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Facts
The assessee received ₹94,76,000 (₹17,00,000 by cheque and ₹77,76,000 in cash) as an advance against an agreement to sell a property. The sale deed was not executed, and possession was not handed over. The Assessing Officer (AO) treated this amount as 'income from other sources' and made an addition.
Held
The Tribunal held that mere receipt of money under an agreement to sell does not automatically result in taxable income. Since no sale deed was executed, no transfer occurred as per Section 2(47) of the Act, and the amount retained the character of an advance. Furthermore, the assessment was vitiated due to the absence of a mandatory notice under Section 143(2) of the Act.
Key Issues
Whether the advance received for a property sale, where the transaction did not materialize, is taxable as 'income from other sources', and if the assessment is valid without a notice under Section 143(2).
Sections Cited
132, 143(3), 147, 148, 250, 2(47), 2(24), 51, 143(2)
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Income Tax Appellate Tribunal, NAGPUR BENCH :: NAGPUR
1. This appeal by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)-3, Nagpur, dated 28/03/2025 passed under section 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of assessment order passed u/s. 143(3) r.w.s. 147 of the Act dated 21.03.2022 for the Assessment Year 2013-14.
ITA No. 360/NAG/20245 (Shashi Vasant Shastri) 2. Facts of the case in brief are that assessee is an individual and not filed her return of income. Based on the information from Investigation Wing, Nagpur, search and seizure action u/s. 132 of the Act was conducted at the residential premises of Mr. Roshan Dhore where certain incriminating documents were found and seized. During the search proceesings, it was revealed that assessee along with other has entered into agreement to sale with M/s. Narayana Educational Society and assessee received 17,00,000/- through cheque and Rs. 77,76,000/- in cash. Further, it was found that vendors have handed over the possession of the property to the buyers and capital gains arose thereon was not offered to tax and has escaped assessment. Accordingly, case was reopened u/s. 147 and issued notice u/s. 148 of the Act and served upon the assessee. In response thereto, assessee filed return of income. Ld. AO completed the assessment u/s. 143(3) r.w.s. 147 of the Act making the addition of Rs. 94,76,000/- on account of ‘income from other sources’.
Aggrieved by the assessment order, assessee preferred appeal before the Ld. CIT(A). Even though assessee remained 2 (Shashi Vasant Shastri) non-compliant, Ld. CIT(A) decided the appeal on merits and dismissed the same by holding as under:-
“5.1 Ground Nos. 1 and 2: In these grounds the appellant has challenged the addition of Rs. 94,76,000/- made to her income on account of income from other sources. Briefly stated, the facts of the case are that the appellant along with others had entered into an agreement to sale on 14.02.2013 with M/s Nairsons Educational Society (henceforth, NES). The total sale consideration as per this Agreement to Sale was Rs. 3,80,00,000/- out of which Rs. 17,00,000/- was received through cheque and Rs. 77,76,000/- was received through cash. The appellant claimed that NES did not fulfil the terms of payment and hence the Sale Deed was not entered into. The appellant also claimed that they had not given the possession of the property to NES and thus no transfer took place which is why she had not offered any income for taxation. The AO rejected the contention of the appellant and held that the appellant had received an amount of Rs. 94,76,000/- (Rs. 17,00,000 by cheque and Rs. 77,76,000/- by cash) which she had not offered for taxation. Hence, the AO treated the income of Rs. 94,76,000/- as income from other sources and added to the total income of the appellant.
During the appellate proceedings, as stated above, the appellant did not file a single submission which would support her claim that she was not in receipt of taxable income during the year. The appellant has emphasized on the fact that the final sale deed was not executed and hence, the transfer did not take place and as such she was in receipt of only advance and not any income. However, the appellant did not file any submission or details to show that the amount of Rs. 94,76,000/- received from NES was returned back by her subsequently. The appellant had maintained a studied silence on this issue and the fact that substantial cash was received by her for transferring the plot of land makes it even more difficult to believe that the appellant had finally returned back the money. This case seems to be the one where advance was made and then was forfeited. In such circumstances, the onus was on the appellant to prove that she returned back the 3 (Shashi Vasant Shastri) money or she transferred the plot and completed the transfer of property. However, no material was brought on record by the appellant to discharge this onus. Hence, the findings recorded by the AO remained uncontroverted. The addition is thus sustained and ground nos. 1 and 2 are dismissed.”
Learned counsel for the assessee submitted that Ld. AO has not issued notice u/s. 143(2) of the Act to the assessee. In absence of notice u/s. 143(2), assessment order passed u/s. 143(3) r.w.s. 147 is void ab initio. It is further submitted that the proposed transaction of sale, did not materialize as the purchaser failed to comply with the terms and conditions stipulated in the agreement. Consequently, no sale deed was executed and the possession of the property was not handed over to the purchaser. Therefore, there was no “transfer” within the meaning of section 2(47) of the Act. She further submitted that the amount received was only in the nature of advance against the proposed sale, and did not partake the character of income. Since the transaction was not completed during the relevant previous year, no income chargeable to tax arose in the hands of the assessee. It was further pleaded that the provisions relating to taxation of capital gains were not attracted in the absence of transfer, and the Assessing Officer 4 (Shashi Vasant Shastri) was not justified in bringing the said amount to tax under the head “Income from Other Sources” without any legal basis, therefore, she prayed for deletion of the addition of ₹94,76,000/-.
Ld. Departmental Representation (DR) supported the orders of lower authorities and vehemently argued that since there is no evidence of returning back the sum of Rs. 94.76 Lakhs, income has arisen.
We have heard both the parties and perused the material available on record. The issue for adjudication before us is whether the sale consideration received by the assessee under an Agreement to Sale can be brought to tax as “Income from Other Sources”. It is an undisputed fact that assessee along with others entered into an Agreement to Sale dated 14.02.2013 with M/s Narayana Educational Society (NES) for a total consideration of ₹3,80,00,000/-. Out of this, a sum of ₹94,76,000/- (17,00,000 by cheque + 77,76,000 in cash) was received by the assessee. It is also not in dispute that no registered sale deed was executed during the relevant previous (Shashi Vasant Shastri) year. The primary basis adopted by the Ld. AO for making the addition is that assessee received the aforesaid sum and did not offer to tax. However, mere receipt of money pursuant to an Agreement to Sale does not ipso facto result in taxable income, unless it partakes the character of income u/s. 2(24) of the Act. The assessee has filed a paper book running into 42 pages. The Hon'ble Bombay High Court in the case of ACIT vs. Geno Pharmaceuticals Ltd. [2013] 32 taxmann.com 162 (Bom.) has dealt with the similar issue and held that “notice u/s. 143(2) is mandatory, and in absence of such service, Assessing Officer cannot proceed to make an inquiry on return filed in compliance with notice issued u/s. 148”. In the present case, the amount received by the assessee is in the nature of advance towards sale consideration of an immovable property. In the absence of execution of a sale deed or transfer within the meaning of section 2(47), such receipt cannot be taxed under the head “Capital Gains”. Further, the Ld. AO has brought the amount to tax under the residuary head “Income from Other Sources”, without establishing how such advance assumes the character of income. It is pertinent to note that 6 (Shashi Vasant Shastri) an advance received in the course of a proposed sale transaction retains the character of a liability unless it is either adjusted against the sale consideration upon completion of transfer or forfeited in terms of the agreement. In the instant case, there is no material on record to demonstrate that the advance received by the assessee was forfeited during the relevant assessment year. In the absence of forfeiture, the amount cannot be treated as income. Even otherwise, forfeiture of advance in relation to transfer of a capital asset is governed by specific provisions of law u/s. 51 of the Act and cannot be brought to tax under the head “Income from Other Sources” in the manner done by the Ld. AO. The addition has been made merely on presumption, without any cogent evidence to establish that the impugned receipt has crystallized into income during the year under consideration. It is a settled principle that only real income can be brought to tax, and not hypothetical or contingent receipts. In view of the above discussion, we are of the considered opinion that the Ld. AO was not justified in treating the sum of ₹94,76,000/- as income of the assessee under the 7 (Shashi Vasant Shastri) head “Income from Other Sources”. Moreover, in absence of notice u/s. 143(2) is a glaring defect which has vitiated the entire assessment. Accordingly, we set aside the order of Ld. CIT(A) and the addition made by the Ld. AO is deleted. The grounds of appeal raised by the assessee are allowed.
In the result, appeal filed by the assessee stands allowed.