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Income-tax Officer, 3(1)(4), Mumbai v. Fiesta Properties (P.) Ltd.
Factual and Procedural Background
This appeal was heard by Accountant Member Ashwani Taneja. The revenue filed the appeal against the order of the Commissioner of Income Tax (Appeals) dated 08-05-2014, which had been passed against the assessment order of the Assessing Officer (AO) under section 143(3) dated 15-03-2013 for assessment year 2010-11.
The core factual matrix is as follows: the assessee company showed income mainly from rent (Income from house property) and business income, and was engaged in construction. The assessee's balance sheet recorded a liability of Rs. 3,74,00,000 in the name of M/s Dawat-E-Hadiyah Trust, originally received in 1995 as an advance for sale of the assessee's property.
During assessment proceedings the AO made enquiries from M/s Dawat-E-Hadiyah Trust, which replied that the liability had been written off in the year under consideration on account of donations received from individual donors. The AO treated the event as a cessation of liability and, invoking section 41(1) of the Income-tax Act, 1961, added Rs. 3,74,00,000 to the assessee's income. The AO characterized the amount as an interest-free unsecured deposit in the course of business and observed absence of cogent documentation proving a property transaction.
The assessee appealed to the CIT(A), who, after examining original correspondence between the assessee and the trust, held that the amount was not taxable under section 41(1) or section 28(iv) and directed that, upon eventual sale of the property, the amount of Rs. 3.74 crores be deducted from the cost of acquisition under section 51. The revenue challenged that deletion before the Tribunal; the Tribunal considered legislative changes (section 56(2)(ix) introduced w.e.f. 01-04-2015) and dismissed the revenue's appeal, upholding the CIT(A)'s directions.
Legal Issues Presented
- Whether the addition of Rs. 3,74,00,000 made by the AO on account of cessation of liability (advance received from M/s Dawat-E-Hadiyah Trust) correctly constituted income of the assessee under section 41(1) of the Income-tax Act, 1961?
- Whether the amount received as an advance towards negotiations for transfer of a capital asset should instead be dealt with under section 51 (i.e., deducted from the cost of acquisition on eventual sale), and therefore not taxed under section 41(1) or section 28(iv)?
- What is the relevance of the subsequently inserted section 56(2)(ix) (w.e.f. 01-04-2015) to the assessment year 2010-11 — i.e., whether that provision applies retrospectively to treat such advances as income?
Arguments of the Parties
Revenue / Assessing Officer's Position
- The AO observed that the liability of Rs. 3,74,00,000 existed in the assessee's books as payable to M/s Dawat-E-Hadiyah Trust but, based on enquiries, regarded the liability as having ceased in the year under consideration and therefore taxable as income under section 41(1).
- The AO relied on earlier Supreme Court decisions (CIT v. T. V. Sundaram Iyengar & Sons Ltd. and CIT v. Sugauli Sugar Works (P.) Ltd.) to support treating cessation of trading liability as assessable income.
- The AO found that neither the assessee nor the trust furnished cogent documentary proof that the original transaction was for transfer of an immovable property; in the absence of such documentation, the AO treated the advance as an interest-free unsecured deposit in the course of business and hence liable to tax on cessation.
- The revenue's ground of appeal (as quoted) asserts that the CIT(A) erred in deleting the addition by ignoring that the liability did not exist in the trust's books as confirmed in enquiries under section 133(6).
Assessee's Position
- The assessee maintained that the Rs. 3.74 crores was received with regard to the sale of a property located at Chennai (Madras), not as a business receipt or a trading liability.
- The assessee contended that provisions of section 41(1) were not applicable to the impugned amount.
- The assessee furnished copies of correspondence between itself and M/s Dawat-E-Hadiyah Trust showing that the advance was made with the intention of transferring the assessee's property at Madras, and that when the deal did not materialize the trust started demanding repayment. The assessee submitted these correspondences to the AO and to the CIT(A).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. T. V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 / 88 Taxman 429 (SC) | Relied on by the AO as authority for treating cessation of liability as taxable income. | The AO relied upon this decision to support adding the amount under section 41(1); the Tribunal noted the AO's reliance but did not accept the AO's conclusion in view of the factual finding that the advance related to a capital asset and applied section 51 instead. |
| CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 / 102 Taxman 713 (SC) | Relied on by the AO in support of taxing cessation of liability as income. | The AO invoked this precedent for the addition; the Tribunal recorded that the AO relied on it but ultimately upheld the CIT(A)'s deletion of the addition after applying section 51 to the facts before it. |
Court's Reasoning and Analysis
The Tribunal undertook a step-by-step analysis strictly tied to the facts on record and the statutory framework extant for the assessment year in question.
- Admitted factual findings: the properties (including the impugned property at Madras) had always been shown as capital assets in the assessee's balance-sheet and assessed under the head "Income from house property." The revenue had accepted this position earlier.
- The Tribunal noted that the liability of Rs. 3.74 crores continued to stand in the assessee's books in the name of M/s Dawat-E-Hadiyah Trust. The CIT(A) had examined original correspondence between the parties and found that the transaction pertained to the assessee's immovable property, but that the transaction had not been completed.
- On the basis of the factual finding that the advance was in respect of negotiations for transfer of a capital asset (and had been retained by the assessee), the Tribunal turned to section 51 of the Income-tax Act. The Tribunal reproduced the section and explained its plain effect: where an advance relating to negotiations for transfer of a capital asset is retained, it shall be deducted from the cost of acquisition (or written down value or FMV, as applicable) in computing cost of acquisition.
- The Tribunal considered the proviso to section 51 (inserted w.e.f. 01-04-2015) and the then newly inserted section 56(2)(ix), which treats such advances as income where the sum is forfeited and negotiations do not result in transfer. The Tribunal observed that these provisions were not clarificatory but substantive, introduced with effect from 01-04-2015, and therefore could not be given retrospective effect to AY 2010-11.
- Because for AY 2010-11 the earlier law applied, section 51 (as it then stood) required the advance to be deducted from the cost of acquisition on eventual sale, and did not mandate taxation of the advance under section 41(1). Having found as a factual matter that the advance related to a capital asset and that the liability remained in the assessee's books, the Tribunal reinforced the CIT(A)'s direction that the AO delete the addition under section 41(1) and that the AO reduce the cost of acquisition by Rs. 3.74 crores when computing capital gains on sale.
- The Tribunal therefore rejected the AO's treatment (which had characterized the advance as an interest-free unsecured deposit in the course of business and relied upon SC precedents) because the factual matrix showed the advance was in respect of a capital asset, and the statutory scheme applicable to AY 2010-11 (section 51) governed treatment of such advances.
Holding and Implications
APPEAL DISMISSED.
Direct effect on the parties:
- The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 3,74,00,000 made by the AO under section 41(1) of the Income-tax Act.
- The Tribunal directed that, upon sale of the relevant property, the Assessing Officer shall reduce the cost of acquisition of the property by Rs. 3.74 crores for the purpose of computing capital gains under section 51.
Broader implications: The opinion relies on the statutory scheme in force for AY 2010-11 (section 51) and observes that the later-introduced section 56(2)(ix) (w.e.f. 01-04-2015) is substantive and not retrospective. The opinion does not purport to lay down a new general precedent beyond applying the existing statutory provisions to the facts of this case.
ORDER
Ashwani Taneja, Accountant Member - This appeal has been filed by the revenue against the order of Commissioner of Income Tax (Appeals) [hereinafter called CIT(A)] dt 08- 05-2014 passed against the assessment order of the AO u/s 143(3) dt 15- 03-2013 for A.Y. 2010-11 on the following grounds:
"On the facts and in the circumstances of the case and in law, the Ld CJT(A) has erred in directing the A.O. to delete the addition of Rs.3,74,00,000/- on account of cessation of liability ignoring the fact that the said liability did not exist in the books of account of M/s, Dawat-E-Hadiyah Trust as confirmed during the course of enquiry u/s. 133(6) of the I.T.Act."
2. The solitary issue raised by the revenue by way of this appeal is with regard to deletion of the addition which was made by the AO on account of cessation of liability on account of advance received from M/s Dawat-E- Hadiyah.
3. The brief background of the issue and the facts of this case are that during the year under consideration, the assessee company had shown income mainly from rent under the head 'Income from house property' and also 'Income from business'. The assessee company was engaged interalia in the business of construction of properties. During the course of assessment proceedings, the AO noted that there was a liability of Rs.3,74,00,000/- as shown in the balance sheet of the assessee, in the name of M/s Dawat-E-Hadiyah Trust. The said liability was created in the year 1995, when the assessee had received the said amount from the said trust as an advance for sale of assessee's property. The AO conducted enquiries from M/s Dawat-E-Hadiyah Trust, who vide their letter dated 29.11.2012 replied that the liability had been written off in the year under consideration on account of donations received from individual donors. But, AO was of the view that there was cessation of liability of the assessee of the said amount of Rs. 3.74 crores, and therefore it should be treated as assessee's income, and therefore he issued show cause notice to the assessee and after considering the reply of the assessee held that the assessee being in the business of construction had trading liability and hence the cessation of such liability should be treated as income of the assessee under section 41(1) of the Act. Accordingly, he added the said amount of Rs.3,74,00,000I- to the total income of the assessee. In support of his view, the AO relied upon the judgments in the cases of CIT v. T. V. Sundaiam lyengar & Sons Ltd. [1996] 222 ITR 344/88 Taxman 429 (SC) and CIT v. Sugauli SugarWorks (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 (SC) . The AO also observed that though both the assessee as well as M/s Dawat-E-Hadiyah Trust, have contended that the transaction was in respect of transfer of property, but this fact was not substantiated by the assessee with any cogent evidence. Both the parties were separately asked to furnish the evidence in this regard but both the parties failed to furnish any proof that the transaction was for an immovable property. Without any documentation, a property transaction of the magnitude of Rs. 3.74 crores in the year 1995 was beyond comprehension. Since there was no supporting evidence, the AO held that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. Thus, on the ground of cessation of the liability, the AO added the amount of Rs. 3.74 crores u/s 41(1) of the Act.
4. Being aggrieved, the assessee filed appeal before Ld. CIT(A) and made detailed submissions. It was submitted that the impugned amount was received by the assessee with regard to sale of property located at Chennai. Under these circumstances, no addition could have been made u/s 41(1) of the Act. This amount was not received in any manner as part of any business transaction. The provisions of section 41(1) are not applicable here at all. It was submitted that it was wrong on the part of the AO to observe that the assessee had not substantiated the fact of property transaction with any evidence. It was also wrong on the part of the AO to hold that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. The assessee had also in this regard furnished copies of the correspondences between itself and M/s Dawat-E-Hadiyah Trust indicating that all through, the intention of the advance received was for transfer of the assessee's property at Madras and when the deal did not materialise, the said M/s Dawat-E-Hadiyah started demanding its money back. Copies of all these correspondences were also furnished before the Assessing Officer.
5. The Ld. CIT(A) considered the entire submissions of the assessee and also examined original copies of the correspondence between the assessee and the said party. After considering the entire submissions and material placed on record, it was held by Ld.CIT(A) that impugned amount was not taxable in the hands of the assessee either u/s 41(1) or section 28(iv) or any other provisions of the Act. After holding so, the Ld. CIT(A) examined the provisions of section 51 and held that whenever the impugned property is sold by the assessee, the cost of acquisition of the property shall be reduced by the amount of Rs.3.74 crores for the purpose of computation of capital gains in view of provisions of section 51 of the Act. Under these circumstances and with these directions, the addition made by the Assessing Officer was directed to be deleted.
6. We have considered the submissions made by both the sides as well as orders passed by lower authorities. The admitted facts on record are that assessee has been showing its rental income from its properties, including the impugned property located at Madras and the same has been assessed by the Assessing Officer also under the head 'Income from house property. These properties have been undoubtedly shown as capital assets in the balance-sheet and never have been declared as stock-in-trade. This position has all along been accepted by the revenue. Further, as far as the assessee is concerned, the liability of Rs.3.74 crores is still outstanding in the name of aforesaid party. The Ld. CIT(A) has recorded a clear and categorical finding that correspondence between the assessee company and said party revealed that the transaction was in respect of assessee's property located at Madras. But, the transaction could not be completed. This factual finding could not be rebutted by the Ld DR. Thus, as per facts and records brought before us, aforesaid property is undoubtedly capital asset of the assessee company. Under these circumstances, it has been rightly held by the Ld. CIT(A) that the impugned amount of advance received towards sale of immovable property being capital asset of the assessee company, cannot be taxed under the provisions of section 41(1) or section 28(iv) of the Act, especially due to the fact that the legislature has provided the specific provision in this regard, i.e. section 51 of the Act. For the sake of ready reference, section 51 is reproduced hereunder:
"51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition:
Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum be deducted from the cost for which the asset was acquired or the written value or the fair market value, as the case may be, in computing the acquisition.]"
7. A perusal of the main portion of section 51 clearly reveals that in case any advance is received towards sale of a capital asset and if the same is retained by the assessee, then it shall be deducted from the cost of said asset for computing cost of acquisition. The provisions becomes further clear on perusal of proviso to this section which has been introduced with effect from 01-04-2015 wherein it has been clarified that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction shall be done in computing the cost of acquisition with the said amount. It is noted that provisions of section 56(2)(ix) reads as under:
'56 (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from sources", namely:-
| ** | ** | ** |
(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,—
The aforesaid provisions clearly lay down that amount of advance received for sale of property shall be treated as income u/s 56 if the same is forfeited and negotiations did not result in transfer of such capital asset. But these provisions have been inserted w.e.f. 01-04-2015. These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset. Thus, we reinforce the direction of the Ld. CIT(A) and direct the Assessing Officer to reduce the cost of acquisition of the property by the amount of Rs.3.74 crores on sale of the said property at the time of computation of capital gains as may be arising on account of sale of the said property. The action of Ld. CIT(A) in directing the Assessing Officer to delete the addition of Rs.3.74 crores which was made by the Assessing Officer u/s 41(1) of the Act, is hereby upheld.
8. As a result, appeal filed by the revenue is dismissed.
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