2016 (9) TMI 848 - AT - Income Tax

Addition on cessation of liability - whether the said liability did not exist in the books of accounts of M/s, Dawat-E-Hadiyah Trust as confirmed during the course of enquiry u/s. 133(6) ? - Held that - Amount of advance received for sale of property shall be treated as income u/s 56 if the same is forfeited and negotiations did not result in transfer of such capital asset. But these provisions have been inserted w.e.f. 01-04-2015. These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset. Thus, we reinforce the direction of the Ld. CIT(A) and direct the Assessing Officer to reduce the cost of acquisition of the property by the amount of ₹ 3.74 crores on sale of the said property at the time of computation of capital gains as may be arising on account of sale of the said property. The action of Ld. CIT(A) in directing the Assessing Officer to delete the addition which was made by the Assessing Officer u/s 41(1) of the Act, is hereby upheld. - Decided in favour of assessee

Summary

Issues:
Deletion of addition on account of cessation of liability.

Analysis:
1. The revenue appealed against the order of CIT(A) directing deletion of an addition of ?3,74,00,000 on account of cessation of liability related to an advance received from M/s Dawat-E-Hadiyah Trust.
2. The AO observed a liability in the balance sheet of the assessee, created in 1995, and considered it as ceased. The AO treated this as income under section 41(1) of the Act, despite contentions from both parties about the transaction being related to property transfer.
3. The assessee argued that the advance was for the sale of a property in Chennai and not part of any business transaction. Correspondences with M/s Dawat-E-Hadiyah Trust were submitted as evidence, indicating the intention for property transfer.
4. CIT(A) examined the submissions and correspondence, concluding that the amount was not taxable under section 41(1) or section 28(iv) of the Act. The CIT(A) applied section 51, directing the reduction of the property's cost of acquisition by ?3.74 crores for future capital gains computations.
5. The Tribunal upheld CIT(A)'s decision, emphasizing that the advance was for a capital asset and not subject to taxation under section 41(1) or section 28(iv). Section 51 mandates the deduction of advance received for a capital asset from the cost of acquisition, which was applicable for the assessment year 2010-11.
6. The Tribunal dismissed the revenue's appeal, affirming the deletion of the addition made by the AO under section 41(1) of the Act. The direction to reduce the property's cost of acquisition by ?3.74 crores for future capital gains calculations was upheld.

This detailed analysis highlights the assessment, arguments, and decisions made regarding the deletion of the addition on account of cessation of liability in this legal judgment.