2016 (8) TMI 261 - AT - Income Tax

Forfeiture of advance received against capital asset - whether the sum has to be reduced from the cost of asset and the same cannot be taxed as income on forfeiture - advance for sale of a capital asset v/s business asset - section 51 applicability - Held that - As in respect of this project transferred by the partnership firm M/s HM Construction to the assessee, the assessee was declaring profit on sale of property of that project as income from business but it does not mean that the assessee cannot hold any real estate property as a capital asset. If said so, then it will be amounting to saying that a person dealing in shares cannot hold any share as investment. This cannot be said and therefore, in the present case also, this fact alone that the assessee was doing some real estate business cannot lead to this conclusion that this property in dispute was also held by the assessee as a business asset and not as a capital asset unless it is shown that this very property was held as a business asset. The revenue has not brought any evidence on record to even suggest that this property in question was also a business asset and the revenue has proceeded on this basis that since in respect of some property, the assessee is disclosing income as business income and showing the closing stock as business stock/ business asset, it cannot be inferred that each and every property owned by the assessee is a business asset and therefore, hold that the property in question is a capital asset because, the revenue could not bring any material on record to establish that this property is also a business asset. Once hold this that the property in question is a capital asset, Sec.51 of the IT Act is applicable regarding the advance received against sale agreement of this property which is forfeited and therefore, such forfeiture of advance has to be reduced from the cost of this asset. Since the forfeiture amount of ₹ 33.00 Lakhs is more than the cost of this asset ₹ 31,76,160/-, the excess amount of forfeiture i.e. ₹ 1,23,840/- has to be brought to tax in the present year in equal proportion in the case of both these assessees who were the owner of this asset in equal proportion and in the year of sale of that property, cost of acquisition should be taken at NIL to compute Capital Gain. - Decided partly in favour of assessee.

Summary

Issues Involved:

1. Assessment of forfeited amount as business income.
2. Classification of the property at Ramagondanahalli as a business asset or capital asset.
3. Application of Section 51 of the Income Tax Act, 1961.
4. Opportunity to prove the veracity of the claim.
5. Liability to interest under Section 158BFA of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessment of Forfeited Amount as Business Income:
The primary issue was whether the forfeited amount of ?16,50,000 should be assessed as business income. The assessees contended that this amount was deducted from the cost of the capital asset on an aborted sale under Section 51 of the Income Tax Act, 1961, and should not be considered business income. The Tribunal noted that the authorities erred in assessing this amount as business income without sufficient evidence to support the claim that the property was a business asset.

2. Classification of the Property at Ramagondanahalli:
The authorities classified the property at Ramagondanahalli as a business asset, which was contested by the assessees. The Tribunal examined the nature of the property and the activities related to it. The Tribunal found that the revenue could not establish that the property was a business asset. It was noted that the assessees had disclosed business income from other real estate activities but had also held properties as capital assets. Therefore, the Tribunal concluded that the property in question was a capital asset.

3. Application of Section 51 of the Income Tax Act, 1961:
The Tribunal addressed the applicability of Section 51, which deals with the forfeiture of advance received against the sale of a capital asset. Since the property was determined to be a capital asset, the forfeited advance of ?33,00,000 had to be reduced from the cost of the asset. The cost of acquisition was ?31,76,160, leading to a surplus of ?1,23,840, which was to be taxed in the present year in equal proportion in the hands of both assessees.

4. Opportunity to Prove the Veracity of the Claim:
The assessees argued that they were not given an opportunity to prove their claim regarding the forfeited amount and the nature of the property. The Tribunal noted that the authorities failed to provide this opportunity, which was against the principles of natural justice. The Tribunal emphasized the importance of allowing the assessees to present evidence to support their claims.

5. Liability to Interest under Section 158BFA of the Income Tax Act, 1961:
The assessees denied their liability to be charged interest under Section 158BFA. The Tribunal's decision on this matter was not explicitly detailed in the judgment, but the overall conclusion indicated a partial allowance of the appeals, suggesting some relief to the assessees.

Conclusion:
The Tribunal partially allowed the appeals, concluding that the property at Ramagondanahalli was a capital asset, and the forfeited amount should be adjusted against the cost of the asset under Section 51. The surplus forfeiture amount was to be taxed in the present year. The Tribunal emphasized the need for natural justice and the opportunity for the assessees to prove their claims. The judgment provided clarity on the classification of assets and the application of tax provisions related to forfeited advances.