2021 (7) TMI 274 - AT - Income Tax

Addition u/s. 28(iv) - advance money against sale of property forfeited by the assessee - loan amount forfeited by the assessee represents income of the assessee and the same has not been declared in the return of income - HELD THAT - In the present case amount represented advance money forfeited by the assessee and the same also represents cash received on forfeiture of advance money. In this view of the matter, the provisions of section 28(iv) of the Act is not applicable to the facts of the present case. In the present case, there is no dispute with regard to the fact that the assessee has received money from Naveen P. Patil initially in the financial year 2006-07. As per the recital in the Agreement for sale, the above said amount was given as investment in the projects taken up by the assessee - CIT(A) has given much importance to the recital so made in the Agreement for sale by observing that neither the assessee nor Naveen P Patil has given the details of project. In fact, the parties have only stated the purpose of given money by Shri Naveen P Patil to the assessee in FY 2006-07. The said facts are not relevant to the issue on hand. The issue on hand is related to the property transaction subsequently entered by the parties, i.e., subsequently, the above said loan amount was converted into advance money in the property transaction, whereby a property belonging to the assessee was agreed to be purchased by Shri Naveen P. Patil for a sum - Thus the issue is related to the property transaction and not the earlier loan transaction. Merely for the reason that the amount received as loan in an earlier year was converted into advance payment for purchase of property, there is no reason to disbelieve the property transaction as a colourable device. No material has been brought to substantiate the above said view of the tax authorities, meaning thereby, they have entertained this view only on surmises and conjectures. Since the amount forfeited by the assessee is on account of sale of property, we agree with the submissions of the assessee that the provisions of section 51 of the Act shall be applicable and the above said amount would go to reduce the cost of property. The impugned amount is not taxable in the hands of the assessee u/s. 28(iv) - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 148 of the Income Tax Act.
2. Taxability of forfeited amount under Section 28(iv) of the Income Tax Act.
3. Applicability of Section 51 of the Income Tax Act to the forfeited amount.
4. Determination of the nature of the forfeited amount (capital receipt vs. revenue receipt).

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 148:
The assessee did not press the ground relating to the validity of reopening of assessment under Section 148 of the Income Tax Act. Consequently, this ground was dismissed as not pressed.

2. Taxability of Forfeited Amount under Section 28(iv):
The core issue was whether the forfeited amount of ?3 crores should be treated as income under Section 28(iv) of the Act. The AO argued that the forfeited amount represented a benefit to the assessee and thus was taxable under Section 28(iv). The AO relied on the decision of the Hon’ble Madras High Court in CIT Vs. Ramaniyam Homes Pvt. Ltd., which held that waiver of a portion of the loan would tantamount to the value of benefit under Section 28(iv). However, the assessee contended that the forfeited amount was a capital receipt and not taxable, relying on the decision of the Hon’ble Bombay High Court in Mahindra & Mahindra Ltd., upheld by the Hon’ble Supreme Court, which stated that Section 28(iv) does not apply to transactions involving money. The Tribunal noted that the Hon’ble Supreme Court clarified that Section 28(iv) applies only to benefits other than money, and since the forfeited amount was in cash, it was not taxable under Section 28(iv).

3. Applicability of Section 51 to the Forfeited Amount:
The assessee argued that the forfeited amount should reduce the cost of the property under Section 51 of the Act. The AO and CIT(A) viewed the agreement for sale as a colorable device to avoid taxation. However, the Tribunal found no material evidence to support this view and concluded that the forfeited amount related to a genuine property transaction. Thus, the provisions of Section 51 were applicable, and the forfeited amount should reduce the cost of the property.

4. Determination of the Nature of the Forfeited Amount:
The Tribunal examined whether the forfeited amount was a capital receipt or a revenue receipt. The AO considered it a revenue receipt, arguing that the agreement for sale was an afterthought to color the loan transaction as an advance for property. The Tribunal disagreed, noting that the initial loan was converted into an advance for property purchase, and the forfeiture was due to the buyer's failure to complete the transaction. The Tribunal emphasized that the nature of payment and receipt depends on the facts of each case and concluded that the forfeited amount was a capital receipt related to a property transaction.

Conclusion:
The Tribunal held that the forfeited amount of ?3 crores was not taxable under Section 28(iv) of the Act and should reduce the cost of the property under Section 51. The appeal filed by the assessee was allowed, and the AO was directed to delete the impugned addition. The order was pronounced on June 30, 2021.