PCIT Vs Ravi Shankar Shetty (Karnataka High Court)
Karnataka High Court: Mere Passage of Time Does Not Convert Business Advance into Taxable Forfeiture under Section 56(2)(ix)
The Karnataka High Court upheld the ITAT’s order deleting an addition of ₹21.11 crore made under Section 56(2)(ix), holding that the essential conditions for invoking the provision were absent. The assessee, engaged in the business of procuring land for real estate developers, had received advances from two companies for identifying and acquiring land. The Revenue treated these outstanding advances as “virtually forfeited” since they remained unpaid for nearly eight years.
Rejecting the Revenue’s stand, the Court held that Section 56(2)(ix) applies only where money is received during negotiations for the transfer of a capital asset, the amount is forfeited, and the negotiations do not culminate in the transfer of such capital asset. In the present case, the advances were received for carrying out a business activity of procuring land and not towards the transfer of any capital asset owned by the assessee. The proposed land acquisitions were in the nature of stock-in-trade, which is specifically excluded from the definition of a capital asset.
The Court further held that mere lapse of time or non-demand of repayment cannot amount to forfeiture. As the advances continued to be reflected as liabilities in the assessee’s books and were acknowledged by the parties, there was no legal forfeiture. Relying on its earlier decision in CIT v. Alvares & Thomas, the Court reiterated that a liability does not cease merely because time has elapsed or the creditor has not demanded repayment. Consequently, the additions under Section 56(2)(ix) were held to be unsustainable, and the Revenue’s appeal was dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This Income Tax Appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) is filed by the Revenue, challenging the order of the Income Tax Appellate Tribunal, Bengaluru Bench (hereinafter referred to as ‘the Tribunal’) dated 08.10.2020 in ITA No.28/Bang/2020 for the assessment year (hereinafter referred to as ‘AY’) 2015-16.
