2026 (1) TMI 1469 - AT - Income Tax

Advance payment under agreement to sell treated as part performance and adjustment against cost, not immediate income tax

Advance consideration received under an agreement to sell was held to constitute part performance of transfer of a capital asset located within eight ... Advance money received - Forfeiture - Part performance / transfer in part performance - LTCG - provisions of section 2(47)(v) - amount received by the assessee as his 50% share out of the amount received by him on account of agreement to sell the property, copy of which was impounded during the course of survey u/s 133A - part performance of transfer of capital assets as the said land is located within 8 kilometers from the end of the municipal limits of Jalna city - HELD THAT:- Since there is no clause of forfeiture and since the matter is still sub-judice, therefore, the provisions of section 56(2)(ix) of the Act, in our opinion, are not applicable to the facts of the present case As and when the assessee sells the property the amount of advance so received which has not yet been refunded shall be reduced from the cost of acquisition and capital gain shall be computed accordingly. Since the Ld. CIT(A) / NFAC in the instant case has not brought any evidence on record that the assessee has forfeited the amount and since the matter is still sub-judice and the asset in question still stands in the name of the assessee and his spouse in the government records, therefore, CIT(A) / NFAC in our opinion, is not justified in bringing to tax an amount of Rs. 25 lakhs in the hands of the assessee as ‘Income from other sources’ by treating the same as forfeiture of the amount. The grounds raised by the assessee are accordingly allowed. Issues: (i) Whether the amounts received by the assessee pursuant to the Essar pavti/agreement constitute income chargeable as long-term capital gains by virtue of part performance / transfer under Section 2(47)(v) and Section 45; (ii) Whether the sums received during the year (share Rs.25,00,000) can be treated as forfeited and taxable as 'income from other sources' under Section 56(2)(ix), or whether they remain advances deductible under Section 51.Issue (i): Whether the Assessing Officer was justified in making a protective addition of Rs.1,00,00,000 treating the assessee's share of receipts as taxable long-term capital gains under Section 2(47)(v) and Section 45.Analysis: The Tribunal reviewed the impounded agreement, the factual position on possession and registration, and the A.O.'s reasoning invoking part performance. The Court noted absence of conclusive evidence of handing over possession or execution of a registered sale deed, and that the asset continued in the names of the assessee and spouse in government records. The Tribunal considered the relevance of Section 2(47)(v) but found no recorded material establishing transfer/part performance sufficient to treat the receipts as capital gains for the year in question.Conclusion: The protective addition of Rs.1,00,00,000 as long-term capital gains is not sustained. This conclusion is in favour of the assessee.Issue (ii): Whether Rs.25,00,000 (assessee's share of Rs.50,00,000 received in the year) can be taxed as forfeited amount under Section 56(2)(ix) as 'income from other sources'.Analysis: The Tribunal examined the agreement for any forfeiture clause, litigation status (civil and criminal proceedings), and evidence of refund or forfeiture. It noted absence of a forfeiture clause in the agreement and that the matter remained sub-judice with no material showing the advance had been forfeited or refunded. The Tribunal contrasted the requirements of Section 56(2)(ix) which applies only where a sum is forfeited and negotiations have failed, with Section 51 which provides that retained advances are to be adjusted against cost/WDV/fair market value when computing cost of acquisition on eventual sale.Conclusion: The addition of Rs.25,00,000 as forfeited amount taxable under Section 56(2)(ix) is not justified and is deleted. This conclusion is in favour of the assessee.Final Conclusion: The Tribunal allowed the appeal, setting aside the addition sustained by the CIT(A) and deleting the impugned additions; the amounts received remain advances to be dealt with under Section 51 upon eventual transfer, and are not presently taxable as forfeiture or capital gains.Ratio Decidendi: Where no clause of forfeiture is shown, possession is not handed over, and no conclusive evidence proves forfeiture or part performance, advances received in negotiations for transfer of a capital asset are not taxable under Section 56(2)(ix) but are to be adjusted under Section 51 against cost of acquisition when the asset is ultimately transferred.