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Finance (No. 2) Act, 2014 inserted Section 56(2)(ix) w.e.f. 01.04.2015. Section 56(2)(ix) provides for taxation of advance received towards sale of capital asset, which is subsequently forfeited. The section reads as follows:
“In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:
…….
(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,—
(a) such sum is forfeited; and
(b) the negotiations do not result in transfer of such capital asset;”
For applicability of section 56(2)(ix), all the following conditions should be satisfied”
- any sum of money is received by the assessee
- Sum is received as advance or otherwise in the course of negotiations for transfer of a capital asset
- Such sum is forfeited
- the negotiations do not result in transfer of such capital asset
Prior to insertion of section 56(2)(ix) in the Act, treatment of such sums was dealt in section 51 of the Act. It was provided that any advance or money received and retained by the assessee in respect of negotiation (on any previous occasion) of transfer of capital asset should be reduced from cost of acquisition or WDV of asset.
Some of the issues that arise with respect to taxability under this section are as follows:
- Whether it applies advances received prior to 01.04.2015 (when this section become effective).
- Whether the section applies to advance received towards sale of stock-in-trade.
- When does one say that advance is forfeited.
The taxability under this section is dealt in the following cases:
Shri Ravi Shankar Shetty v ACIT ITA No.28/Bang/2020; [TS-521-ITAT-2020(Bang)] – the Assessee-Individual is sole proprietor and had received advances from various parties. The Assessee had received advance of Rs. 20.11 Cr. and Rs. 1 Cr in 2007 and 2008 respectively. The advance was received to procure lands. The Assessee made initial payment of advance of Rs.5.53 crores to third parties towards procurement of land. However, land could not be procured due to litigation. The AO observed that the creditors were not traceable, no recovery suits were filed by the creditors and advances were utilized by the assessee in its business. Thus, AO taxed them under section 56(2)(ix). The CIT(A) upheld the decision of the AO on the basis that the agreement with the creditors did not provide for refund of the advances and it could only be adjusted against the future land deals. The CIT(A) upheld the Order and observed that the advances were virtually forfeited as no attempts were made by the creditors for their recovery.
On appeal by Assessee, the ITAT allowed the appeal holding that Section 56(2)(ix) was not invocable in the facts of the case. The Tribunal held as follows:
The Tribunal rejected the contention of the assessee that provision of S. 56(2)(ix) cover only advances received after 01.04.2015, when the said provision came into effect.
ITAT gave due weightage to the confirmation letters furnished by the creditors and the pendency of land deal.
The Tribunal observed that “From the plain reading of section 56(2)(ix), it is clear that money should be received as advance or otherwise in the course of negotiation for transfer of capital asset. Therefore, sum received in the course of negotiation for transfer of a capital asset is sine qua non for invoking the deeming provisions. This negotiation is to be in relation to the transfer of a capital asset in whose case the deeming provision is attracted. In other words, the capital asset which is the subject matter of negotiation for transfer must belong to the assessee”. The ITAT observed that in the instant case, the assessee and creditors are engaged in the real estate business, which was an admitted fact. Relying on legislative intent behind the insertion of section 56(2)(ix) and earlier Section 51, the ITAT observed that section 56(2)(ix) applies to capital asset.
The ITAT further observed that “the assessee has not forfeited the amount received by him and it has been shown as outstanding in the respective name of these two parties in the Balance Sheet of the present assessee. The entry in the Balance Sheet itself shows that it is outstanding on the date of the balance sheet and the assessee is liable to pay the same to the two parties. More so, the parties have given confirmation letters stating that the amount is outstanding from the assessee to them. In such a situation, it cannot be considered as an amount forfeited by the assessee so as to invoke the provisions of section 56(2)(ix) of the I.T. Act.” Accordingly, the ITAT concluded that amount is not forfeited.
The Tribunal further held that “usage of the funds by the assessee cannot be reason to invoke the provisions of section 56(2)(ix) of the I.T. Act. The usage of said funds by the assessee cannot change the character of the source of funds received by the assessee and it will remain as received towards procurement of land on behalf of the lender for procuring land which is stock in trade to the assessee”.
Based on all the above, the ITAT concluded that the twin condition contained in S. 56(2)(ix) {capital asset and forfeiture) were not fulfilled in the instant case and additions were deleted.