2025 (4) TMI 1044 - AT - Income Tax

Addition u/s 56(2)(ix) - assessee has forfeited the said amount received in advance against agreement to sale of land by making various incorrect irrelevant observations - HELD THAT - When the assessee filed the additional evidence considering the specific prayer of the assessee same was forwarded for AO s comments and without considering the merits of the dispute and without verifying the veracity of the documents the documents signed by third party cannot be directly held to be colorable devise. Therefore the bench is of the view that lis between the parties has to be decided on merits providing opportunity of being heard to the assessee. We deem it fit to remand the matter to the file of the AO who will consider the factual aspect of the matter as raised by the assessee after due verification of the facts and charge the correct income in hands of the assessee after affording due opportunity to the assessee and dealing with the evidence placed on record. The assessee will not seek any adjournment on frivolous ground and remain cooperative during proceedings before the AO. Appeal filed by the assessee is disposed off for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the amount of Rs. 20,01,000/- received as advance against an agreement to sell land is taxable under section 56(2)(ix) of the Income Tax Act, 1961, on the ground that the amount was forfeited due to non-execution of sale deed and failure of the buyer to comply with the terms of the agreement.

(b) Whether the additional evidence filed by the assessee, showing repayment of the advance amount by account payee cheque after the assessment year and cancellation of the sale agreement, ought to have been admitted and considered by the appellate authorities.

(c) Whether the actions of the assessee in filing additional evidence and submitting cancellation documents constitute a bona fide attempt to establish non-forfeiture or are merely colorable devices to avoid legitimate taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Taxability of advance amount under section 56(2)(ix) of the Income Tax Act

Relevant legal framework and precedents: Section 56(2)(ix) provides that any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset shall be charged to income tax if (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset. Both conditions must be satisfied simultaneously to attract tax.

Precedents cited include Supreme Court and High Court rulings emphasizing that recitals in agreements must be tested against surrounding facts and circumstances to prevent tax evasion through self-serving documents (CIT v. Durga Prasad More), and that payment through banking channels does not per se validate a transaction (Commissioner of Income-tax v. P. Mohanakala; Nemi Chand Kothari v. CIT; CIT v. Precision Finance Pvt. Ltd.).

Court's interpretation and reasoning: The Assessing Officer (AO) found that the agreement provided that if the buyer failed to register the sale deed by 27.12.2017, the advance amount would stand forfeited. Since the sale deed was not executed and the advance was not returned, the AO concluded the amount was forfeited and thus taxable under section 56(2)(ix).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's order, emphasizing that the assessee failed to provide credible evidence of encroachment or any genuine reason for non-registration. The CIT(A) noted that the issue of encroachment was not raised during assessment and the assessee's claim of ongoing negotiations was unsupported by any agreement extending the validity of the sale agreement or advance. The CIT(A) also pointed to the public notice issued by the assessee for forfeiture, which negated the claim of ongoing negotiations.

The CIT(A) further held that the cancellation agreement and repayment documents filed during appeal were not bona fide but colorable devices created to avoid tax, citing the absence of any legal action against the alleged encroacher and the delay in raising these issues only at the appellate stage.

Key evidence and findings: The original agreement dated 05.07.2017, affidavit signed by the Karta of Ashok Gupta HUF, public notice of cancellation, ledger entries showing receipt of advance, and absence of sale deed execution were critical to the AO and CIT(A) findings. The assessee's claim of encroachment was unsupported by documentary evidence such as electricity bills or legal proceedings.

Application of law to facts: The Tribunal noted that both conditions under section 56(2)(ix) must be satisfied. The AO and CIT(A) found that the advance was forfeited because the sale did not materialize and the advance was retained by the assessee. The absence of sale deed and failure to refund the advance supported this view.

Treatment of competing arguments: The assessee argued that the amount was not forfeited because the sale agreement was cancelled only in 2020 and the advance was repaid by cheque post-assessment year. The assessee contended that the provisions of section 56(2)(ix) do not apply as no forfeiture occurred during the relevant assessment year.

The Revenue disputed the genuineness of the cancellation and repayment documents, viewing them as afterthoughts to circumvent tax liability. The CIT(A) relied on the absence of evidence during assessment and the timing of the documents to reject the assessee's claims.

Conclusions: The AO and CIT(A) concluded that the advance amount was forfeited in December 2017 and taxable under section 56(2)(ix). The assessee's belated evidence was rejected as not bona fide.

Issue (b): Admission and consideration of additional evidence filed under Rule 46A

Relevant legal framework: Rule 46A of the Income Tax Rules allows the appellate authority to admit additional evidence if the assessee was prevented by sufficient cause from producing such evidence during assessment proceedings.

Court's interpretation and reasoning: The assessee filed an application before the CIT(A) to admit additional evidence relating to cancellation of the sale agreement and repayment of the advance amount through cheque dated 03.02.2020, which occurred after the assessment order dated 30.12.2019. The CIT(A) forwarded these documents to the AO for remand report.

The AO objected to admission on the ground that the assessee was not prevented by sufficient cause from producing evidence during assessment and that the documents did not establish that the repayment related to the advance under dispute.

The CIT(A) rejected the additional evidence, holding them as colorable devices, not bona fide, and created to avoid tax. The CIT(A) emphasized that the evidence was filed belatedly and contradicted earlier submissions.

Key evidence and findings: The additional evidence included the cancellation agreement, affidavit of the buyer, bank statements evidencing repayment, copy of cheque, and ledger account entries. These documents were filed only at the appellate stage after the assessment order.

Application of law to facts: The Tribunal observed that since the cancellation and repayment occurred post-assessment, the assessee had no opportunity to produce such evidence during assessment proceedings. The Tribunal was of the view that the appellate authorities ought to have considered the evidence on its merits rather than dismissing it outright as a colorable device without verification.

Treatment of competing arguments: The assessee contended that the evidence was genuine and filed as soon as the events occurred, after the assessment order. The Revenue and CIT(A) viewed the evidence skeptically due to timing and inconsistency with earlier claims.

Conclusions: The Tribunal found merit in the assessee's contention regarding the timing and genuineness of the additional evidence and held that the matter required factual verification rather than outright rejection.

Issue (c): Whether the documents filed post-assessment are colorable devices or bona fide evidence

Relevant legal framework and precedents: The Court referred to precedents cautioning against acceptance of self-serving documents without corroboration and emphasizing the need to look at the entire factual matrix (CIT v. Durga Prasad More). However, it also recognized that genuine evidence should not be rejected merely because it is filed post-assessment if the assessee was prevented by sufficient cause.

Court's interpretation and reasoning: The CIT(A) considered the documents as colorable devices since they contradicted earlier submissions and were filed late. However, the Tribunal noted that the cancellation and repayment occurred after the assessment order, thus the assessee could not have produced these documents earlier.

The Tribunal opined that the appellate authorities should have verified the authenticity of the documents and the factual claims rather than dismissing them summarily. The Tribunal emphasized the need for a fair opportunity to the assessee to prove the genuineness of the cancellation and repayment.

Key evidence and findings: The cancellation deed, affidavit of buyer, bank statements, cheque copy, and ledger entries were the primary documents. The buyer's affidavit and the sale deed to a third party at a higher price shortly after cancellation were also relevant.

Application of law to facts: The Tribunal found that these documents, prima facie, supported the assessee's claim of cancellation and repayment, and the subsequent sale to a third party corroborated the non-forfeiture of the advance.

Treatment of competing arguments: The Revenue's suspicion of the documents as fabricated was noted, but the Tribunal held that such doubts require factual inquiry and cannot justify outright rejection without verification.

Conclusions: The Tribunal concluded that the documents should be admitted and considered on merits after due verification and opportunity to the assessee.

3. SIGNIFICANT HOLDINGS

The Tribunal's significant legal reasoning includes the following verbatim extracts:

"The bench noted that the apple of discord in the matter is that when the assessee filed the additional evidence, considering the specific prayer of the assessee same was forwarded for AO's comments and without considering the merits of the dispute and without verifying the veracity of the documents the documents signed by third party cannot be directly held to be colorable devise."

"The lis between the parties has to be decided on merits, providing opportunity of being heard to the assessee."

"Considering the peculiar aspect of the matter, we deem it fit to remand the matter to the file of the ld. AO who will consider the factual aspect of the matter as raised by the assessee after due verification of the facts and charge the correct income in hands of the assessee after affording due opportunity to the assessee and dealing with the evidence placed on record."

Core principles established:

- Both conditions under section 56(2)(ix) must be satisfied simultaneously for taxation of advance amounts: actual forfeiture and failure of transfer.

- Recitals in agreements must be tested against the surrounding circumstances and factual matrix to prevent misuse for tax evasion.

- Additional evidence filed post-assessment, if supported by sufficient cause, should be admitted and considered on merits rather than rejected summarily as colorable devices.

- The appellate authority must verify the authenticity of documents and afford a fair opportunity to the assessee before rejecting evidence.

Final determinations on each issue:

(a) The addition of Rs. 20,01,000/- under section 56(2)(ix) was sustained by the AO and CIT(A) based on the record available during assessment, finding the amount forfeited.

(b) The Tribunal remanded the matter to the AO for fresh consideration of the additional evidence filed by the assessee regarding cancellation and repayment, directing verification of facts and affording due opportunity to the assessee.

(c) The Tribunal rejected the CIT(A)'s conclusion that the additional evidence was a colorable device without verification, emphasizing that such determination requires factual inquiry.