Forfeiture of advance received on agreement to sale of property is capital receipt

Forfeiture of advance received on agreement to sale of property is capital receipt not income from other sources 

ABCAUS Neutral Case Law Citation:
ABCAUS 3691 (2023) (03) ITAT

Important Case Laws relied upon by parties:
Travencore Rubber & Tea Company Ltd. Vs. CIT (2000) 243 ITR 158 (SC)
CIT Vs. Meera Goyal (2014) 360 ITR 346 (Del)
CIT vs Kailas Rubber & Company Limited (1966) (60 ITR 435) (SC)

In the instant case, the Revenue had challenged the order passed by the CIT(A) in holding that amount forfeited out of agreement to sale was capital receipt.

The respondent assessee had entered into agreement to sale of property with a company for a sale consideration against which the assessee received advance sale consideration.   

Since, the buyer failed to pay the balance sale consideration even after issuing legal notice, the assessee forfeited the advance money.

The AO brought to assess the amount forfeited as income from other sources invoking of Section 56(2)(vii) of the Act. The AO was of the opinion that Section 51 of the Income Tax Act provides for  taxation of advance money forfeited to the extent of cost of acquisition/WDV of the property.  

The AO was of the opinion that the taxability of excess money received by the assessee over and above the cost of acquisition/WDV is neither covered u/s 51 of the Act, nor covered under the head “salary” or “Profit & Gains of Business/Profession” and It cannot even be taxed under the head income from other sources u/s 56(2)(vii) of the Act.   

Before the ITAT, the assessee submitted that it is well settled law that any amount received against the sale of “capital asset‟ is a “capital in nature‟ not a “revenue receipt‟, hence can be subjected to “capital gain‟ only  and  it  cannot  be  taxed  under  the  head  “income from other sources”.   

It was further submitted that the income from other sources‟ chargeable in Section 56(2)(ix) of the Act does not provide taxation of forfeited capital receipt till Assessment Year 2014-15.

The case of the Revenue was that excess money could not be taxed under the head “Capital Gain” as there were no transfer of any asset as contemplated u/s 2(47) of the Act, therefore, the  same has to be taxed under the head “income from other sources” u/s 56(2)(ix) read with section 56(1) of the Act.

The ITAT opined that the assessee will not fall within the ambit of section 56(2) of the Act

The Tribunal pointed out that Supreme Court have held that any amount received against Sale of Capital Asset is a Capital Receipt and not a Revenue Receipt, hence can be subjected to Capital Gain only, it cannot be taxed under the head “income from other sources”. Income from other sources chargeable in section 56 of the Act does not provide taxation of forfeited capital receipt till AY 2014-15.

Further, the Supreme Court held that the amount forfeited referred  only to the capital asset of the assessee and were directly related  to  the sale  of  such  capital  asset.

The ITAT further observed that Hon’ble High Court have observed that earnest money forfeited by the assessee as provided in the agreement to sell received from the purchaser, who failed to pay  the ‘balance consideration is a capital receipt not liable to tax. Provisions of section 51 would come into play in these circumstances as it specifically covers this type of transaction, once the transaction had been held to be genuine, there is no question  of the transaction being without any consideration so as to invoke provisions of section 56(2)(vi) of the  Act. 

Thus, we do not find any error/ infirmity in the approach of the CIT(A) in deleting the addition made by the AO and we find no merit in the Ground.

Accordingly, the ITAT dismissed the ground of the Appeal.

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