2020 (12) TMI 602 - AT - Income Tax

Characterisation of receipt - Forfeiture of advance received during the assessment year - Addition on account of treatment of the earnest money forfeited in respect an agreement for sale of property as assessee s income under the head Income from Other Source - CIT (A) initially deleted the addition on the grounds that there is no provision to tax the amount forfeited in the Income Tax Act and held that the provisions of Section 51 and the provisions of Section 56(2)(ix) are not applicable to the facts of the assessee in the current year - HELD THAT - Both the provision to section 51 has been inserted by the Finance (No.2) Act 204 with effect from 1.4.2015 and so as the provisions of clause (ix) of sub-section (2) of section 56 - AO chose to apply the provisions inserted from 01.04.2015 to the assessment year 2013-14 which cannot be held to be legally valid. The pre-amended provisions applicable to the case of the assessee for the instant assessment year directs as to how the advance or other money received is to be treated. As per the provisions in existence, any money or other money received in connection with negotiations of any capital asset and retained by the assessed shall be deducted from the cost for which the asset was acquired in computing the cost of acquisitions while determining the capital gains. Going through the provisions of Sections amended and pre-amended, we find that till the assessment year 2015- 16, the amount of forfeiture is not liable to be taxed but will go only in reducing the value of the asset while computing the taxability of the assessee under the head capital gains . There is no taxability of the forfeited amount in the current year. The revenue may monitor or keep track of determination of capital gains as and when the asset is finally sold. Not to leave the issue raised by the revenue of receipt of advance money from M/s Shine Star Built Co. Pvt. Ltd. of ₹ 18 crores during the assessment year 2007-08, we find that the Hon ble High Court 2013 (2) TMI 74 - DELHI HIGH COURT deleted the addition made by the AO on similar grounds and held that the amount received should be treated in accordance with Section 51 of the Income Tax Act, thus, resting the arguments of the revenue.

Summary

Issues:
1. Rectification order u/s 154 based on change of opinion and reappraisal of facts.
2. Taxability of forfeiture amount under Section 51 of the Income Tax Act.
3. Applicability of provisions of Section 56(2)(ix) to the forfeiture amount.

Analysis:

Issue 1: Rectification Order u/s 154
The assessee challenged the rectification order passed by the CIT(A) under Section 154 r.w.s. 250(6) of the Income Tax Act, 1961. The grounds raised included the contention that the rectification order was passed on an illegal and arbitrary basis, without any apparent mistake on record. The assessee argued that the forfeiture issue was already under appeal before the ITAT, making the rectification order jurisdictionally invalid. The CIT(A) modified the order, holding that the amount received by the assessee without consideration was taxable.

Issue 2: Taxability of Forfeiture Amount under Section 51
The dispute revolved around the taxability of the forfeited amount of ?12.50 crores under Section 51 of the Act. The AO treated the forfeited amount as income from other sources, citing the non-payment of tax on the amount. However, the CIT(A) initially deleted the addition, stating that there was no provision in the Income Tax Act to tax the forfeited amount. The CIT(A) emphasized the legal transaction between the parties and the absence of grounds to treat the receipt as income from other sources.

Issue 3: Applicability of Section 56(2)(ix)
The revenue contended that the amount forfeited should be taxed under Section 56(2)(ix) due to the habitual nature of receiving and forfeiting money by the assessee. However, the ITAT held that the provisions inserted from 01.04.2015 were not applicable to the assessment year 2013-14. The ITAT clarified that the forfeited amount would only reduce the value of the asset for computing capital gains until the asset's final sale.

In conclusion, the ITAT dismissed the appeal of the revenue and held that the matter adjudicated in the revenue's appeal made the assessee's appeal against the order passed u/s 154 infructuous. The judgment clarified the tax treatment of forfeited amounts under Sections 51 and 56(2)(ix) and emphasized the importance of applying the correct provisions based on the relevant assessment year.