The Karnataka High Court (Bengaluru Bench) has held that Section 56(2)(ix) of the Income Tax Act can be invoked only when money is received in the course of negotiations for transfer of a capital asset and such money is forfeited, with the negotiations not resulting in transfer. If the money is received for a business activity involving procurement of land as stock-in-trade, and continues to be reflected as a liability without any legal forfeiture, Section 56(2)(ix) has no application. Mere efflux of time or non-demand by the payer does not by itself amount to forfeiture.
The Division Bench comprising Justice S.G. Pandit and Justice Rajesh Rai K reproduced Section 56(2)(ix) and noted that the provision applies only where money is received as an advance or otherwise in the course of negotiations for transfer of a capital asset, and where two conditions are both satisfied: first, the sum is forfeited; and second, the negotiations do not result in transfer of that capital asset. The Court stressed that the legislature used the word “and”, so both conditions must coexist.
The Court found that the money received from Metro Corp entities was not an advance paid in the course of negotiations for transfer of any capital asset belonging to the assessee. Instead, the funds were entrusted to the assessee to locate, procure and acquire lands for the business projects of those concerns. Therefore, the relationship was not that of transferor and transferee negotiating transfer of a capital asset, but one of business funding for carrying out a land procurement activity.
The Court further observed that, in the ordinary course of the assessee’s business, the lands proposed to be acquired would be stock-in-trade and not capital assets. Referring to Section 2(14), the Court noted that stock-in-trade is excluded from the definition of capital asset. On that basis, it held that the first requirement of Section 56(2)(ix) itself failed.
On forfeiture also, the Court rejected the Revenue’s stand. It held that as on March 31, 2015, the amount continued to be shown as a liability in the assessee’s books, and there was no material to show that the assessee had become absolutely entitled to retain the advance. The Court said that mere lapse of time cannot amount to forfeiture.
While dealing with this aspect, the Court reiterated in the context of Section 41(1) that mere inability to trace a creditor or mere passage of time does not legally establish cessation of liability. It also reiterated that the advance could not be regarded as forfeited merely because eight years had passed without any refund claim, especially when the amount was still treated as a liability.
Briefly, the assessee, Ravi Shankar Shetty, was engaged in the business of procurement of lands and real estate, and had filed his return declaring total income of Rs. 25.74 lakhs. During scrutiny, the Assessing Officer examined advances of Rs. 21.89 crores shown as outstanding. These amounts had been received from Metro Corp and Metro Corp Infrastructure Ltd. under an agreement dated Feb 10, 2006 for procuring lands at Doddaballapur and Chikkaballapur. In the assessment order passed under Section 143(3), the AO made an addition of Rs. 21.11 crores under Section 56(2)(ix) of the Act. On appeal, the ITAT held that the conditions required under Section 56(2)(ix) were not satisfied.
