The Karnataka High Court has dismissed the Income Tax Department’s appeal against real estate businessman holding that advances received for procuring land cannot be treated as taxable income merely because they remained outstanding for several years.
The bench of Justice S.G. Pandit and Justice Rajesh Rai K upheld the Income Tax Appellate Tribunal’s (ITAT) order in favour of the assessee for the Assessment Year 2015-16.
The respondent/assessee is engaged in the business of identifying, procuring and facilitating acquisition of land for real estate projects. During the assessment proceedings for AY 2015-16, the Assessing Officer (AO) examined advances amounting to ₹21.89 crore received from Metro Corp and Metro Corp Infrastructure Ltd.under an agreement dated February 10, 2006, for procuring land in Doddaballapur and Chikkaballapur.
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The AO concluded that since the advances had remained outstanding for nearly eight years and no refund had been sought by the companies, the amount had effectively been “forfeited.” Accordingly, an addition of ₹21.11 crore was made under Section 56(2)(ix) of the Income Tax Act, which taxes forfeited advances received during negotiations for transfer of a capital asset.
While the Commissioner of Income Tax (Appeals) upheld the assessment, the ITAT deleted the addition, prompting the Revenue to approach the High Court.
The Income Tax Department argued that the advances were utilized by the assessee for acquiring assets in his own name rather than procuring land for the promoters. The absence of any claim for refund for nearly eight years amounted to virtual forfeiture. Consequently, the conditions prescribed under Section 56(2)(ix) stood satisfied and the amount became taxable as income from other sources.
The assessee contended that the advances were received solely for identifying and procuring land on behalf of the companies. The transaction did not involve negotiations for transfer of any capital asset owned by the assessee. There was no forfeiture of the advances. The lands intended to be acquired constituted stock-in-trade, not capital assets, thereby taking the transaction outside the ambit of Section 56(2)(ix).
The High Court agreed with the Tribunal and held that the statutory conditions necessary for invoking Section 56(2)(ix) were absent.
The Bench observed that Section 56(2)(ix) applies only where money is received as an advance during negotiations for transfer of a capital asset; the advance is forfeited; and the negotiations ultimately fail to culminate in transfer of the capital asset.
The Court emphasized that these conditions are cumulative because the legislature has consciously used the conjunction “and.”
Rejecting the Revenue’s principal contention, the Court held that the advances were never received in connection with transfer of any capital asset owned by the assessee.
Instead, the funds were entrusted to the assessee to identify and acquire land for the business projects of Metro Corp and Metro Corp Infrastructure Ltd.
According to the Bench, this constituted a business arrangement rather than negotiations between a transferor and transferee of a capital asset.
The Court further noted that land acquired in the ordinary course of the assessee’s real estate business would constitute stock-in-trade, which is specifically excluded from the definition of “capital asset” under Section 2(14) of the Income Tax Act. Consequently, the very first requirement of Section 56(2)(ix) failed.
The Court also rejected the Department’s contention that non-refund of advances over eight years amounted to implied forfeiture.
It observed that the advances continued to be reflected as liabilities in the assessee’s books of account and there was no evidence showing that the payer companies had relinquished their rights or that the assessee had become absolutely entitled to retain the money.
The Bench categorically held that mere efflux of time cannot amount to forfeiture in the absence of material establishing that the advance has legally become the recipient’s property.
The Court also relied upon its earlier decision in CIT v. Alvares & Thomas, wherein it had held that a liability does not cease merely because a creditor cannot be traced or considerable time has elapsed.
Drawing from that precedent, the Bench reiterated that cessation or forfeiture must occur in law, and cannot be presumed solely from delay or inaction.
Holding that neither the requirement of negotiations for transfer of a capital asset nor the requirement of forfeiture had been satisfied, the High Court answered both substantial questions of law in favour of the assessee.
Accordingly, the Court dismissed the Revenue’s appeal and affirmed the ITAT’s order deleting the ₹21.11 crore addition.
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