Money Received As Security Deposit If Subsequently Refunded To Developer, Is Irrelevant For Determining Taxability U/s 56(2)(Vii)(A): Mumbai ITAT
While deleting the enhancement made u/s 56(2)(vii)(a) of the Income Tax Act, the Mumbai ITAT explained that as per the provisions of section 56(2)(vii)(a), any sum of money, the aggregate of which exceeds Rs.50,000, received by an individual without consideration is taxable as income from other sources, and thus, u/s 56(2)(vii)(a), the incidence of taxation is at the stage of receipt...
While deleting the enhancement made u/s 56(2)(vii)(a) of the Income Tax Act, the Mumbai ITAT explained that as per the provisions of section 56(2)(vii)(a), any sum of money, the aggregate of which exceeds Rs.50,000, received by an individual without consideration is taxable as income from other sources, and thus, u/s 56(2)(vii)(a), the incidence of taxation is at the stage of receipt of money.
The ITAT clarified that the fact that the money received as a security deposit was subsequently refunded by the assessee to the developer is not relevant for the determination of taxability under section 56(2)(vii)(a) of the Act.
The Bench of the ITAT comprising of Sandeep Singh Karhail (Judicial Member) and Prashant Maharishi (Accountant Member) observed that “under section 56(2)(vii)(a) of the Act, one of the preconditions for the taxability of the money received by the assessee is that the same should have been received without consideration, which, in our considered view, is not fulfilled in the present case, as the amount of Rs.25 lakh was received by the assessee as a security deposit towards the development agreement entered into by the assessee with the developer for development of non-agriculture land.” (Para 12)
As per the brief facts of the case, the Assessee's return was selected for scrutiny to verify the large investment in property as compared to the total income, wherein AO observed that the assessee jointly with her husband owned non-agricultural land and entered into a development agreement, under which the developer agreed to develop the said land as per the sanctioned plan and hand over the possession of 15 bungalows in favour of the assessee upon completion of the project. The developer also paid an advance of Rs.25 lakh to the assessee. Accordingly, during the assessment proceedings, the assessee was asked to show cause as to why the capital gain arising out of the transaction entered into with the developer for the intended development of the land should not be taxed. The AO while disagreeing with the submission of the assessee held that there was a written agreement between the assessee and developer according to which the developer has handed over the possession for an agreed consideration of 15 constructed bungalows apart from the Rs.25 lakh, which constitutes transfer within the meaning of the Transfer of Property Act, 1882 and there was no document presented in favour of cancellation of the agreement. Accordingly, the AO concluded that the receipt is taxable in the hands of the assessee and computed the long-term capital gains of Rs. 95,69,037 taxable in the hands of the assessee.
The CIT(A) deleted the addition on account of long-term capital gains made by the AO on the basis that the developer and the assessee did not act upon the terms and conditions of the development agreement has cancelled the development agreement since the developer neither started any construction on the land owned by the assessee nor did it hand over 15 bungalows as agreed in the development agreement resulting in violation of terms of the agreement.
The CIT(A) after deletion of the addition, noted that at the time of execution of the development agreement, the developer made a payment of Rs.25 lakh to the assessee as a security deposit which the assessee retained and there is no documentary evidence to prove that this amount was returned to the developer. Accordingly, the CIT(A) concluded that the amount of Rs.25 lakh received by the assessee as deposit is taxable in the hands of the assessee as per the provisions of section 56(2)(vii)(a) and hence, addition has been made.
The Bench noted under the light of the provision of section 251, though the statute has conferred the power of enhancement on the CIT(A) while disposing of an appeal against an order of assessment, however, as per the provisions of sub-section (2) the CIT(A) is required to grant reasonable opportunity of showing cause against such enhancement to the assessee before making any such enhancement.
The Bench observed that no such opportunity was granted by the CIT(A) to the assessee while making the enhancement and directing the AO to tax Rs.25 lakh in the hands of the assessee under section 56(2)(vii)(a).
The Bench further observed that the non-grant of a reasonable opportunity to the assessee to show cause against the proposed enhancement results in an irregularity, as the CIT(A) failed to comply with the procedure laid down under section 251(2) of the Act before making the impugned enhancement.
The Bench highlighted that since one of the conditions for applicability of section 56(2)(vii)(a) of the Act is not satisfied in the present case, the enhancement directed by the CIT(A) under section 56(2)(vii)(a) of the Act is not sustainable.
The Bench found that the fact that the money received as a security deposit was subsequently refunded by the assessee to the developer is not relevant to the determination of taxability under section 56(2)(vii)(a).
Therefore, on finding non-compliance with the procedure prescribed under section 251(2), ITAT allowed the assessee's appeal.
Counsel for Appellant/Taxpayer: Shashank Mehta
Counsel for Respondent/Department: H.M. Bhatt
Case Title: Chandarani N. Goyal verses Income Tax Officer
Case Number: ITA no.3661/Mum/2023