2023 (5) TMI 467 - AT - Income Tax

Advance money forfeited not taxable as capital gains by ITAT, Delhi.

The Appellate Tribunal ITAT DELHI allowed the appeal of the assessee, directing the AO to delete the addition made towards LTCG on the forfeited advance ... Liability under the head short term/ long term capital gain - forfeiture of advanced amount against sale of property - Transfer of capital asset u/s 2(47) - joint owned property inherited - sale bargain was not concluded - HELD THAT:- Admittedly assessee jointly with her two sons inherited agricultural land from her husband after his death - also not in dispute that bargain was cancelled and cancellation of agreement to sale was specifically recorded on the back of the agreement to sale. These facts have not been controverted by the authorities below. AO made an addition being 1/10th share of advance amount in the hands of the assessee considering the same as sale consideration. The amount of advance was deposited in the joint bank account in the name of assessee, her son and widow wife of late. The amount as per submissions of the assessee and this quantum has not been disputed by the AO and the AO has also took note of said amount in first para of the assessment order. AO has grossly erred in taxing the advance amount under the head capital gain in peculiar circumstances when no transfer of any asset was made by the assessee and her co-owner - In the present case the assessee received advance amount on 06.09.2010 under agreement to sale, which was cancelled on 16.03.2011 and amount of advance was forfeited therefore, provision of section 51 of the Act are applicable and the amount proportionately forfeited by the assessee would be deducted from the cost of acquisition of the asset or fair market value as the case may be at the time of actual transfer of such asset in future. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received as advance under an agreement to sell land, later cancelled, can be taxed as long-term/short-term capital gains in absence of any transfer of the capital asset. 2. Whether provisions applicable to advance money forfeited prior to 31.03.2014 (section 51) or the post-2014 provision taxing forfeited advances as income from other sources (section 56(2)(ix)) govern the tax treatment of such forfeited advances. 3. Whether an assessing officer may attribute the entire advance receipt to one co-owner where the advance was received for co-owned land and deposited in a joint bank account in the names of multiple co-owners. 4. Ancillary: Whether any part of the facts (possession, operation of section 2(47) read with section 53A of the Transfer of Property Act) suffices to treat the cancelled agreement as effecting a transfer for capital gains purpose. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of forfeited advance as capital gain where agreement to sell was cancelled (Legal framework) Legal framework: Taxability of capital gains requires a 'transfer' as defined in section 2(47). Section 45 taxes income arising from transfer of a capital asset. Specific provisions dealing with advances received in relation to proposed transfers include section 51 (applicable to advances forfeited before 31.03.2014) and, with effect from AY 2015-16, section 56(2)(ix) (taxing forfeited advances as income from other sources). (Precedent Treatment) The Tribunal relied on ratio from higher and co-ordinate court authorities holding that where an agreement to sell is cancelled and there is no transfer/possession passed, the advance forfeited cannot be treated as sale consideration for capital gains; the advance is governed by pre-2014 rule (i.e., to be adjusted against cost on future transfer). (Interpretation and reasoning) The Court found no transfer of any capital asset: the agreement to sell dated 06.09.2010 was expressly cancelled on 16.03.2011 (cancellation recorded on the agreement), possession was not shown to have passed, and therefore no element of 'transfer' under section 2(47) existed. The advance, though received and later retained (forfeited), did not convert into taxable capital gains in the year of forfeiture because the statutory machinery for treating a forfeited advance as capital gain is absent for amounts forfeited before 31.03.2014. Section 51 prescribes that such forfeited amounts are to be adjusted by deduction from cost of acquisition or fair market value at the time of actual transfer in future; they are not immediately chargeable as capital gains. (Ratio vs. Obiter) Ratio: Where an advance for sale of land received before 31.03.2014 is forfeited pursuant to cancellation of the agreement and no transfer has occurred (including lack of possession), such forfeited advance is not taxable as capital gains in the year of forfeiture; rather, section 51 applies to adjust cost/fair market value on subsequent transfer. Obiter: Observations on the later insertion of section 56(2)(ix) indicate the legislative intent to change tax timing post-2014, but do not affect the present conclusion. (Conclusion) The amount of advance forfeited cannot be taxed under the head capital gains for the relevant year; the assessing officer must apply section 51 and treat the forfeited amount as deductible from cost or FMV on any future transfer. Issue 2 - Applicability of section 51 (pre-2014) versus section 56(2)(ix) (Legal framework) Legal framework: Section 51 (operative for advances forfeited before 31.03.2014) and section 56(2)(ix) (operative from AY 2015-16) differ in timing and head of taxation: section 51 defers effect to computation of capital gain on future transfer; section 56(2)(ix) provides immediate taxation as income from other sources where advances are forfeited and negotiations do not result in transfer. (Precedent Treatment) The Court treated pre-enactment authorities as applicable to facts where forfeiture occurred before the operative date of the new provision and followed such treatment. (Interpretation and reasoning) Since the advance in question was received on 06.09.2010 and forfeited upon cancellation on 16.03.2011, the forfeiture falls before 31.03.2014. Therefore, the pre-2014 statutory provision (section 51) governs the tax consequences. The later insertion of section 56(2)(ix) cannot be applied retrospectively to advance receipts/forfeitures occurring earlier. (Ratio vs. Obiter) Ratio: Temporal operation of specific statutory provisions controls tax treatment; forfeiture before 31.03.2014 is governed by section 51, not by post-2014 section 56(2)(ix). Obiter: None significant beyond the temporal principle. (Conclusion) Section 51 applies; forfeited advances received before 31.03.2014 are to be adjusted against future cost and are not presently taxable as income under section 56(2)(ix) or as capital gains under section 45. Issue 3 - Attribution of forfeited advance among co-owners where advance was deposited in a joint account (Legal framework) Legal framework: Taxation must reflect true beneficial receipt and share; amounts received for co-owned property are to be attributed according to respective shares and evidence of joint receipt. (Precedent Treatment) The Tribunal noted that attributing the entire advance to one co-owner, in presence of joint ownership and joint bank account, is impermissible absent evidence showing exclusive receipt/beneficial ownership by that single person. (Interpretation and reasoning) Facts showed the advance was to be divided as per shares, the cheque/advance was deposited in a joint account in the names of three co-owners, and the total quantum of advance deposited matched the amount claimed. No material contradicted the assessee's assertion that the amount was joint money. The assessing officer erred in treating Rs.11 lakh as the assessee's individual receipt without reconciling co-ownership and joint deposit. (Ratio vs. Obiter) Ratio: In cases of co-owned property where advance is received for collective interest and deposited in a joint account, the assessing officer cannot unilaterally attribute the whole amount to one co-owner without evidence; assessment must reflect the proportionate shares. (Conclusion) The addition attributing the entire advance to a single co-owner is unsustainable; assessment must be recomputed recognizing joint receipt and applying section 51 consequences proportionately. Issue 4 - Application of section 2(47) and section 53A of Transfer of Property Act where agreement was cancelled (Legal framework) Legal framework: Section 2(47) defines 'transfer'; section 53A (suspensory effect of part performance) may, in some factual matrices, treat certain transactions as effecting transfer on equitable grounds if possession/practical acts occurred. (Precedent Treatment) The Court considered but found no factual basis to invoke section 53A or any sub-clause of section 2(47) because possession was not shown to have passed and the agreement was expressly cancelled. (Interpretation and reasoning) The absence of delivery of possession or acts sufficient to invoke part performance meant neither equitable title nor deemed transfer arose. Cancellation recorded on the instrument reinforced absence of transfer. Therefore, statutory definitions of 'transfer' were not attracted. (Ratio vs. Obiter) Ratio: Where an agreement to sell is cancelled and no possession or acts constituting part performance have occurred, neither section 2(47) nor section 53A can be invoked to treat the transaction as a transfer for capital gains purposes. (Conclusion) The cancelled agreement did not amount to a transfer under section 2(47) nor to an equitable transfer under section 53A; hence capital gains provisions (section 45) are inapplicable for the forfeiture year. Overall Disposition Conclusion: The forfeited advance received and retained before 31.03.2014 is not taxable as capital gains in the year of forfeiture; section 51 governs and the amount is to be deducted from cost of acquisition or FMV upon any future transfer. The assessing officer's addition treating the advance as capital gain and attributing the entire amount to one co-owner is set aside; the addition is to be deleted and assessment recomputed in accordance with the foregoing principles.