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Facts
The assessee, a property developer, received advances from customers for properties. While some transactions matured or advances were refunded, the Assessing Officer (AO) and subsequently the CIT(A) treated a remaining sum of Rs. 35,00,000/- as forfeited advances and added it to the assessee's income, citing that 13 years had passed without refund or adjustment.
Held
The Tribunal held that Section 51 of the Income Tax Act was not applicable as the properties were stock-in-trade, not capital assets. It further ruled that the amount could not be added under Section 68 due to established source, nor under Section 56(2)(ix) as the forfeiture provisions were not applicable for the assessment year 2012-13. The Tribunal concluded that no cessation of liability occurred in the relevant assessment year to warrant the addition, thus deleting the impugned addition.
Key Issues
Whether un-refunded advances received by a property developer for properties (stock-in-trade) can be treated as forfeited income and added to the assessee's income under Sections 51, 68, or 56(2)(ix) of the Income Tax Act for the Assessment Year 2012-13, and whether the addition on account of cessation of liability was warranted.
Sections Cited
51, 68, 56(2)(ix)
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per the law in force for the assessment year under consideration, could not be treated as income of the Assessee. He invited our attention to section 51 of the Income Tax Act as in force for the assessment year under consideration i.e. 2012-13. As per the said provisions, the amount of earnest money received in respect of a capital asset has been forfeited, the said amount of earnest money shall be deducted from the cost for which the asset was acquired or the Written Down Value or fair Market Value, as the case may be, in computing the cost of acquisition at the time of computing the capital gains on sale of such capital asset.
6.2. I am not convinced with the above contention of the Ld. AR of the assessee. The aforesaid provisions of section 51 of the Act
70-Chd-2025 Harmel Singh, Parwanoo. 5 are applicable in case of capital asset not on stock in trade. The plots in question, regarding which the assessee had received the earnest money were stock in trade of the assessee, therefore the assessee can not be given benefit of the provisions of section 51 of the Act.
6.3 However, the aforesaid amount of earnest money received by the assessee can neither be added u/s 68 of the Act as the source of the same is duly established on the record. So far as the observation of the Ld. CIT(A) that the assessee had not returned back/refunded the said amount to the customers even after passing 13 years is concerned, may it be so, but the addition on account of cessation of liability can not be made in the year of receipt but in the year in which the liability has ceased to exist. It is not on record as to whether the assessee has refunded the said amount in subsequent years or not. Therefore, no addition is warranted in the assessment year under consideration on this count also as there was no cessation of liability of this amount in the year under consideration.
Even, there is no forfeiture of this amount in the year under consideration hence the provisions of section 56(2) (ix) which provides for treating the amount of forfeiture of earnest money as income from other sources, will also be not applicable for the year
70-Chd-2025 Harmel Singh, Parwanoo. 6 under consideration. However, this issue can be examined by the AO in subsequent years.
6.4. Therefore, the impugned addition made/sustained by the lower authorities is not justified for the assessment year under consideration. The impugned addition is, accordingly, ordered to be deleted.
In the result, the appeal of the assessee is allowed.