Loan received in earlier year converted to advance payment for purchase of property: No reason to disbelieve property transaction as colourable device, says Bangalore ITAT

Read Order: M/s. Archana Traders Pvt. Ltd v. Income Tax Officer 

Pankaj Bajpai

Bangalore, July 14, 2021: While examining the reasons for reopening initiated by the I-T Department, the Bangalore ITAT recently held that there is no reason to disbelieve a property transaction as a colourable device, simply because the amount received as loan in earlier year was converted into advance payment for purchase of property.

Reiterating that the amount forfeited by the director which was earlier given by him to the company, was rightly set off against his income as loss, the Coram of George George K (Judicial Member) & B R Baskaran (Accountant Member) observed that the only reason that has induced the tax authorities to tax forfeited amount in the hands of assessee company, was that the director had treated the said amount as his loss and set off the same against his income. 

The sequence of events which followed pursuant to receiving of information from the Enforcement Directorate, New Delhi, was that one of the directors of the assessee company had informed that a sum of Rs. three crores given by him to the assessee stood forfeited. 

Resultantly, the director claimed set off of said amount against his income declared under the head “Income from other sources”. The AO took the view that such forfeited amount represents income of assessee which was not declared in the I-T return. Hence, the AO reopened the assessment, opining that the assessee had given colour of a property transaction for the forfeited amount, and taxed the said sum u/s 28(iv) of the I-T Act.

Citing the decision of Supreme Court in case of Mahindra & Mahindra Ltd., wherein it was held that for the applicability of Sec 28(iv), the income which can be taxed shall arise from business or profession, the Bangalore ITAT found that it is not necessary that the nature of payment and nature of receipt should be the same.

The Tribunal found from the recital in the Agreement for sale, that a loan was given by the director as investment in the projects taken up by the assessee company, which was subsequently converted into advance money in the property transaction, whereby a property belonging to the company was agreed to be purchased by the director. 

Observing that only because the director had failed to pay balance amount of sale consideration, the earlier amount of Rs. 3 crores stood forfeited, the ITAT held that the issue at hand is related to the property transaction and not the loan transaction. 

Hence, the subject amount was held not taxable in the hands of the assessee company u/s 28(iv) of the I-T Act.