The Madras High Court held that the advance received by the respondent (which is returnable due to the failure of the development agreement) from the developer was not to be treated as income in the hands of the assessee.
The Respondent in his agreement with L&T Urban Infrastructure was granted irrevocable license to develop the land, vacant possession of the property was handed over to the developer and a power of attorney dated 16/03/2007 was also executed in favor of the developer by the Respondent.
The case of respondent-assessee M/s City Lubricants was selected for scrutiny and a notice for the same was issued u/s 148 alleging that the receipt of advance by the assessee from the developer amounts to capital gains u/s 2(47) r/w Section 45 of the Income Tax Act and admission of the same was not made in his return of loss.
It was the case of the respondent-assessee that the transaction cannot amount to ‘deemed transfer’ u/s 2(47)(v) of the Act to which the Assessing Officer (AO) had held that the impugned advance is to be treated as Income from Other Sources. After exhausting the alternative remedies available, the respondent-assessee is before the present Court of law.
It was submitted by the respondent that the advance amount would not fall within the definition of ‘income’ as defined u/s 2(24). Also, the impugned advance was never a reason for reopening the assessment.
The Bench constituting of Hon’ble Justices T.S. Sivagnanam and Pushpa Sathyanarayana held that the advance was not to be treated as income in the hands of the assessee.
The Bench elaborated that a mortgage was created in favor of the developer by the respondent in return of the advance. However, since the Joint Development Agreement did not take off, the developer addressed the assessee to return the amount (but was not cancelled). Signifying, the advance in hands of the respondent cannot be treated to be his gain.
On whether the advance can be treated as income from other sources, it was held that the AO had not rendered a finding that the advance does not fall under the heads ‘A’ to ‘E’ to be brought under the residuary head ‘F’. Hence, the finding of the AP was held to be perverse.
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