name and no attempt/negotiations were made by the assessee to transfer such capital asset to the promoter?
Observations:
Upon hearing the learned counsel for the parties and perusing the material on record, the Court found no reason to interfere with the order passed by the Tribunal.
The Court noted that, as on 31.03.2015, the assessee had received advances aggregating to Rs.21,89,22,200/- from Metro Corp and M/s Metro Corp Infrastructure Ltd. under the agreement dated 10.02.2006 for procuring lands at Doddaballapur and Chikkaballapur. The Assessing Officer treated the said advances as having been virtually forfeited on the ground that no claim for refund had been made by the concerned parties for nearly eight years and consequently brought the amount to tax under Section 56(2)(ix) of the Income-tax Act.
The Court observed that a plain reading of Section 56(2)(ix) makes it evident that any sum received as an advance or otherwise in the course of negotiations for the transfer of a capital asset would be chargeable to tax under the head “Income from Other Sources” only if both the prescribed conditions are fulfilled, namely: (i) the sum is forfeited, and (ii) the negotiations do not result in the transfer of such capital asset. The legislature has consciously employed the conjunction and, thereby making the fulfilment of both conditions mandatory for invoking the provision.
The Court further observed that the material on record established that the assessee was engaged in the business of identifying, procuring and facilitating the acquisition of lands for real estate projects. The amounts received from Metro Corp and M/s Metro Corp Infrastructure Ltd. were not advances paid in the course of negotiations for the transfer of any capital asset belonging to the assessee, but were entrusted to the assessee for locating, procuring and acquiring lands for the business projects of the said concerns. The relationship between the parties was, therefore, not that of a transferor and transferee negotiating the transfer of a capital asset, but one arising out of a business arrangement. The Court further observed that the lands proposed to be acquired would constitute stock-in-trade in the ordinary course of the assessee’s business and not capital assets within the meaning of Section 2(14) of the Act. Consequently, the first requirement of Section 56(2)(ix), namely receipt of an advance in the course of negotiations for the transfer of a capital asset, was held to be absent.
Having held that the transaction did not involve negotiations for the transfer of a capital asset, the Court observed that the question of examining forfeiture did not strictly arise. Even otherwise, the Court found that the advances continued to be reflected as liabilities in the books of account of the assessee as on 31.03.2015. Since Section 56(2)(ix) specifically employs the expression “forfeited”, and there was no material to establish such forfeiture, the requirement contemplated under the provision remained unsatisfied. The submission on behalf of the assessee that a part of the advance had also been returned to Metro Corp and M/s Metro Corp Infrastructure Ltd. was noted by the Court.
The Court rejected the contention of the Revenue that mere lapse of time resulted in a virtual forfeiture of the advances. It observed that mere efflux of time cannot amount to forfeiture unless there is material to demonstrate that the recipient has become absolutely entitled to retain the advance. In support of this proposition, the Court relied upon the decision in CIT v. Alvares & Thomas, wherein it was held that the mere inability to trace a creditor or the mere passage of time does not constitute cessation of liability in law. The Court observed that cessation must be a legal cessation of the debt and not one inferred solely from the lapse of time or inability to verify the creditor.
Agreeing with the aforesaid decision, the Court held that, as on 31.03.2015, the advances could not be regarded as forfeited merely because eight years had elapsed without any claim for refund. The advances continued to be reflected as liabilities in the books of account of the assessee and stood confirmed by Metro Corp and M/s Metro Corp Infrastructure Ltd., as noticed by the Tribunal in paragraph 7.3 of its order. Accordingly, the Court found no basis to treat the advances as forfeited
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