The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that advance amount forfeited on cancellation of sale agreement, is deductible from the cost of acquisition.
The aforesaid observation was made by the Delhi ITAT, when an appeal was filed before it by the assessee, as directed against the order dated 30.07.2019 of the CIT(A), Karnal relating to Assessment Year 2011-12.
The grounds of the assessee’s appeal being that the the CIT(A) has grossly erred in upholding the assumption of jurisdiction under Section 147, which is based on grossly wrong, incorrect, exaggerated and frivolous reasons, and further that the CIT(A) did not consider the submission made by the Appellant, he added that the CIT(A) and the A.O. has both grossly erred in law and on facts in calculating LTCG on advance money received without any transfer of any capital asset.
It was submitted by, Shri Satyam Aneja, the Advocate on behalf of the assessee, that that as per judgment of the jurisdictional High Court in the case of CIT Vs. Reliance International Corporation , and the order of ITAT Mumbai Bench in the case of Futura Ployster Ltd Vs. ITO ,dated 16.07.2020, when the assessee has challenged the addition of long term capital gain arising from sale of land, on the ground that agreement to sale of said land was cancelled subsequently by executing a cancellation deed, in view of the fact that possession of land was never handed over by assessee to third party, on said count alone, provisions of section 2(47)(v) read with section 53A of Transfer of Property Act, 1882, would not be applicable and, thus, that addition has to be deleted.
On the other hand, Shri Om Prakash, the Sr. DR, strongly supported the order of the authorities below and submitted that even in a case when the agreement to sale was cancelled subsequently, then also the amount of advance forfeited by the assessee has to be taxed in the hands of the assessee.
Hearing the opposing contentions of both sides as well as perusing the materials available on record, the ITAT observed:
“In my considered opinion the AO has grossly erred in taxing the advance amount under the head capital gain in peculiar circumstances when no transfer of any asset was made by the assessee and her coowners. Thus, I am in agreement with the contention of the ld counsel that no tax liability under the head short term/ long term capital gain arises in the hands of the assessee in such a situation. It is also to be noted that the assessee had deposited an amount of Rs. 20,00,274/- in the joint bank with three others co-owners and we are unable to understand the action of the AO in taxing Rs. 11 lakhs in the hands of the assessee when there being no transfer of land. Undisputedly the amount received by the assessee and her co-owners which was deposited in the joint bank account has not been returned to the 3rd party and it is remained with the assessee and co-owners after being forfeited. In such a situation provision of section 51 are applicable which provides that if advance money received and forfeited before 31.03.2014, then the advance received and retained by the assessee in respect of such cancellation of transaction shall be deducted from the cost of acquisition of asset or the written down value or fair market value as the case may be and this fact would be considered by the AO in a case where such property is transferred in future point of time. But the amount of advance received and forfeited by the assessee before 31.03.2014 cannot be taxed in the hands of the assessee under the head capital gain.”
“In the present case the assessee received advance amount on 06.09.2010 under agreement to sale, which was cancelled on 16.03.2011 and amount of advance was forfeited therefore, provision of section 51 of the Income Tax Act are applicable and the amount proportionately forfeited by the assessee would be deducted from the cost of acquisition of the asset or fair market value as the case may be at the time of actual transfer of such asset in future. My conclusion also gets support from the judgment of the Hon’ble Jurisdictional High Court of Delhi in case of CIT Vs. Reliance International Corporation (P) Ltd, and the order of the co-ordinate bench of Mumbai in the case of Futura Plooyster Ltd Vs. ITO”, the coram of C. M. Garg added.
Finally, the ITAT held:
“In the result, the appeal of the assessee is allowed and the AO is directed to delete the addition.”
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