2021 (7) TMI 274 - AT - Income Tax

Tribunal rules forfeited amount not taxable under Income Tax Act, reduces property cost.

Archana Traders Pvt. Ltd. Versus Income Tax Officer, Ward-1 (1) (4)

Archana Traders Pvt. Ltd. Versus Income Tax Officer, Ward-1 (1) (4) - TMI Issues Involved:1. Validity of reopening of assessment under Section 148 of the Income Tax Act.2. Taxability of forfeited amount under Section 28(iv) of the Income Tax Act.3. Applicability of Section 51 of the Income Tax Act to the forfeited amount.4. Determination of the nature of the forfeited amount (capital receipt vs. revenue receipt).Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 148:The assessee did not press the ground relating to the validity of reopening of assessment under Section 148 of the Income Tax Act. Consequently, this ground was dismissed as not pressed.2. Taxability of Forfeited Amount under Section 28(iv):The core issue was whether the forfeited amount of Rs. 3 crores should be treated as income under Section 28(iv) of the Act. The AO argued that the forfeited amount represented a benefit to the assessee and thus was taxable under Section 28(iv). The AO relied on the decision of the Hon’ble Madras High Court in CIT Vs. Ramaniyam Homes Pvt. Ltd., which held that waiver of a portion of the loan would tantamount to the value of benefit under Section 28(iv). However, the assessee contended that the forfeited amount was a capital receipt and not taxable, relying on the decision of the Hon’ble Bombay High Court in Mahindra & Mahindra Ltd., upheld by the Hon’ble Supreme Court, which stated that Section 28(iv) does not apply to transactions involving money. The Tribunal noted that the Hon’ble Supreme Court clarified that Section 28(iv) applies only to benefits other than money, and since the forfeited amount was in cash, it was not taxable under Section 28(iv).3. Applicability of Section 51 to the Forfeited Amount:The assessee argued that the forfeited amount should reduce the cost of the property under Section 51 of the Act. The AO and CIT(A) viewed the agreement for sale as a colorable device to avoid taxation. However, the Tribunal found no material evidence to support this view and concluded that the forfeited amount related to a genuine property transaction. Thus, the provisions of Section 51 were applicable, and the forfeited amount should reduce the cost of the property.4. Determination of the Nature of the Forfeited Amount:The Tribunal examined whether the forfeited amount was a capital receipt or a revenue receipt. The AO considered it a revenue receipt, arguing that the agreement for sale was an afterthought to color the loan transaction as an advance for property. The Tribunal disagreed, noting that the initial loan was converted into an advance for property purchase, and the forfeiture was due to the buyer's failure to complete the transaction. The Tribunal emphasized that the nature of payment and receipt depends on the facts of each case and concluded that the forfeited amount was a capital receipt related to a property transaction.Conclusion:The Tribunal held that the forfeited amount of Rs. 3 crores was not taxable under Section 28(iv) of the Act and should reduce the cost of the property under Section 51. The appeal filed by the assessee was allowed, and the AO was directed to delete the impugned addition. The order was pronounced on June 30, 2021.