Section 41(1) read with Sections 28(i) and 51- Prior to 01.04.2015, if an assessee builder had received advance towards sale property held by it as a capital asset and the same was standing as liability in balance sheet of the assessee and if the actual sale transfer didn’t materialise, then the said amount would not be taxable u/s. 41(1) on writing off of corresponding amount by transferee but would be deducted u/s. 51 from cost of acquisition in computing capital gain when the property is ultimately sold.
FACTS
The assessee company was engaged, interalia, in the business of construction of properties. During the year under consideration, the assessee company had shown income mainly from rent under the head ‘Income from house property’ and also ‘Income from business’.
During the course of assessment proceedings, the AO noted that there was a liability of Rs.3.74 crore as shown in the balance sheet of the assessee, in the name of M/s Dawat-E-Hadiyah Trust. The said liability was created in the year 1995, when the assessee had received the said amount from the said trust as an advance for sale of assessee’s property. The AO conducted enquiries from M/s. Dawat-E-Hadiyah Trust, who vide their letter dated 29.11.2012 replied that the liability had been written off in the year under consideration.
AO was of the view that the assessee being in the business of construction had trading liability and hence, the cessation of said liability should be treated as income of the assessee u/s. 41(1) of the Act. Accordingly, he added the said amount of Rs.3.74 crore to the total income of the assessee. The AO also observed that though both the assessee as well as M/s Dawat-E-Hadiyah Trust, contended that the transaction was in respect of transfer of property, but both the parties failed to furnish any proof that the transaction was for an immovable property. Without any documentation, a property transaction of the magnitude of Rs. 3.74 crore in the year 1995 was beyond comprehension. Since there was no supporting evidence, the AO held that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. Thus, on the ground of cessation of the liability, the AO added the amount of Rs. 3.74 crore u/s. 41(1) of the Act.
Being aggrieved, the assessee filed appeal before CIT(A). It was submitted that the impugned amount was received by the assessee with regard to sale of property located at Chennai. The assessee also furnished copies of the correspondences between itself and M/s Dawat-E-Hadiyah Trust indicating that all through, the intention of the advance received was for transfer of the assessee’s property at Madras and when the deal did not materialise, the said M/s Dawat-E-Hadiyah started demanding its money back. Copies of all these correspondences were also furnished before the AO. After considering the entire submissions it was held by CIT(A) that impugned amount was not taxable in the hands of the assessee either u/s. 41(1) or u/s. 28(iv) or under any other provisions of the Act and that whenever the impugned property is sold by the assessee, the cost of acquisition of the property shall be reduced by the amount of Rs.3.74 crore for the purpose of computation of capital gains in view of provisions of section 51 of the Act.
On revenue’s appeal before the Tribunal:
HELD
The admitted facts on record are that assessee has been showing its rental income from its properties, including the impugned property located at Madras and the same has also been assessed by the AO under the head ‘Income from house property’. These properties have been undoubtedly shown as capital assets in the balance-sheet and never have been declared as stock-in-trade. This position has all along been accepted by the revenue.
Further, as far as the assessee is concerned, the liability of Rs.3.74 crore is still outstanding in the name of aforesaid party. The CIT(A) has recorded a clear and categorical finding that correspondence between the assessee company and said party revealed that the transaction was in respect of assessee’s property located at Madras. But, the transaction could not be completed. This factual finding could not be rebutted by the Ld DR. Thus, as per facts and records brought before us, aforesaid property is undoubtedly capital asset of the assessee company. Under these circumstances, it has been rightly held by the CIT(A) that the impugned amount of advance received towards sale of immovable property being capital asset of the assessee company, cannot be taxed under the provisions of section 41(1) or section 28(iv) of the Act, especially due to the fact that the legislature has provided the specific provision in this regard, i.e. section 51 of the Act.
Clause (ix) of section 56(2), inserted w.e.f. 01-04-2015, clearly lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset. Also proviso, introduced with effect from 01-04-2015 to section 51, states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold.
These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset.
Thus, the action of CIT(A) in directing the AO to delete the addition of Rs.3.74 crore which was made by the AO u/s. 41(1) of the Act, is hereby upheld.
