2013 (2) TMI 74 - HC - Income Tax

Earnest money forfeiture of Rs.18 crores not taxable under section 56(2)(vi) without proper foundation

The Delhi HC dismissed the revenue's appeal challenging the Tribunal's decision regarding addition under section 56(2)(vi) for forfeited earnest money of ... Addition u/s 56(2)(vi) - Agreement to sell - forfeiture of earnest money - Application of section 51 - six cheques received in lieu of earnest money - failure to pay the balance consideration and the respondent/ assessee sent a notice of forfeiture - forfeited amount of Rs.18 crores was shown as advance received from the property in the balance sheet of the respondent/ assessee and not been offered for taxation in the relevant assessment year - AO not satisfied made a reference to ACIT u/s 144 - Held that:- Appellant/ revenue sought to invoke the provisions of section 56(2)(vi) however, find that this plea had not been raised before the Tribunal. Consequently, such plea of revenue cannot be entertained. Even otherwise, before a plea based on section 56(2)(vi) can be taken, a foundation has to be laid that the transaction was without any consideration. No such foundational plea had been taken before the Tribunal. Apart from this the Tribunal has rightly noted that the provisions of section 51would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration. Consequently, no merit in the revenue’s appeal, much less any substantial question of law for consideration - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this appeal include:Whether the forfeited earnest money of Rs. 18 crores received by the assessee from the purchaser under an agreement to sell property constitutes taxable income in the relevant assessment year.Whether the assessing officer was justified in treating the forfeited amount as income by alleging the transaction was a sham designed to book bogus losses.The applicability and binding nature of directions issued under section 144A of the Income Tax Act, 1961, especially regarding the treatment of forfeited earnest money.The relevance and applicability of section 51 of the Income Tax Act, 1961, in the context of forfeiture of earnest money and its adjustment against the cost of property for capital gains computation.Whether the plea invoking section 56(2)(vi) of the Income Tax Act could be entertained at the appellate stage when it was not raised before the Tribunal.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of the forfeited earnest money of Rs. 18 croresRelevant legal framework and precedents: The Court considered section 51 of the Income Tax Act, 1961, which deals with the adjustment of capital gains in cases where any amount is forfeited or received as earnest money in relation to property transactions. The Supreme Court decision in the case of Travancore Rubber and Tea Company Ltd. was cited by the authorities below as supporting the treatment of forfeited earnest money as a capital receipt rather than taxable income.Court's interpretation and reasoning: The Court noted that the forfeited amount was shown as an advance received from the property in the assessee's balance sheet and was not offered for taxation in the relevant year. The Addl. Commissioner of Income Tax, under section 144A, had directed that the forfeited amount is not liable to be taxed as income or capital gain until the sale of the property is completed. Instead, the forfeited amount should be adjusted against the cost of the property for the purpose of computing capital gains when the property is eventually sold.Key evidence and findings: The transaction involved an agreement to sell property for Rs. 150 crores, with earnest money of Rs. 36 crores paid by the purchaser. Due to the purchaser's failure to pay the balance consideration by the stipulated date, Rs. 18 crores of earnest money was forfeited by the seller. The earnest money was received through banking channels, and no incriminating material was found during a survey under section 133A. The genuineness of the receipt was not disputed.Application of law to facts: The Court applied section 51 and the principles established by precedent to conclude that the forfeited earnest money is not taxable as income in the year of forfeiture but should be treated as an adjustment to the cost of the property, affecting capital gains computation upon sale.Treatment of competing arguments: The revenue contended that the forfeited amount should be treated as income and sought to invoke section 56(2)(vi), which deals with income from other sources without consideration. However, this plea was not raised before the Tribunal and lacked foundational basis, as the transaction was held to be genuine and supported by consideration.Conclusions: The Court upheld the treatment of the forfeited earnest money as a capital receipt, not taxable as income in the relevant year, consistent with section 51 and judicial precedent.Issue 2: Allegation of sham transaction and booking of bogus lossesRelevant legal framework and precedents: The assessing officer alleged that the entire transaction was a sham intended to book bogus losses, which if true, would justify treating the forfeited amount as income. The Court examined the evidence in light of the principles governing sham transactions and the requirement of genuine consideration for tax treatment.Court's interpretation and reasoning: The Tribunal found that no incriminating material was discovered during the survey under section 133A, and the addition by the assessing officer was based on presumption rather than concrete evidence. The earnest money was received through proper banking channels, and the genuineness of the transaction was not disputed.Key evidence and findings: The absence of incriminating material and the legitimate banking transactions supported the genuineness of the sale agreement and the forfeiture. The Tribunal and CIT (Appeals) held that no addition could be made on mere surmises and conjectures.Application of law to facts: Since the transaction was genuine and supported by evidence, the Court rejected the revenue's allegation of sham transaction.Treatment of competing arguments: The revenue's argument was rejected due to lack of evidence and failure to establish the transaction as a sham.Conclusions: The Court concluded that the transaction was genuine and the forfeiture was lawful, negating the revenue's claim of bogus losses.Issue 3: Binding nature of directions under section 144A of the Income Tax ActRelevant legal framework and precedents: Section 144A empowers the Addl. Commissioner of Income Tax to issue directions in certain cases. The question was whether these directions are binding on the assessing officer.Court's interpretation and reasoning: The CIT (Appeals) held that the directions issued under section 144A were binding on the assessing officer, who had failed to comply with them. The Tribunal concurred with this view, emphasizing that the assessing officer had no authority to disregard the directions.Key evidence and findings: The Addl. Commissioner's directions explicitly stated that the forfeited amount is not taxable as income until the property is sold and must be adjusted against the cost of the property.Application of law to facts: The assessing officer's non-compliance with these directions was a procedural lapse, leading to an erroneous addition.Treatment of competing arguments: The revenue did not contest the binding nature of the directions but sought to raise other grounds not previously argued.Conclusions: The Court upheld the binding effect of the directions under section 144A and ruled against the assessing officer's non-compliance.Issue 4: Invocation of section 56(2)(vi) of the Income Tax Act at appellate stageRelevant legal framework and precedents: Section 56(2)(vi) deals with income arising from receipt of property or money without consideration or inadequate consideration. The Court considered procedural propriety and foundational requirements for invoking this provision.Court's interpretation and reasoning: The Court observed that the plea under section 56(2)(vi) was not raised before the Tribunal and thus could not be entertained at this stage. Further, for such a plea to succeed, it must be established that the transaction was without consideration, which was not the case here.Key evidence and findings: The transaction was supported by consideration (agreement to sell and earnest money paid), and no foundational plea regarding lack of consideration was made before the Tribunal.Application of law to facts: The Court declined to entertain the new plea and found no merit in it.Treatment of competing arguments: The revenue's attempt to raise this plea at the High Court was rejected on procedural and substantive grounds.Conclusions: The Court refused to entertain the section 56(2)(vi) plea and found no merit in it.3. SIGNIFICANT HOLDINGSThe Court held:'In the light of above observation, forfeited amount is not liable to be taxed as income or chargeable gain under the provisions of the act till there is sale of property. The legal position to this effect is supported from provisions of sec. 51 of the Income Tax Act, 1961 and various judgments referred to above.''No addition can be done on the basis of surmises and conjectures.''The Assessing Officer had to abide by the directions of the Addl. Commissioner of Income Tax, which he has not done in this case.''Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration.'Core principles established include:Forfeited earnest money in a property sale agreement is not taxable as income in the year of forfeiture but is to be adjusted against the cost of the property for capital gains computation upon sale, pursuant to section 51 of the Income Tax Act.Directions issued under section 144A are binding on the assessing officer and must be complied with.Additions to income cannot be made based on mere assumptions or conjectures without evidentiary support.New grounds or pleas not raised before the Tribunal cannot be entertained at the High Court stage.Final determinations were in favor of the assessee/respondent, dismissing the revenue's appeal and confirming that the forfeited earnest money is not taxable as income in the relevant assessment year and must be treated as an adjustment to the cost of the property for capital gains purposes.