Section 51 — Treatment of advance money received — Pursuant to a transaction of sale of property the assessee received advance money — Whether AO justified in reducing the advance money received from cost of acquisition of the property — Held, No.

Section 51 — Treatment of advance money received — Pursuant to a transaction of sale of property the assessee received advance money — Whether AO justified in reducing the advance money received from cost of acquisition of the property — Held, No.

The assessee was the co-owner of an immovable property acquired prior to 31-3-1981. Both the coowners had agreed to sell the property by entering into agreement in November, 1994 for a total consideration of Rs.1.3 crore. The assessee and the co-owner received sales consideration in several instalments during the financial years 1998-99 to 2003-04 and the transfer of the property took place only in the year under consideration. The issue before the Tribunal was whether advance received in connection with the transfer of the property could be reduced from the cost of acquisition of the property. According to the AO as well as the CIT(A), as per the provisions of section 51, the advances received by the assessee should be deducted the from the value of the property as on 1-4-1981 while computing cost of acquisition.

Held:

The Tribunal noted that clause (iii) below the Explanation to section 48 does not provide for reduction of the advance amount from the cost of acquisition as against which, the clause (iv) below the said Explanation, which explains ‘indexed cost of improvement’, states that “the cost inflation index for the year in which the improvement to the asset took place” should be taken as the basis. Further, referring to the Apex Court decision in the case of Travancore Rubber & Tea Co. Ltd. (243 ITR 158), where it was held that advances received and forfeited by the assessee would be reduced from the 11 cost of acquisition u/s.51, the Tribunal held that the provisions of section 51 are applicable to an aborted transaction only. In the case of the assessee, the advances were received from a transaction which was not aborted. According to the Tribunal, the decision of the Bombay High Court in the case of Sterling Investment Corpn. Ltd. (123 ITR 441) also supports the case of the assessee. Accordingly, the appeal filed by the assessee was allowed on the point.