Introduction
In the realm of direct taxation, the interpretation of Section 56(2)(ix) of the Income Tax Act, 1961 has often sparked litigation, particularly when revenue authorities seek to tax advances that remain outstanding for prolonged periods. The Karnataka High Court, in Pr. Commissioner of Income Tax v. Shri Ravi Shankar Shetty (ITA No. 225 of 2021, dated 8 July 2026), delivered a significant ruling that clarifies the essential preconditions for invoking this provision. The Court dismissed the Revenue’s appeal, thereby affirming the ITAT’s order that deleted an addition of ₹21,11,00,000 made under Section 56(2)(ix). This commentary provides a deep analysis of the judgment, examining the legislative framework, the factual matrix, the reasoning of the High Court, and its implications for tax practitioners and assessees engaged in land procurement activities.
Facts of the Case
The assessee, Shri Ravi Shankar Shetty, was engaged in the business of procuring lands and real estate. For the Assessment Year 2015-16, he filed a return declaring total income of ₹25,74,540. During scrutiny, the Assessing Officer (AO) noticed that the assessee had received advances aggregating ₹21,89,22,200 as on 31 March 2015, from M/s Metro Corp and M/s Metro Corp Infrastructure Ltd. under an agreement dated 10 February 2006 for procuring lands at Doddaballapur and Chikkaballapur. The AO treated this amount as virtually forfeited because no refund claim had been made for nearly eight years. Consequently, the AO passed an assessment order under Section 143(3) on 28 December 2017, adding ₹21,11,00,000 under Section 56(2)(ix) of the Act.
The assessee’s appeal before the Commissioner of Income Tax (Appeals) was dismissed on 25 November 2019. However, the Income Tax Appellate Tribunal (ITAT), Bengaluru Bench, allowed the assessee’s appeal on 8 October 2020, holding that the conditions under Section 56(2)(ix) were not satisfied. The Revenue then filed an appeal under Section 260A before the Karnataka High Court, which admitted the appeal on 9 November 2021 to examine two substantial questions of law, primarily whether the Tribunal’s order was perverse in deleting the addition and whether the advances amounted to forfeiture under the said section.
Reasoning of the High Court
The Karnataka High Court, after hearing both sides, upheld the ITAT’s order and dismissed the Revenue’s appeal. The Court’s reasoning revolved around a meticulous interpretation of Section 56(2)(ix) and its applicability to the facts.
1. Condition Precedent – Advance in Course of Negotiation for Transfer of Capital Asset
The Court first examined the language of Section 56(2)(ix), which reads:
> “(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,—
> (a) such sum is forfeited; and
> (b) the negotiations do not result in transfer of such capital asset.”
The Court emphasised that the sine qua non for invoking this provision is that the advance must be received “in the course of negotiations for transfer of a capital asset.” Here, the assessee was in the business of identifying, procuring and facilitating acquisition of lands for real estate projects. The advances were not paid by the assessee to any third party for purchasing a capital asset belonging to another; rather, the assessee himself received the funds to locate and acquire lands on behalf of Metro Corp and M/s Metro Corp Infrastructure Ltd. Thus, the relationship was not that of a transferor and transferee negotiating a transfer of a capital asset, but a principal-agent or service arrangement.
2. Character of the Asset – Stock-in-Trade vs. Capital Asset
A central plank of the Court’s reasoning was that the lands which the assessee was engaged to procure would, in the ordinary course of his business, constitute “stock-in-trade” and not “capital asset.” Section 2(14) of the Act defines “capital asset” to mean property of any kind held by an assessee, but expressly excludes stock-in-trade. Since the advances were meant for acquiring lands that the assessee would eventually transfer to the promoters as part of his business activity, those lands fell within the exclusion. Consequently, the very first limb of Section 56(2)(ix) – receipt of advance in the course of negotiations for transfer of a capital asset – remained unsatisfied.
3. No Actual Forfeiture – Mere Lapse of Time Insufficient
Even assuming the first condition could be met, the Court examined the element of forfeiture. The Revenue argued that since no refund claim was made for nearly eight years, the advances stood “virtually forfeited.” Rejecting this contention, the High Court observed that the assessee continued to treat the outstanding advances as a liability in his books of account. The judgment in CIT v. Alvares & Thomas was relied upon to hold that mere lapse of time or non-claim does not amount to a legal forfeiture. Forfeiture under Section 56(2)(ix) must be a conscious act or a contractual event leading to the cessation of the liability. In the absence of any agreement or legal action that resulted in forfeiture, the Revenue could not impute notional forfeiture to bring the amount to tax.
4. Conjunctive Conditions – Both Requirements Must Be Satisfied
The Court highlighted that the legislature used the conjunction “and” between conditions (a) and (b) of Section 56(2)(ix). Therefore, both forfeiture and the failure of negotiations resulting in non-transfer of the capital asset must coexist. In this case, neither condition was satisfied. The advances were not received for transfer of a capital asset, and there was no forfeiture. Hence, the addition under Section 56(2)(ix) was rightly deleted by the Tribunal.
Conclusion
The Karnataka High Court’s judgment in PCIT v. Shri Ravi Shankar Shetty serves as a robust precedent on the limited scope of Section 56(2)(ix). It clarifies that the provision cannot be applied mechanically merely because advances remain outstanding for a long time. Tax authorities must first establish that the advance was received in a transaction involving a capital asset (as opposed to stock-in-trade) and that a legal forfeiture has occurred. The decision reinforces the principle that tax is levied on real income, not on hypothetical or contingent events. For assessees engaged in land procurement or real estate development, this ruling provides much-needed certainty that advances received for stock-in-trade, even if not refunded for years, will not be automatically taxed under the head “Income from Other Sources.”