The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an advance received for the sale of property is taxable under the head Income from other sources if the agreement for sale is not registered under Section 56(2)(ix) of the Income Tax Act, 1961.
The Assessee, Anthony Lewis, entered into an unregistered agreement for sale of a property in Mumbai on 1 April 2008. The agreement for sale was not registered. The sale price of the property was Rs. 100 crores. The buyer did not take possession, and the assessee retained an INR 5 crores advance. The assessee was assessed as income from other sources, and the assessee appealed to the ITAT.
The assessee argued that the Rs. 5 crores advance cannot be taxed as income due to the lack of property transfer. It was also claimed that the agreement for sale was not legally enforceable, the purchaser did not take possession, and the assessee retained the advance without refunding it.
The revenue argued that an Rs. 5 crores advance was taxable as income as it was received during negotiations for the property sale. The argument was based on the unregistered agreement, the purchaser’s possession, and the assessee’s retention of the advance without refunding it to the purchaser.
In CIT v. P.L. Shamdasani (1991) and CIT v. M.K. Alagappan (2001), it was ruled that an advance received for property sale is not taxable as income if the sale does not materialize. The amount of the advance is also not taxable if the agreement for sale is not registered.
The tribunal observed that the Rs. 5 crores advance could not be taxed as income due to the unregistered agreement for sale, the purchaser’s lack of legal rights to the property, and the assessee’s failure to refund the advance.
The ITAT also noted that the revenue argument that the advance was taxable was invalid due to the unregistered agreement and the purchaser’s lack of possession and the assessee’s retention of the advance in its books of account was not valid, as it was not used for any other purpose.
The Two-member bench comprising of Amarjit Singh (Accountant Member) and Rahul Chaudhary (Judicial Member) ruled that the Rs. 5 crores advance cannot be taxed as income due to the non-registered agreement for sale, the purchaser’s failure to take possession, and the assessee’s failure to refund the advance.
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