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Tax Publishers Ravi Shankar Shetty v. Asstt. CIT [ITA No. 28/Bang/2020, dt. 8-10-2020] : 2020 TaxPub(DT) 4147 (Bang-Trib) Additions under section 56(2)(ix) for advances given for stock-in-trade in real estate business *Facts:* Assessee was in the real estate business and was enabling procure lands to builders. Two entities had advanced monies to the assessee for purchasing of lands. The said land could not be procured as it ran into litigation. The debts stood still acknowledged by the two entities in writing. It was the case of the assessing officer and Commissioner (Appeals) that the said receipt of advance which was shown as Sundry Creditors in the books and not repaid for almost 7 years be treated as income under section 56(2)(ix) as these were advances taken for acquiring capital asset and since the advances were not repaid nor legal action claimed by the lenders against the assessee, the windfall of gain which arose by alleged forfeiture was income under section 28 as held in T.V. Sundaram Iyengar and Sons (1996) 222 ITR 344 (SC) : 1996 TaxPub(DT) 1245 (SC). On higher appeal - Held in favour of the assessee that it was clear that the advances were given for acquiring stock-in-trade (land) in the assessee's case as a real estate businessman. Thus invocation of section 56(2)(ix) by revenue was incorrect. The advances were not forfeited thus Sundaram Iyengar and Sons case (1996) 222 ITR 344 (SC) : 1996 TaxPub(DT) 1245 (SC) also cannot be applied. The liabilities were established by the assessee. Section 56(2)(ix) of the Income Tax Act, 1961 which was inserted with effect from 1-4-2015 amendment made in the Finance (No. 2) Bill, 2014, read as follows :-- 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; Intent of section 56(2)(ix) is as under -- "Section 56 -- Finance Act, 2014 6.10 Taxability of advance for transfer of a capital asset where advance is forfeited. (Sections 51 and 56) In Travancore Rubber & Tea Co. Ltd. v. CIT (2000) 243 ITR 158 (SC) : (2000) 109 Taxman 250 (SC) : 2000 TaxPub(DT) 1298 (SC) it was held that forfeiture of advance money received for transfer of capital asset cannot be treated as revenue receipt chargeable to tax. In order to overcome this ruling by the Supreme Court, section 56 relating to income from other sources has been amended by the Finance (No. 2) Act, 2014 by inserting a new clause (ix) in sub-section (2) of the aforesaid section. The said new clause (ix) provides that where any sum of money, received as an advance or otherwise in the course of the negotiation for transfer of a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such sum shall be chargeable to income-tax under the head "Income from other Sources". This amendment will take effect from 1-4-2015 and will accordingly, apply in relation to the assessment year 2015-16 and subsequent years. Consequential amendments have been made to definition of income in section 2(24) and in section 51. The existing provisions contained in clause (24) of section 2 define the term "income". The clause (24) has been amended so as to include any sum of money referred to in clause (ix) of sub-section (2) of section 56 in the definition of income. This amendment will take effect from 1-4-2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. The existing provisions contained in section 51 provide that where any capital asset was on any previous occasion, the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. Finance (No. 2) Act, 2014 ha inserted a proviso in the said section, so as to provide that where any sum of money received as an advance or otherwise in the course of the negotiations for transfer of a capital asset has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost of acquisition. This amendment aims to avoid double taxation of the forfeited advance. This amendment will take effect from 1-4-2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years." Section 51 discusses advances received for transfer of a capital asset which stood annulled and the above section simply substitutes the same post 1-4-2015.

Tax Publishers

Ravi Shankar Shetty v. Asstt. CIT [ITA No. 28/Bang/2020, dt. 8-10-2020] : 2020 TaxPub(DT) 4147 (Bang-Trib)

Additions under section 56(2)(ix) for advances given for stock-in-trade in real estate business

Facts:

Assessee was in the real estate business and was enabling procure lands to builders. Two entities had advanced monies to the assessee for purchasing of lands. The said land could not be procured as it ran into litigation. The debts stood still acknowledged by the two entities in writing. It was the case of the assessing officer and Commissioner (Appeals) that the said receipt of advance which was shown as Sundry Creditors in the books and not repaid for almost 7 years be treated as income under section 56(2)(ix) as these were advances taken for acquiring capital asset and since the advances were not repaid nor legal action claimed by the lenders against the assessee, the windfall of gain which arose by alleged forfeiture was income under section 28 as held in T.V. Sundaram Iyengar and Sons (1996) 222 ITR 344 (SC) : 1996 TaxPub(DT) 1245 (SC). On higher appeal -

Held in favour of the assessee that it was clear that the advances were given for acquiring stock-in-trade (land) in the assessee's case as a real estate businessman. Thus invocation of section 56(2)(ix) by revenue was incorrect.

The advances were not forfeited thus Sundaram Iyengar and Sons case (1996) 222 ITR 344 (SC) : 1996 TaxPub(DT) 1245 (SC) also cannot be applied. The liabilities were established by the assessee.

Section 56(2)(ix) of the Income Tax Act, 1961 which was inserted with effect from 1-4-2015 amendment made in the Finance (No. 2) Bill, 2014, read as follows :--

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;

Intent of section 56(2)(ix) is as under --

"Section 56 -- Finance Act, 2014

6.10 Taxability of advance for transfer of a capital asset where advance is forfeited. (Sections 51 and 56)

In Travancore Rubber & Tea Co. Ltd. v. CIT (2000) 243 ITR 158 (SC) : (2000) 109 Taxman 250 (SC) : 2000 TaxPub(DT) 1298 (SC) it was held that forfeiture of advance money received for transfer of capital asset cannot be treated as revenue receipt chargeable to tax. In order to overcome this ruling by the Supreme Court, section 56 relating to income from other sources has been amended by the Finance (No. 2) Act, 2014 by inserting a new clause (ix) in sub-section (2) of the aforesaid section. The said new clause (ix) provides that where any sum of money, received as an advance or otherwise in the course of the negotiation for transfer of a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such sum shall be chargeable to income-tax under the head "Income from other Sources". This amendment will take effect from 1-4-2015 and will accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

Consequential amendments have been made to definition of income in section 2(24) and in section 51. The existing provisions contained in clause (24) of section 2 define the term "income". The clause (24) has been amended so as to include any sum of money referred to in clause (ix) of sub-section (2) of section 56 in the definition of income. This amendment will take effect from 1-4-2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

The existing provisions contained in section 51 provide that where any capital asset was on any previous occasion, the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. Finance (No. 2) Act, 2014 ha inserted a proviso in the said section, so as to provide that where any sum of money received as an advance or otherwise in the course of the negotiations for transfer of a capital asset has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost of acquisition. This amendment aims to avoid double taxation of the forfeited advance. This amendment will take effect from 1-4-2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years."

Section 51 discusses advances received for transfer of a capital asset which stood annulled and the above section simply substitutes the same post 1-4-2015.