Income received during negotiation for the transfer of fixed assets as “other income”, the use of the fund cannot be a reason to impose a tax liability: ITAT

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ITAT - Tax liability - User funds - Income - Taxation - Fixed assets - Other income - Taxscan

The Income Tax Appeal Tribunal (ITAT), Bangalore Bench, ruled that the use of the fund cannot be the reason for imposing a tax liability.

The assessor filed his income tax return for the tax year declaring income under the headings “business and professional income, capital gains and other sources”. The assessment was carried out pursuant to subsection 143 (3) of the Act.

In developing the appraisal, the AO observed that the appraised person had received advances of Rs. 21, 89, 22, 200 from various parties.

The AO inquired of the appraiser about the unpaid amounts on behalf of Metro Corp and M / s. Metro Corp Infrastructure Ltd. It was stated that the appraised person received money from the empty Metro Corp deal for the acquisition of land in Dodaballapur and Chikkaballapur.

It was argued that the Evaluate did not claim any expense deduction in respect of the advance which remained a liability on its books. The position of M / s is similar. Metro Corp. Infrastructure Ltd.

The AO observed that, according to the content of the agreement, the appraised is not required to repay the advance received and that the issue of performance of the obligation does not arise when the other party is not traceable to the address given by the appraised and the appraised itself could not locate Metro Corporation and Metro Corp Infrastructure Ltd.

The amount is payable only according to the books and not in real terms. It is also relevant to mention that although the sum was received in 2007, to date negotiations have not resulted in a transfer of fixed asset and the appraised has not been able to produce / trace the other party and, as such, the AO considered that this sum had been confiscated.

Thus, the OA added the advances received from M / s. Metro Corp and M / s. Metro Corp Infrastructure Ltd. totaling Rs.21,11,00,000 to the income of the appraised by invoking the provisions of Article 56 (2) (ix) of the Income Tax Act.

The CIT (A) observed that, although the appraised asserted that it was required to return these advances, the facts of the case indicate that there was a virtual containment of the amount because the promoters did not have made no attempt to retrieve them.

According to the CIT (A), these advances had the character of commercial advances and not having made the same and having used them to make investments in its own name, these sums had acquired the character of income in the hands of the ‘evaluated.

The court observed that the use of funds by the appraised cannot be a reason for invoking the provisions of section 56 (2) (ix) of the Income Tax Act. The use of said funds by the appraised cannot change the character of the source of funds received by the appraised and they will remain as received for the purchase of land on behalf of the lender for the acquisition of lands that are valued commercial stocks.

The court said both questions must be respected.

First, whether the appraised received the money as part of the fixed asset transfer.

Second, if there is forfeiture.

The court found that these two conditions were not met in order to invoke the provisions of article 56 (2) (ix).

The bench of two members of Beena Pillai and Chandra Poojari considered that there was no confiscation of the amount thus received by the appraised and that it was overdue in the account books of the appraised and also confirmed by lenders.

The court ruled that there was also no negotiation for the transfer of fixed assets by the appraised with these two parties. Thus, the case of the assessed person is not affected by the provisions of section 56 (2) (ix) of the Income Tax Act. Accordingly, the addition supported by CIT (A) is deleted.

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