Section 68 cannot tax an advance in a year subsequent to its receipt.

For AY 2016–17, the Assessing Officer (“AO”) made an addition of ₹10 crores under Section 68 of the Income Tax Act, 1961, treating the amount received by the assessee as an unexplained advance and a colourable device

The assessee had claimed that ₹10 crores was received as an advance against the proposed sale of land in FY 2006–07, but that the transaction had not culminated at that time

A sale deed was subsequently executed by the assessee’s power-of-attorney holder in FY 2013–14. According to the assessee, the execution came to its knowledge only in FY 2015–16, corresponding to AY 2016–17, when the assessee disclosed the transaction and offered the resulting capital gain, which was set off against a capital loss

On discovering that the purchaser had recorded the transaction in FY 2013–14, the AO concluded that the assessee had deliberately deferred disclosure of the sale to obtain a set-off of capital gain against capital loss and added the advance under Section 68 in AY 2016–17

The CIT(A) deleted the addition, and the Income Tax Appellate Tribunal (“ITAT”) affirmed that decision by holding that the amount had been received in FY 2006–07 and could not be added in AY 2016–17

The Revenue challenged the ITAT’s order under Section 260A of the Act.

Whether an advance of ₹10 crores admittedly received in FY 2006–07 could be treated as unexplained income and added under Section 68 in AY 2016–17

Whether the alleged use of a colourable device to defer recognition of capital gain and obtain a set-off against capital loss justified the impugned addition under Section 68

Section 68 of the Income Tax Act, 1961 permits addition of a credit as income in the relevant assessment year where the assessee fails to satisfactorily explain the nature and source of the credit; it does not authorise addition of an amount in a year wholly disconnected from the year in which the amount was actually received.

Section 260A provides for an appeal to the High Court on a substantial question of law.

The Court further held that even where an assessee may have adopted a colourable device or arrangement for tax avoidance, the Assessing Officer must invoke an appropriate statutory mechanism; Section 68 cannot be used to tax, in AY 2016–17, an amount admittedly received in FY 2006–07

The Court accepted that the assessee may have structured or deferred the transaction in a manner intended to obtain a set-off of capital gain against capital loss

However, that alleged tax-avoidance device did not alter the year in which the ₹10 crore advance was actually received. Since the amount was admittedly received in FY 2006–07, it could not be treated as an unexplained credit arising in AY 2016–17 under Section 68

The Court observed that other statutory modes or measures could have been adopted to address any impermissible tax-avoidance arrangement, but recourse to Section 68 for making the addition in the year under consideration was legally impermissible

The findings of the CIT(A) and ITAT were therefore neither erroneous nor infirm

Finding no error in the orders of the CIT(A) and ITAT, the Court rejected the Revenue’s appeal

The applications seeking condonation of delay in filing and re-filing were also allowed