2016 (8) TMI 261 - AT - Income Tax

Tribunal rules on property as capital asset, adjusts forfeited amount under Income Tax Act

The Tribunal partially allowed the appeals, determining that the property in question was a capital asset. The forfeited amount was to be adjusted against ... Capital asset versus business asset - treatment of forfeited advance under Section 51 of the Income tax Act - reduction of forfeiture from cost of acquisition and taxation of excess - allocation of taxable surplus between co owners - inapplicability of Suraj Lamp & Industries (on mode of transfer) to forfeiture disputeCapital asset versus business asset - Nature of the Ramagondanahalli property - whether held as capital asset or business asset - HELD THAT: - The Tribunal examined the factual matrix and the finding of the ld. CIT(A) that the assessee had earlier undertaken real estate activity (Crystal Springs) but held that such prior or other real estate dealings do not automatically convert every property of the assessee into stock in trade. The revenue had not produced material to show that the Ramagondanahalli property itself was held as a business asset. On the facts, the property was held as a capital asset. [Paras 7]Property at Ramagondanahalli is a capital assetTreatment of forfeited advance under Section 51 of the Income tax Act - reduction of forfeiture from cost of acquisition and taxation of excess - Applicability of Section 51 to forfeited advances and tax consequence of the forfeiture - HELD THAT: - Having held the property to be a capital asset, the Tribunal applied Section 51 to treat the forfeited advances as required to be reduced from the cost of the asset. Because the total forfeiture exceeded the cost of acquisition, the excess portion was held to be taxable in the year in which the forfeiture was realized; the cost of acquisition for computing capital gains in the year of sale should be taken as nil to the extent of the excess reduction. The Tribunal also noted that, on allowance of the adjustment, a surplus remained which must be brought to tax. [Paras 7]Forfeited advances to be reduced from cost under Section 51; excess over cost to be taxed in the year of realization and cost taken as NIL for computing capital gainsAllocation of taxable surplus between co owners - reduction of forfeiture from cost of acquisition and taxation of excess - Apportionment of the taxable surplus arising from forfeiture between the two assessees - HELD THAT: - The Tribunal accepted the parties' common ownership and the earlier restoration of the issue concerning a combined forfeiture sum; after applying Section 51 and calculating the excess, the Tribunal directed that the taxable surplus be brought to tax in equal proportion in the hands of the two assessees. [Paras 4, 7]Excess forfeiture to be taxed equally between the two assesseesInapplicability of Suraj Lamp & Industries (on mode of transfer) to forfeiture dispute - Relevance of Suraj Lamp & Industries to the present dispute on forfeiture - HELD THAT: - The Tribunal considered the cited Supreme Court decision concerning modes of transfer of immovable property and held that the principle thereabout conveyance being the only mode of legal transfer was not relevant to the present controversy, which concerns the tax treatment of forfeited advances and not the validity of transfer instruments. [Paras 8]Suraj Lamp & Industries decision is not applicable to the forfeiture issue in this caseFinal Conclusion: Both appeals were partly allowed: the Ramagondanahalli property was held to be a capital asset; forfeited advances are to be reduced from cost under Section 51, with the excess over cost treated as taxable (to be apportioned equally between the two assessees) and the cost taken as NIL for computing capital gains in the year of sale; the cited Supreme Court decision was held inapplicable to the forfeiture issue. 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 Rs. 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 Rs. 33,00,000 had to be reduced from the cost of the asset. The cost of acquisition was Rs. 31,76,160, leading to a surplus of Rs. 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.