Karnataka High Court Upholds Deletion Of Tax Addition On Advances Received By Businessman Procuring Land

The Karnataka High Court has upheld the deletion of a ₹21.11 crore tax addition made against a Bengaluru-based businessman engaged in identifying and procuring land for real estate projects. The court held that advances received in the course of that business cannot be taxed merely because they remained outstanding for several years.

The court observed that the mere passage of time does not amount to forfeiture, and such advances cannot be treated as taxable income in the absence of material showing that the recipient had become absolutely entitled to retain the money.

A division bench of Justice S.G. Pandit and Justice Rajesh Rai K dismissed the revenue's appeal and upheld the Income Tax Appellate Tribunal's order.

The dispute arose after the Income Tax Department treated ₹21.11 crore out of advances of ₹21.89 crore received by the businessman from Metro Corp and Metro Corp Infrastructure Ltd. under a 2006 agreement for procuring land as taxable income.

According to the Department, since no refund had been sought for nearly eight years, the advances had been virtually forfeited and were therefore liable to tax.

The assessee contended that he was engaged in the business of identifying and procuring land for real estate projects and that the amounts were received solely for carrying out that business activity. He argued that the advances were neither received in the course of negotiations for the transfer of a capital asset nor had they been forfeited.

Accepting the assessee's contention, the High Court held that the provision relied upon by the Department applies only where money is received as an advance during negotiations for the transfer of a capital asset, the amount is forfeited, and the proposed transfer does not materialize.

The court observed that the advances in the present case related to business transactions involving stock-in-trade and not capital assets.

"In the ordinary course of the assessee's business, the lands proposed to be acquired would partake the character of stock-in-trade and not capital assets," the Court held.

It further noted that the amounts continued to be reflected as liabilities in the assessee's books and that there was nothing on record to show that the assessee had become absolutely entitled to retain the money.

"Section 2(14) of the Act defines 'capital asset' to mean property of any kind held by an assessee, whether or not connected to the business or profession, but does not include stock-in-trade. Hence, the said advances cannot be said to have been received in the course of transfer of a capital asset; rather, they pertain to transactions involving stock-in-trade" the court held.

Relying on its earlier decision in CIT v. Alvares & Thomas, the Court reiterated that mere lapse of time does not establish forfeiture or cessation of liability. It observed that a liability cannot be treated as extinguished simply because it has remained outstanding for a long period.

Accordingly, the High Court upheld the ITAT's order deleting the ₹21.11 crore tax addition and dismissed the Revenue's appeal

For Appellant: Advocates Sanmathi E.I. and Nirmal Matherw

For Respondent: A. Shankar, Senior Counsel along with Madhusudhan U.A., for Advocate S Annamalai,