2013 (2) TMI 74 - HC - Income Tax

Agreement to sell - six cheques received in lieu of earnest money - failure to pay the balance consideration and the respondent/ assessee sent a notice of forfeiture - forfeited amount of Rs.18 crores was shown as advance received from the property in the balance sheet of the respondent/ assessee and not been offered for taxation in the relevant assessment year - AO not satisfied made a reference to ACIT u/s 144 - Held that - Appellant/ revenue sought to invoke the provisions of section 56(2)(vi) however, find that this plea had not been raised before the Tribunal. Consequently, such plea of revenue cannot be entertained. Even otherwise, before a plea based on section 56(2)(vi) can be taken, a foundation has to be laid that the transaction was without any consideration. No such foundational plea had been taken before the Tribunal. Apart from this the Tribunal has rightly noted that the provisions of section 51would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration. Consequently, no merit in the revenue s appeal, much less any substantial question of law for consideration - in favour of assessee.

Summary

Issues:
1. Interpretation of the agreement for sale of property and forfeiture of earnest money.
2. Tax treatment of forfeited amount in the balance sheet and relevant assessment year.
3. Compliance with directions under section 144A of the Income Tax Act, 1961.
4. Authority of assessing officer to disregard directions and make additions.
5. Application of section 51 of the Income Tax Act in the case.
6. Consideration of the provisions of section 56(2)(vi) of the Income Tax Act.

Interpretation of the agreement for sale of property and forfeiture of earnest money:
The case involved an appeal by the revenue against the order passed by the Income Tax Appellate Tribunal regarding the assessment year 2007-08. The respondent, an assessee, had a property in New Delhi and entered into an agreement to sell it for Rs.150 crores, with earnest money of Rs.36 crores. When the purchaser failed to pay the balance amount by the specified date, the respondent forfeited Rs.18 crores and returned the first two cheques. The assessing officer considered the transaction as sham, resulting in an addition of Rs.18 crores. The Commissioner of Income Tax (Appeals) held in favor of the respondent, noting the directions under section 144A and the non-compliance by the assessing officer.

Tax treatment of forfeited amount in the balance sheet and relevant assessment year:
The forfeited amount of Rs.18 crores was not offered for taxation in the relevant assessment year and was shown as an advance received from the property in the balance sheet. The assessing officer disputed this treatment, alleging the transaction was a sham. The Commissioner of Income Tax (Appeals) held that the forfeited amount was not liable to tax until the property was sold, in line with the directions under section 144A, which the assessing officer failed to follow.

Compliance with directions under section 144A of the Income Tax Act, 1961:
The directions under section 144A emphasized that the forfeited amount was not taxable until the property sale, with adjustments for capital gains. The Commissioner of Income Tax (Appeals) found the assessing officer bound by these directions, which were not disregarded. Non-compliance with these directions led to a ruling in favor of the respondent.

Authority of assessing officer to disregard directions and make additions:
The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), emphasizing the assessing officer's obligation to follow the directions under section 144A. The Tribunal found no merit in the revenue's appeal, stating that no substantial question of law arose, especially considering the genuineness of the transaction and compliance with legal provisions.

Application of section 51 of the Income Tax Act in the case:
The Tribunal concurred with the Commissioner of Income Tax (Appeals) that the provisions of section 51 of the Income Tax Act applied to the transaction. It was concluded that the transaction was genuine, and adjustments against the cost of the property would be made for capital gains when the property was sold.

Consideration of the provisions of section 56(2)(vi) of the Income Tax Act:
The revenue attempted to invoke section 56(2)(vi) of the Income Tax Act, but the plea was not entertained as it was not raised before the Tribunal. The Tribunal highlighted that for such a plea to be considered, it required a foundation that the transaction was without consideration, which was not established. The provisions of section 51 were deemed applicable, and the appeal was ultimately dismissed.