Standard

Transfer of goodwill is not considered company income but rather a capital gain

Fact and issue of the case

By way of the present appeal the Appellant has challenged the order, dated 20/11/2017, passed by the Ld. Commissioner of Income Tax (Appeals)-14, [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2013-14, whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 26/03/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

The Appellant has raised following grounds of appeal: “1 The Ld. CIT(A) erred in holding that compensation received by appellant on termination of its agreement with M/s. VMI EPE, Holland (VMI) is a revenue receipt as against capital receipt taxable u/s.45 of the Income Tax Act without properly appreciating the facts of the case and law applicable thereto.

The Ld. CIT(A) erred in holding that receipt of compensation is taxable as business income u/s.28(ii)(c) of the Income Tax Act without appreciating the fact that appellant is not an agent of VMI as assessee is restrained to conclude any agreement for and on behalf of VMI.

The Ld. CIT(A) erred in not properly interpreting terms of settlement agreement which provided payment of compensation on termination to the appellant being payment for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995 and not a payment for future profit or for creating any goodwill for VMI. The Id CIT(A) thus erred in rewriting the agreement entered between two independent parties.

The Ld. CIT(A) erred in holding that compensation received by appellant from VMI is for services rendered by appellant in creating goodwill for VMI as products of VMI were marketed in the name of VMI without appreciating the fact that compensation was awarded under the terms of the agreement, for damage caused to appellant’s business apparatus and not for creating any goodwill for VMI.

The Ld. CIT(A) further erred in holding that compensation received from VMI, in part, was to compensate towards future profit which could have been earned by appellant from clientele list developed since 1995 without appreciating the fact that appellant developed business apparatus for VMI products of tyre making plant and equipments in Indian market, a profit making apparatus, damages received for destruction of such profit making apparatus is capital receipt.

Appellant pray that compensation received under settlement agreement from VMI, being compensation for damage, injury and deterioration of its profit making apparatus be assessed u/s 45 of the IT ACT.

The Appellant has also raised the additional grounds of appeal vide letter dated 13/05/2021:

“The Ld. CIT(A) ought to have held that compensation received by appellant on termination of its agreement with M/s VMI EPE, Holland (VMI) is a capital receipt, not chargeable to tax under Income Tax Act.”

The relevant facts in brief are that the Appellant is an Indian private limited company engaged, at the relevant time, in the business of trading in Rubber, Chemicals, & equipment. Further, the Appellant also acted as commission agent for various parties.

For the Assessment Year 2013-14, the Appellant filed original return of income on 27/09/2013 declaring total income of INR 22,94,11,820/- which was processed under Section 143(1) of the Thereafter, the Appellant filed a revised return on 26/12/2013 declaring total income of INR 23,00,31,800/-

Observation of the court

We note that the Appellant was paid Euro 20,00,000/- „for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995.‟ and this was clearly stated in Clause 2.1 of the SA reproduced in paragraph 6.5 above. There is nothing on record to doubt the genuineness of the SA entered between the Appellant and VMI. In our view, the authorities below failed to appreciate that the Appellant had received a separate payment of Euro 2,00,000/- for surrendered all the claims which included claim for damages for loss of goodwill on account of termination of the agreement and all the other claims such as claim for commission due/lost and future commission. The Appellant had offered the same to tax as business income which was accepted by the Revenue. The conclusion drawn by the Assessing Officer that the payment is in lieu of loss of business earning runs contrary to express terms of ‘Financial Arrangement’ and is not supported by any material on record. In view of the aforesaid, we hold that the payment of Euro 20,00,000/- (INR 14,33,15,000/-) received by the Appellant from VMI in terms of SA was consideration for transfer of goodwill and the capital gains arising from the aforesaid transaction were correctly offered to tax by the Appellant as capital gains. The Assessing Officer is directed to accept the capital gains of INR 13,83,15,000/- offered to tax by the Appellant in the return of income after verification of the computation. In view of the aforesaid, the other contentions/submission advanced by both the sides in relation to payment under consideration being in the nature of compensation for termination of agency or otherwise are rendered academic and therefore, not adjudicated upon.

In view of the above, (a) Ground No. 1, & 3 raised by the Appellant are allowed; (b) Ground No. 2 raised by the Appellant is dismissed as being infructuous; and (c) Ground No. 4, 5, 6 and the additional ground raised by the Appellant are dismissed. In result, the present appeal preferred by the Assessee is partly allowed.

Order pronounced on 15.09.2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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SBM-Chemicals-Instruments-Pvt.-Ltd.-Vs-ACIT-ITAT-Mumbai2

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October, 14
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Agricultural Land Stock Profit is Exempt, but Not Business Receipt: ITAT

Fact and issue of the case

The Revenue has come in appeal against the order dated 20.01.2013 passed by the Commissioner of Income Tax (Appeals)-XIII, New Delhi (hereinafter referred as “learned First Appellate Authority” or in short “FAA”) in Appeal no. 128/2010-11, for the assessment year 2008-09, arising out of the assessment order dated 06.12.2010 u/s 144 of the Income-tax Act, 1961 (hereinafter referred as the “Act”), passed by the Income-tax Officer, Ward 11(2), New Delhi, (hereinafter referred in short as “Ld. AO”).

The facts in brief are that the assessment was completed u/s 144 of the Act whereby addition was made on account of profit on sale of shares; profit on sale of agricultural land; agricultural income; and professional and consultancy. The learned CIT(A) had deleted the additions for which Revenue is in appeal raising following grounds:

The learned CIT(A) has erred on facts and circumstances of the case and in law, deleting the addition of Rs. 9,64,47,552/- treating capital gain on sale of stock of agriculture land, where as AO has rightly treated the numerous sale of agriculture land as business income. The sale of produce of Rs. 7,20,512/- on agriculture land being stock in trade is also business receipt.

The learned CIT(A) has erred on facts and circumstances of the case and in law in deleting the addition of Rs.76,84,287/- on sale of shares as long-short term capital gain where as AO has rightly treated the same as business income being bulk sale of shares along with speculative business.”

Heard and perused the record.

Learned DR relied on the findings of learned AO and submitted that assessee had not provided relevant information at the time of assessment.

Learned AR at the same time relied on the findings of learned CIT(Appeals) and further relied on the remand report given by the learned AO, made available at pages 63-64 of the paper book.

Observation of the court

In regard to ground no. 1 it can be appreciated that based upon the additional evidence allowed under rule 46A of the Income-tax Rules, 1962, remand report was sought from the learned AO and learned CIT(Appeals) after taking into consideration the remand report has concluded that learned AO has not doubted the fact that based upon the parameters about situation of the land beyond 8 kms. of the municipal limits of the Municipality Tizara and the population of the villages in which land was situated was less than ten thousand as per last census the, land sold by assessee was agricultural land and the sale proceeds received from the said sale of land was income derived from agricultural land which is exempt. Thus there is no error in the findings of learned CIT(Appeals) as the sale of land has given rise to profit from sale of agricultural land.

Further learned AO’s report also establish the fact that Revenue Officers of the concerned Revenue estae acknowledged the fact that assessee had grown crops during the agricultural year and the bills filed confirmed with the Agricultural Produce Market Committee of Khairthal. So the sale of produce of Rs. 7,20,512/- on agriculture land is also not business receipt.

In regard to ground no. 2 it can be observed that again learned CIT(Appeals) has taken into consideration the report of learned AO which established that during the year appellant had sold shares of Jai Prakash Associates which he was holding over 10-15 years. Learned CIT(Appeals) has relied assessee’s own case in ITA no. 383/Del/2007 for A.Y. 1996-97 and 1997-98 wherein the sale of shares was considered as ‘capital gain’ and not as ‘business income’. Learned CIT(A) has given directions to the learned AO to treat the sale of 2500 shares which were purchased during the year and sold in the same year as short term capital gain and tax accordingly, which is not disputed by the assessee. In the light of the above the ground no 2 is decided against the Revenue.

Consequently, The appeal of Revenue is dismissed.

Order pronounced in open court on 26.07.2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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September, 4
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Regardless of a controlling interest, shares held as investments are subject to the capital gains tax

Fact and issue of the case

These cross appeals by the assesse and the Revenue are against the order of the Commisioner of Income-tax (Appeals)-9, Mumbai (in short, „the CIT(A)‟) dated 30/04/2015 for assessment year 2008-09.

The assessee is a holding company and has made investment in the joint venture in JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which the assessee is holding 49% (49 lakhs equity shares) along with Morgan Stanley (India) Securities Pvt Ltd (MSSPL) which holds 51% share. The assessee filed return of income for A.Y. 200809 declaring total income at Rs.1191,60,94,839/-. The case was selected for scrutiny and the assessment order under section 143(3) was passed on 06/12/2010 assessing the total income at Rs.1761,62,51,490/-. During the year under consideration, the assessee has shown long term capital gain of Rs.1730,58,51,513/- on sale of shares in JMMSSPL to MSSPL. The Assessing Officer proceeded to treat this gain as the business income of the assessee for the reason that the assessee was in the business of shares and securities as a broker and was also involved in share trading business. The Ld.CIT(A) upheld the order of assessment by holding that the termination of the joint venture was to avoid commercial inconvenience accruing in the future as a joint venture and that termination was a result of split of business arrangement between the assessee and its partners. Aggrieved, the assessee preferred appeal before the Tribunal. The Tribunal remitted the issue back to the Assessing Officer by holding that –

“We have considered the rival arguments made by both the sides, perused the orders of the AO and the ld.CIT(A) and the paper book filed on behalf of the appellant. We have also considered the various decisions cited before us. The question to be decided in the impugned ground is regarding the treatment of consideration received on sale of 49 lakh equity shares of JMMS Securities to Morgan Stanly or a gross consideration of ₹ 1771.32 crores. According to the appellant since these shares were held as capital asset for more than 8 years therefore, the gain on sale has to be treated as LTCG. According to the revenue the same has to be treated as LTCG of business or profession. Both the parties filed elaborate written submissions and relied on various case laws to support their stand. The ld.Counsel for the assessee while concluding his arguments filed a copy of the decision of Hon’ble Supreme Court in the case of Vodafone International Holding B.V. and submitted that all points have been answered in the elaborate decision of the Hon’ble Apex Court running in to more than 250 pages. Since admittedly this decision was not available either before the AO or before the ld.CIT(A), therefore, considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issues afresh in the light of the decision o the Hon’ble Apex Court cites supra and in accordance with law after giving due opportunity of being heard to the appellant. The AO shall also give opportunity to the appellant to furnish the details of the nature of services rendered by JMFCPL to it and show the nexus of expenses incurred in connection with the transfer of the shares. We hold and direct accordingly. The ground of appeal No.1 by the appellant is accordingly allowed for statistical purpose.”

In the second round of proceedings, the Assessing Officer held the gain on sale of shares be business income by stating that assessee’s case is distinguishable from the case of Vodafone International Holdings B.V. vs UOI 341 ITR 1 (SC). The Ld.CIT(A) in the second round allowed the appeal in favour of the assessee by holding that the income arising out of the sale of shares is to be taxed under the head, „capital gains‟. The assessing Officer in addition to the above did not allow the loss arising out of sale of shares of JM Financial Products Pvt Ltd and did not allow the same to be set off against the long term capital gain declared by the assessee. This issue was also remitted back by the Tribunal in the first round of appeal to the Assessing Officer. The Assessing Officer in the second round retained the disallowance of set off of short term capital loss against the long term capital gain by holding the same to be non genuine. The CIT(A) upheld the order of the Assessing Officer in the second round of appellate proceedings also. Therefore, both the assessee and the revenue are in appeal before the Tribunal raising the following grounds of appeal – Assessee

Treatment of the transaction of Sale of shares of JM Financial Products Pvt. Ltd, as a colourable device and non-genuine and consequently Disallowance of Claim for Set-off of Long-Term Capital Loss on the same: Rs.54,90,36,870 (Rs.54.90 crores) (Page 104 of the Order) On the facts and circumstances of the case, the Appellant prays that the conclusion reached by the learned Commissioner of Income-tax (Appeals) – 9, (“CIT(A)’:) that the Appellant has entered into a transaction for sale of shares of JM Financial Products Pvt. Ltd. with the object of tax avoidance and it is a colorable device is erroneous and contrary to the facts. The Appellant prays that the claim of long term capital loss of Rs.54,90,36,870/- be accepted as a genuine long term capital loss.

Treatment of the transaction of Sale of shares of JM Financial Products Pvt. Ltd, as a colourable device and non-genuine and consequently Disallowance of Claim for Set-off of Short-Term Capital Loss on the same: Rs.465,44,19,508 (Rs.465.44 crores)

Observation of the court

During the year under consideration the assessee has transferred 5.445 crores shares of JMFPPL to the Trust formed for the purpose of issuing ESOPs to the employees. It is noticed from the perusal of records that out the above 3.439 crore shares have already been issued to employees under the ESOP scheme by the Trust. It is noticed that the employees have exercised options to the extent of 14.82% of the shares. The ld AR during the course of hearing submitted that JMFPPL was the main profit making subsidiary company in the group having high credit rating and that is the reason the company was chosen for implementing ESOPs. The ld AR further submitted that the issue of shares under ESOP scheme is a common business practice in order to retain talent and to provide opportunity to employees to grow with the company. It is also brought to our notice that JMFPPL had applied for banking license in 2013 which resulted in phenomenal growth of the company which resulted in wealth creation for employees. We also notice that these facts have not been considered by the lower authorities before concluding that the entire transaction to be non-genuine It is relevant to consider the decision of the Hon’ble Supreme Court in the case of CIT Mumbai vs Walfort Share & Stock Brokers (P.) Ltd where it is held that –

The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of section 94(7) vide Finance Act, 2001 with effect from 1-4-2002. With regard to such cases we may state that on facts it is established that there was a “sale”. The sale price was received, by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called “abuse of law”. Even assuming that the transaction was pre-planned there is nothing to” impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.’s case (supra). Hence, in the cases arising before 1-4-2002, losses pertaining to exempted income cannot be disallowed.

It is observed by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) that an act which is otherwise valid in law cannot be treated as to evade tax merely on the basis of some suspicious underlying motive supposedly resulting in some economic detriment or prejudice to the Revenue. In the present case genuineness of the claim cannot be impeached. In his regard, we notice that the shares were sold by the assessee from the Demat account for which the consideration is received by the assessee and that shares sold had been issued under the ESOP scheme of the Trust where the options are being exercised by the assessee. We further notice that the assessee has also shown short term capital gain of Rs.4,95,00,000 on sale of 49.50 lakh shares of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax. On the other hand the revenue has not brought any material to controvert the contention of assessee. So we cannot countenance the action of Ld.CIT(A)/AO on this issue and uphold the claim of assessee. In view of these discussion and considering the decisions of the Hon’ble Supreme Court, we see no infirmity. We therefore set aside the order of the CIT(A) disallowing the setoff of long term capital loss of Rs.54,90,36,870/- and short term capital loss of Rs.4,65,44,19,508/-.

The CIT(A) while upholding the disallowance of set off of losses has also held that the loss as computed by the assessee is not correct for the reason that the provisions of section 55(2)(aa)(ii) of the Act is not applicable in assessee’s case. During the course of hearing the ld AR presented various arguments in this regard contending that the provisions of section 55(2)(aa)(ii) is applicable to the impugned transaction. Since we have already held that the set off of loss should allowed in the case of the assessee in the foregoing paras., the submissions of the ld AR and ld DR in this regard is left open.

In result the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

Order pronounced in the open court on 04/08/2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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J.M.-Financial-Ltd-Vs-DCIT-ITAT-Mumbai-2

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August, 12
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When capital gains are taxed in a given year, ITAT directs AO to examine Section 54 Exemption Eligibility.

Fact and issue of the case

Present appeal has been filed by the assessee against the order of the ld.Commissioner of Income Tax (Appeals)-5, Vadodara dated 29.09.2016 passed under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for short) for the Asst.Year 201314.

This is a recalled matter. Initially, the Tribunal had dismissed the above appeal of the assessee for default vide order dated 18.9.2018. Thereafter, the assessee had filed a Misc.Application No.29/Ahd/2021 seeking recall of this order on the ground that the assessee was prevented by sufficient reasons in not attending the hearing before the Tribunal. After hearing both the sides, the Tribunal recalled its impugned ex parte order dated 18.9.2018 (supra) vide order dated 10.2.2022 and the appeal of the assessee was placed for de novo hearing. Accordingly the matter came up before us for fresh adjudication.

Brief facts relating to the case is that in the return of income filed for the year, the assessee had returned capital gain on account of sale of an alleged residential property being plot No.18, Urmi Cooperative Hsg. Society Ltd., Jetalpur, Vadodara. The said property was sold for a consideration of Rs.3.30 crores and the assessee being co-owner along with two co-owners, he had shown sale proceeds of Rs.1,09,98,900/- pertaining to his share. The assessee had also claimed exemption under section 54 and 54EC of the Act amounting in all to Rs.86,61,245/-, resulting in capital gain at NIL. On perusal of the documents of sale, the AO noticed that the capital gain pertained to the preceding year since he noted that the property sold on 27.2.2012 ,i.e in F.Y 2011-12pertaining to Asst. Year 2012-13; the impugned year before us being Asst.Year 2013-14. Accordingly he held that the capital gain was not liable to tax in the impugned year. Alternatively, he also examined the assessee’s claim of deduction under section 54 of the Act and found the same to be untenable. Accordingly, he held that the capital gain from sale of property were liable to tax in the preceding year i.e.Asst. Year 2012-13, and alternatively, he also held, that if capital gain is found taxable in the impugned year, then the assessee is not entitled to claim deduction under section 54 of the Act.

The matter was carried in appeal before the ld.CIT(A) who confirmed the finding of the AO that the capital gain is liable to tax in the preceding assessment year, and also the alternate denial of claim of deduction under section 54 of the Act. Aggrieved by the same, the assessee has raised the following grounds before us:

In law and in the facts and in the circumstances of the case of the appellant, learned Assessing officer had erred in concluding that the property, i.e. residential house in Urmi Co-op. Housing Soc. Limited, is transferred during the previous year relevant to A. Y. 2012-13 and not A. Y. 2013-14, and Hon. CIT (Appeals) has also erred in confirming the same.

In law and in the facts and in the circumstances of the case of the appellant, learned Assessing Officer had erred in holding that the possession of the property sold by the appellant had been transferred to the purchaser of the property on the date of executing the registered sale deed i.e. 27th February. 2012 and Hon. CIT (Appeals) has also erred in confirming the same without considering the memorandum of understanding dated 27th February, 2012.

In law and in the facts and in the circumstances of the case of the appellant, learned Assessing Officer had erred in holding that the appellant has not satisfied the necessary conditions to claim exemption u/s. 54. whereas the appellant has completed the construction of new residential house property (in Shree Hari Bungalows) by 27/08/2014 and has obtained the allotment letter from Shreeji Associates dated 14/06/2012. 4. Without prejudice to the above, in law and in the facts and in the circumstances of the case of the appellant, the Learned Assessing Officer had failed to appreciate that even if the transfer of property were assumed to have taken place in AY 2012-13, the appellant would have been eligible for benefit u/s. 54, as the construction of new residential house has been completed within three years from the said date of transfer, I.e. 27-02-2012, adopted by him.

In law and in the facts and in the circumstances of the case of the appellant, Hon. CIT(Appeals) has erred in holding that the property sold by the appellant is a plot of land and it does not consist of a residential building and thereby rejecting the claim of the appellant for exemption u/s. 54, without stating any basis for reaching such a conclusion.

Observation of the court

Without prejudice to the above, in law and in the facts and in the circumstances of the case of the appellant, Hon. CIT(Appeals) has also erred in not appreciating that even if the appellant had transferred a plot of land, he would have been eligible for exemption u/s. 54F in respect of amount invested by him in a new residential house and not granting the legitimate benefit available to the appellant, as per his own understanding about the property sold by the appellant.

On the facts and in the circumstances of the case, the learned Assessing Officer has erred in charging interest under Section 234B and 234D of the Act.

In law and in the facts and circumstances of the appellant’s case, the learned Assessing Officer has grossly erred in initiating penalty proceedings u/s.271(1)(c) of the Act.

The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.

Ground no.1 & 2 were not pressed before us. The only grievance of the assessee is vis-à-vis the denial of claim of deduction/ exemption under section 54 of the Act of the capital gain earned. Since the capital gain has been held to be not taxable in the impugned year, the eligibility to claim of exemption of the same, we hold, is to be examined in the year to which the capital gain pertains. Therefore, in the eventuality that the departments subjects the capital gains to tax in the preceding assessment year i.e. Asst. Year 2012-13, the assessee’s claim of exemption under section 54 is to be examined afresh in the said year.

The grounds of appeal raised by the assessee are disposed of in the above terms.

In the result, appeal of the assessee is allowed in the above terms.

Order pronounced in the Court on 5th July, 2023 at Ahmedabad.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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August, 8
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Wife’s mistakenly paid capital gain tax must be returned and reclaimed from the assessee

Fact and issue of the case

This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (DRP-2), Mumbai – 3 [hereinafter in short “Ld. DRP”] dated 13.12.2022 for the A.Y.2013-14.

Brief facts of the case are, assessee filed its original return of income on 28.01.2014 declaring total income of ₹.3,09,96,140/-. Subsequently the Assessing Officer received information from Income Tax Officer, Ward – 5(2)(3), Ahmedabad that assessee has sold two immovable properties during the year under consideration amounting to ₹.1,33,40,000/- and ₹.2,32,18,150/-. He observed that assessee has offered capital gain tax on transaction of ₹.2,32,18,150/- but did not offered the transactions of ₹.1,33,40,000/- in his return of income. Accordingly, he issued notice u/s.148 of Income-tax Act, 1961 (in short “Act”) on 08.03.2021 and served on the assessee through ITBA portal. The Assessing Officer has reproduced the reasons for reopening in Assessment Order, it is on Page 1 to 3 of the Assessment Order. In response assessee has filed his return of income on 20.04.2021 declaring the total income of ₹.3,09,96,140/-. Accordingly, notices u/s. 143(2) and 142(1) were served on the assessee.

In response to the above notices assessee had stated that due to some error while submitting the return of income, one of the property sold by the assessee has been declared in his wife return and all the relevant taxes were paid in her account. After considering the above reply the Assessing Officer issued show cause notice on 15.03.2022. In response assessee had continued to make the submissions that assessee has failed to declare the same in his return of income, however, the same source of income was already declared in his wife account and paid all the relevant taxes, therefore, there is no loss to the revenue by relying on certain judicial pronouncements. After considering the submissions of the assessee, Assessing Officer rejected the submissions made by the assessee and proceeded to make the addition in the hand of the assessee and accordingly, passed the draft Assessment Order u/s. 144C(1) of the Act.

Aggrieved with the above order, assessee filed objections before Ld.DRP and before Ld. DRP assessee had filed detailed submissions. After considering the detailed submissions, Ld. DRP dismissed the ground raised by the assessee and also discussed the issue of who has to sign the objections for filing the objection before Ld. Ld. DRP, since assessee has not signed the objections but the same was signed by the authorised representative. Apart from that Ld. DRP has rejected the submissions made by the assessee that there is no loss to the revenue and all the due taxes were paid by wife of the assessee and whatever case laws relied by the assessee were distinguished by the Ld. DRP and Ld. DRP has relied on decision of the Hon’ble Supreme Court and by distinguished the case law relied by the assessee in the case of Dhansukh Rawajibhai patel v. ACIT in ITA.No. 2802/Mum/2017 dated 16.11.2017, wherein Ld. DRP has sustained the addition made by the Assessing Officer with the observation that the tax has to be levied on the right person on whom the tax is leviable.

Aggrieved, assessee is in appeal before us raising following grounds in its appeal: –

The learned ITO Int Tax Ward-4(2)(1), Mumbai erred in passing order dated 2-1-2023 w’s 147 r.w.s 144C[13] and adding ₹.1,17,02,181 – in respect of Long Term Capital Gains on the sale of property.

In the facts and the circumstances of the case and in law, the Honorable DRP erred in confirming the addition proposed by the AO amounting to Rs. 1.17.02.181/-in respect of Long Term Capital Gains on the sale of property.

In the facts and the circumstances of the case and in law, the learned ITO Int Tax Ward- 4(2)(1), Mumbai erred in reopening the assessment u/s 148

Only on the basis of borrowed satisfaction based on the information received from ITO Ward 5(2)(3), Ahmedabad.

Even though return was not processed us 143(1) as mentioned in Para no. 1 at page no. 1 of the Draft Assessment Order.

In the facts and the circumstances of the case and in law, the learned ITO Int Tax Ward- 4(2)(1), Mumbai erred in making the addition of LTCG amounting to Rs. 1,17,02,181/-in respect of property sold vide Sale deed no. 355 of 2013 registered with Sub-Registrar, Sanand (Gujarat) by Overlooking the fact that a. the same LTCG amounting to Rs. 1,17,02,181/- in respect of property sold vide Sale deed no. 355 of 2013 registered with Sub-Registrar, Sanand (Gujarat) was already offered for tax in the hands of Mrs. Purnima Shrikant Shah, wife of the Appellant for AY 2013-14.

same tax is paid in the hands of the wife of the Appellant as was payable in the hands of the Appellant

there is no loss to the revenue since same tax is paid in the hands of the wife of the Appellant.

The said addition tantamount to double addition of same income in the hands of the Appellant even though the same is already taxed in the hands of the wife of the

Neither the Appellant nor his wife has claimed any tax benefit us 54F, 54EC etc

Rate of tax on LTCG is a flat rate applicable to the Appellant as well as to his wife and thereby works out to exactly identical figure.

The time limit for revising return of the wife of the Appellant had already lapsed by the time the reassessment was initiated by the ITO Int Tax Ward 4(2)(1), Mumbai.

This was inadvertent error committed by the erstwhile common CA of the Appellant and his wife without any intention to save the taxes.

The assessee & the wife are Non-Residents for more than 20 years & has no knowledge of Indian Tax Laws.

In the facts and the circumstances of the case and in law, the learned ITO Int Tax Ward- 4(2)(1), Mumbai erred in passing assessment order u/s 147 rws 144C[13] even though section 144C(15)(b) clearly postulates twin conditions, viz, variation proposed by TPO under Transfer pricing and non-resident/foreign company and in this case no variation in Transfer Pricing was proposed. General: – The Appellant reserve rights to add alter or delete any portion of this objections to appeal before its conclusion. This appeal is filed in time and may please be allowed in full. A detailed paper book will be filed at the time of hearing.

Observation of the court

At the time of hearing, Ld. AR of the assessee submitted that both assessee and his wife are NRI and while filing the return of income of both the assessees, tax consultant by mistake declared the capital gain income in the hands of assessee’s wife instead of assessee’s return of income. He submitted that both the parties fall under the same tax bracket and he also brought to our notice the relevant return of income filed by assessee’s wife which is placed on record at Page No. 63 of the Paper Book and he also brought to our notice assessee has filed an affidavit in this regard. Further, he brought to our notice Page No. 293 of the Paper Book which is the show cause notice issued by the Assessing Officer. He submitted that the Assessing Officer has come to know of this transaction with the information received from the Income Tax Officer, Ward – 5(2)(3), Ahmedabad and in this regard he relied on the case of Mahaver Kumar Jain v. CIT in Civil Appeal No. 4166 of 2006 dated 19.04.2018 he submitted that as per the above decision the Hon’ble Supreme Court held that there cannot be double taxation on the assessee.

On the other hand, Ld. DR relied on the findings of the lower

Considered the rival submissions and material placed on record, we observe from the records submitted before us that due to mistake assessee has not declared one transaction involving capital gain on sale of the property which was in the name of the assessee and it is fact on record that the same was declared by wife of the assessee in her return of income and duly paid the relevant tax on record. It is also fact on record that both the assessee as well as assessee’s wife are falling under same tax bracket. We observe that the Assessing Officer has come to know that assessee has failed to declare the above said transaction in his return of income, however, he is aware of the fact the same income was declared by wife of the assessee, even though the property was not in the name of the assessee’s wife and the same was duly accepted by the revenue and assessed to tax. At the same time, it is also fact on record that assessee has failed to declare the same in his return of income and as per the opinion of the tax authorities that the income has to be declared and assessed in the right person. Accordingly, the income has to be assessed in the hands of the assessee only.

It is a peculiar case wherein the income has been declared and rightfully paid the due tax but in the hands of the wrong person. In order to do the right thing assessee has to revise his return of income at the same time even wife of the assessee has to revise her return of income, we observe that at this point of time this is not possible considering the fact that the issue involved relating to A.Y. 2013-14. Since the assessee has brought on record that the assessee’s wife has paid the relevant tax in her return of income it shows that even though by mistake the assessee has remitted the relevant tax on this transaction. However, we observe that the income was not declared by the original person and paid the relevant tax by the proper person. We are of the view that the same transaction cannot be charged to tax twice. Therefore, in our considered view in order keep the record straight and also agreeing the line of argument put forth by the tax authorities, we are directing the Assessing Officer who is aware of the fact that assessee has declared the relevant transaction in the hands of the assessee’s wife, therefore we direct the Assessing Officer to intimate the Assessing Officer [Income Tax Officer – Ward – 16(2)(4)] of the assessee’s wife i.e. Purnima Shrikant Shah [PAN BJKPS 6068J] to revise the assessment in case assessment has been already completed or initiate the proceeding of re-assessment and reject the capital gain declared by her in her return of income and initiate the refund along with interest till this date and as soon as the refund is initiated the present Assessing Officer may initiate the recovery of demand arising out of the assessment in the present case.

In summary, the issue has to be dealt only by the tax authorities and the credit in the hands of the assessee’s wife has to be refunded are adjusted against the demand raised in the hands of the assessee. The method by which it has to be carried out left to the tax authorities without there being any burden on the assessee. Since the assessee has paid the due tax on this transaction. The legislature intention is not to tax twice on the same transaction. Therefore, we partly allowed the grounds of appeal raised by the assessee. Accordingly, Ground No. 1 to 4 are partly allowed and with regard to Ground No. 3 on reopening of assessment u/s. 148 of the Act we observe that the submissions of the assessee and the grounds of appeal raised by the assessee are not proper considering the fact that the return of income filed by the assessee is defective, therefore the finding given by the Ld. DRP, in our view, are proper on record. Accordingly, Ground No. 3 raised by the assessee is dismissed. At the same time, we direct the Assessing Officer to follow the directions given in above paragraph.

With Extra Caution, we direct the Assessing Officer to make sure that there should not be any burden on the assessee in collecting the due tax along with interest considering the fact that the relevant taxes were already paid by the assessee’s wife properly on time, the relevant amount of tax was with the revenue. Therefore, there is absolutely no loss to the revenue in this case.

In the result, appeal filed by the assessee is partly allowed as indicated above.

Order pronounced in the open court on 04th July, 2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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July, 24
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Land owned as an investment is taxable under the “capital gain” heading

Fact and issue of the case

This is an appeal filed by the assessee directed against the order of the ld. Commissioner of Income Tax (Appeals) – 2, Nagpur [‘the CIT(A)’] dated 12.03.2019 for the assessment year 2015-16.

The appellant raised the following grounds of appeal :-

On the facts and in circumstances of the case and in law, the learned CIT(A) erred in stating that the subject, whether proper approval was taken before converting limited scrutiny into complete scrutiny being administrative measure cannot be taken up.

On the facts and in the circumstances of the case and in law the learned CIT (A) erred in upholding the addition of Rs 1,00,85,013/- made by the AO as income under the head business and profession rightly declared as income under the head capital gains.

On the facts and in circumstances of the case and in law, the learned CIT(A) ought to have considered

(i) intention of the assessee

(ii) period of holding

(iii) consistency in treating the sale of another pieces of same land as income under the head capital gain in subsequent years.

On the facts and in circumstances of the case and in law, the learned CIT(A) erred in upholding the denial of exemption u/s 54F of Rs 51,31,063/-made by the AO rightly claimed as exemption u/s 54F by the appellant.

Any other ground which may be preferred at the time of hearing.”

Briefly, the facts of the case are as under :-

The appellant is an individual engaged in the business of builders and land developers. The return of income for the assessment year 2015-16 was filed through e-filing on 25.03.2016 declaring a total income of Rs.49,64,470/-. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Circle-3, Nagpur (‘the Assessing Officer’) vide order dated 28.12.2017 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.1,01,58,080/-. While doing so, the Assessing Officer made addition of Rs.1,00,85,013/- being the profits arising out of the sale of land, treating as an income from business as against the claim of the appellant that it is a nature of capital gains. The factual background leading to the above additions as follows :

The appellant along with one Shri Sadik F. Kachchhi purchased a land bearing Khasara No.73/1, Area 0.60 Hectare for a consideration of Rs.2,00,000/- on 25.05.2005. The cost of investment on the said land was shown in the balance sheet as on date of acquisition and continued to be shown so till the date of sale. During the previous year relevant to the assessment under consideration, the said land was sold to 21 different parties for a consideration of Rs.1,01,44,000/- and, accordingly, the appellant had computed the capital gains and sought exemption on the capital gains on investment in the residential property as prescribed under the provisions of section 54F of the Act. The claim for exemption u/s 54F of the Act was denied by the Assessing Officer on the following grounds :-

(i) The appellant is engaged in the business of builders and developers and a dealer of land.

(ii) The appellant had indulged into transactions of purchase and sale of land in the earlier years also and same was treated as business income.

(iii) The land was sold to 21 different parties after dividing the plots into 21 pieces, which according to the Assessing Officer indicate the intention of the appellant is only to hold it as business asset.

(iv) The Assessing Officer also held that the mere reflecting concerned asset as investment in fixed asset in the balance sheet does not conclusively prove that it is investment not stock in trade and there was no agricultural activity on the said land was carried out.

The assessee also held other asset of investments. The sum and substance of the conclusion of the Assessing Officer is that since the appellant is a dealer in land and sold the land by dividing plots into 21 different pieces, the land was only as business assets and, therefore, the profit arising on the sale of said land only results in the business profits not as a capital gains. The Assessing Officer also referred to the decision of the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT, 35 ITR 594 in support of the proposition that when the land was purchased with the intention of re-sell of profits, it is a transaction in the nature of trade and, accordingly, the Assessing Officer assessed the profits arising on sale of said land as “business profits” as against the claim of the appellant that the profits are in the nature of “capital gains”. Accordingly, denied the claim of exemption u/s 54F of the Act.

On an appeal before the ld. CIT(A), the CIT(A) after referring to the plethora of judgements upheld the findings of the Assessing Officer.

Being aggrieved, the appellant is before is in the present appeal.

The ld. AR submitted that the asset was purchased in the year 2005 and was shown as a part of the fixed asset in the balance sheet. It is contended that the finding of the Assessing Officer that the assessee himself had divided the land into pieces is contrary to the facts as the layout of the said land was approved by local authority much before the acquisition by the appellant. He also filed the copy of the permission of the local authorities. He further contended that :-

The land was continued to be investment in the books of account till the date of sale.

The assessee is entitled to hold two different portfolios i.e.

(i) stock in trade and

(ii) investment.

The fact that the land was sold after gap of decade, no borrowed funds were utilized for the purpose of acquiring the said lands indicates the intention of the party to hold against on investment.

In the light of the above submissions, she pleaded that the orders of the lower authorities should be reversed and set-aside.

On the other hand, ld. CIT-DR placing heavily reliance on the orders of the lower authorities submitted that when the land was divided into pieces it clearly establish motive of assessee to hold the land ‘stock in trade’.

Observation of the court

We heard the rival submissions and perused the material on record. The issue in the present appeal relates to whether or not the surplus arising from the sale of land constitutes “capital gains” or “business income”. It is undisputed fact that the appellant had acquired the subject land in the year 2005 for consideration of Rs.1,01,44,000/- along with one Shri Sadik F. Kachchhi and the land was shown as a part of the fixed asset in the balance sheet and this treatment in books of account continued to be so till the sale of land. Admittedly, no borrowed funds were utilized for acquisition of the said land and assessee also holding some other lands as a part of investment and is also a dealer in lands. In the return of income, the appellant had offered the profit arising on sale of land as “capital gains” and sought the exemption of capital gains by investing of this sale proceeds in the residential house u/s 54F of the Act. The assessee also maintained the distinction between the “stock in trade” and “investment”. The appellant is also a dealer in land and the profits on the sale of land in the earlier year were shown as “business profits”. The Assessing Officer relying upon the decision of the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. (supra) held that the assessee acquired the land only with the intention to re-sell the property since he had not carried out any agricultural activity on the said land. The Assessing Officer took into consideration the fact that the land was sold to 21 different parties and, accordingly, denied the claim for exemption u/s 54F of the Act. On appeal before the ld. CIT(A), the ld. CIT(A) referred to plethora of decisions confirmed the findings of the Assessing Officer relying on two factors i.e. (i) the business of the appellant has been to carry out the regular transaction in purchase and sale of different pieces of land and (ii) the assessee is a dealer in the land. This approach of the ld. CIT(A) while confirming the action of the Assessing Officer cannot be appreciated as it is settled position of law that the assessee is entitled to maintain two different portfolios i.e. stock in trade as well as the investment. This is also clarified by the CBDT in the context of taxing the profits in respect of sale transaction and shares and securities vide CBDT Circular No.4 of 2007 dated 04.05.2007. The assessee had treated the transaction of purchase of land as investment in the books of account by showing this as a part of the fixed asset. It is settled position of law that to determine whether a particular transaction is an adventure in the nature of trade or investment, the test to be applied is intention of the party at the time of acquisition of the property as held by the Hon’ble Supreme Court in the case of G. Venkataswami Naidu & Co. (supra). If there is any material on record to indicate that the intention of the party is only to re-sell the asset for profit, no doubt it is a stock in trade. In the present case, the land was sold after the gap of decade and there was no material to show that the appellant had acquired the land only with the intention to re-sell the land for profit. The assessee is undoubtedly entitled to hold two different portfolios in respect of the same kind of asset i.e. stock in trade and investment. The Hon’ble Gujarat High Court in the case of CIT vs. Rewashanker A. Kothari, 283 ITR 338 held as under :-

“The Commissioner had expressed prima facie opinion to the effect that the assessee was doing business in shares and the shares purchased by him were held as stock-in-trade. By holding that the Assessing Officer had failed to inquire about the real nature of the transaction, the Commissioner also opined prima facie that the transactions available on record revealed that the assessee was a dealer in shares. [Para 6]

However, even if one proceeds on the footing that the Commissioner had not expressed any opinion and had merely set aside the assessment while exercising powers under section 263, nonetheless, when an appeal is preferred against such an order, the Tribunal is well within its jurisdiction to examine as to whether the Commissioner had rightly exercised jurisdiction under section 263. In the process, if the Tribunal examines the facts and evidence which are available on record before the Commissioner at the time of framing of order under section 263, it cannot be stated that the Tribunal has committed any error in recording findings in relation to such facts and evidence on record. In the instant case, all that the Tribunal had done was whether, in light of the record which was available before the Commissioner when he exercised the jurisdiction under section 263, it was possible to come to the conclusion that the assessment order was both erroneous and prejudicial to the interest of the revenue. [Para 7]

In each case, it is the total effect of all relevant factors and circumstances that determine the character of the transaction. Each case has to be determined on the total impression created on the mind of the Court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an assessee. The nature of the commodity would also be a relevant factor. It is equally well-settled that, merely because the original purchase was made with the intention to re-sell, if an enhanced price could be obtained, that by itself is not enough to infer that an assessee is carrying on business. However, though profit motive in entering into a transaction is not decisive, if the facts and circumstances indicate that the purchase of the asset was made solely and exclusively with an intention to re-sell the asset at a profit, it would be a strong factor for inferring that the transaction was in the nature of business. [Para 10]

On the application of the aforesaid tests, if the matter was examined, it was apparent that not only the Tribunal had applied the correct tests, but had also drawn the right inference. The findings of fact recorded by the Tribunal on the basis of evidence available before it could not be termed to be without any evidence, and once that was so, it was not possible to state that the Tribunal committed any error when it concluded that the assessment order was not erroneous. That as a consequence, the Commissioner could not have assumed jurisdiction under section 263 as stated hereinbefore, once an assessee has exercised its right to file a statutory appeal against the order of Commissioner made under section 263, the Tribunal is bound to examine whether Commissioner had rightly invoked provisions of section 263. The basic requirement for this is satisfaction of the twin conditions envisaged by the section, namely, the assessment order is erroneous and prejudicial to the interests of the revenue. It is equally well-settled that if the Assessing Officer has taken a view of the matter which is reasonably possible in the factual matrix, the Commissioner cannot exercise powers under section 263, merely because it is possible to record a different conclusion on the same set of facts and circumstances. [Para 12]

On facts, the Tribunal had taken note of the fact that there was a long gap between the date of acquisition of the shares and their sale and that some of the shares sold in the relevant accounting period were purchased at least 3 years ago, while some other shares were purchased as far back as in 1971, i.e., a period of about 14 to 15 years. Furthermore, in the reply to the show-cause notice issued, the assessee had categorically stated that he was a partner in a firm having business of building materials, hardware items, etc., and neither the firm nor the assessee were carrying on any business in shares. That the assessee had been duly filing wealth-tax returns right from assessment year 1957-58 and the shareholding on respective valuation dates had duly been shown as wealth on account of investment. These facts had not been disputed by the Commissioner. [Para 13]

Therefore, in the light of above discussion, the impugned order of the Tribunal did not suffer from any infirmity. The Tribunal had rightly concluded that the order made by the Commissioner under section 263 was not sustainable, and that, on facts, the income was required to be taxed under the head ‘Capital gains’ and not as ‘Income from business’. [Para 14]”

In the facts and circumstances of the present case, it does not indicate that the purchase of land was made with the intention to re-sell. The Hon’ble Supreme Court in the case of CIT vs. Associated Industrial Development Co. (P.) Ltd., 82 ITR 586 held as under :-

“The High Court went beyond the matters which were the subject-matter of controversy before the departmental authorities and the Tribunal. It was never the case of the assessee at any stage that although it was a dealer in shares those shares which were the subject-matter of sale were held by way of investment. It had maintained throughout that all the shares were held by it as an investor and that it could not be regarded as a dealer because the shares did not form its stock-in-trade. That case of the assessee was negatived because of the extensive dealings and other facts and circumstances which were taken into consideration. The figure of purchases and sales as also of the profits relating to the years 1954 to 1957 justified the view that although up to a certain point of time it had been assessed as an investor, the multiplicity of the transactions occurring successively over the years supported the departmental stand that the assessee had ceased to be an investor and had become a dealer. Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. The assessee, in the instant case, made no attempt whatsoever to make out a case that the shares which had been sold were a part of its capital investment. Nor did it place any material from which it could be established that those shares had been treated in its books differently from other shares held by it. The mere fact that the sale proceeds were paid into the overdraft account in which admittedly proceeds of sale of all the shares held by the assessee were being credited as and when the sales were made and that these shares had not been sold with any amount of frequency could not be regarded as sufficient to establish that these shares had been held by way of investment. Even otherwise it was for the Tribunal to give its decision on facts and since no decision was invited from the Tribunal as to whether the shares in question had been held by way of investment it was not open to the High Court to give its finding on that question which was essentially one of fact and which it was within the jurisdiction of the Tribunal to determine.

Hence, the Tribunal was justified in holding that the profit arose to the assessee in the course of its business as a dealer in shares and as such was liable to be assessed as a revenue receipt.”

In the present case, undisputedly the appellant had made a distinction between those lands which are stock in trade and those lands which are held by investment. Therefore, none of the factors considered by the Assessing Officer can militate against the claim of the appellant that it is an investment and the profit arising out of the sale of this land is assessable to tax under the head “capital gains”. Therefore, the orders of the lower authorities are hereby reversed and set-aside. Thus, the grounds of appeal raised by the assessee are allowed.

In the result, the appeal filed by the assessee is allowed.

Order pronounced on this the 24th day of June, 2021.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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July, 21
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Investment made in a new home within the delayed return due date is eligible for the Section 54F Exemption

Fact and issue of the case

The instant appeal at the instance of the assessee is directed against the order dated 25.06.2019 passed by the Commissioner of Income Tax (Appeals), Jamnagar (‘the CIT(A)’), arising out of the assessment order dated 30.06.2017 passed by the Learned DCIT, Circle-2, Jamnagar under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2015-16, whereby and where under the claim of exemption under Section 54F of the Act to the tune of Rs.10,53,975/- has been disallowed.

We have heard the rival submissions made by the respective parties and we have also perused the relevant materials available on record.

The brief facts leading to this case is this that the assessee, an individual, filed the return of income on 05.08.2015 declaring total income of Rs.59,37,270/-, which was subsequently revised at Rs.48,83,290/- by filing the revised return of income on 31.10.2015. Such revised return of income was filed to claim deduction of Rs.10,53,975/- under Section 54F of the Act on account of purchase of residential building by the appellant. In fact, on 05.11.2014, the assessee sold her immovable property being a godown for a consideration of Rs.60 Lakhs and the long term capital gain out of that was also offered to tax by filing the original return. Within one year of such sale of property, the appellant purchased the residential house on 07.10.2015 for a sum of Rs.12 Lakhs and claimed deduction 10,53,975/- under Section 54F of the Act by filing revised return of income. Upon selection of the case under scrutiny, the assessment was finalized under Section 143(3) of the Act in terms of the original return of income at Rs.59,37,270/- rejecting the claim of deduction to the tune of Rs.10,53,975/- under Section 54F of the Act as per the revised return filed by the appellant on the ground that the appellant had not invested the fund into capital gain scheme before purchase of the residential property before filing of the return of income under Section 139(1) of the Act. The case of the Revenue is this that the appellant is not entitled for exemption under Section 54F of the Act, since the unutilized amount was not deposited by him before the due date of filing of return of income under Section 139(1) of the Act. On this aspect, both the authorities below relied upon the judgment passed in the matter of Suleman Merchant passed by the Hon’ble High Court of Bombay, wherein it was held that the amount which has not been invested either in purchase or in construction of house has to be deposited in the specified accounts before the due date of filing of return of income under Section 139(1) of the Act. On the other hand, series of a judgment has been relied upon by the assessee in support of his case to this effect that if the investment in the residential property is made within the time limit of Section 139(4) of the Act, the deduction under Section 54F of the Act is allowable. In fact, the judgment passed by the Hon’ble Karnataka High Court in case of CIT vs. K. Ramachandra Rao, reported in (2015) 56 Taxmann.com 163 (Karnataka HC) was basically relied upon. Some other judgments observing a liberal approach should be taken by interpreting the provision of Section 54 of the Act were also relied upon by the appellant. The judgment passed by the Co-ordinate Bench in the case of Shrawankumar G. Jain vs. ITO, reported in (2018) 99 taxmann.com 88 (ITAT-AHD) was also relied upon by the appellant.

We have considered the entire aspect of the matter and the judgments relied upon by the respective parties. Hon’ble Karnataka High Court in the case K. Ramachandra Rao (supra) dealt with a similar case wherein following observation was made:

In the present case, the assessee purchased new asset on 05/10/2009 and had transferred the original asset on 8/01/2008. As per Section 54F (1) of the Act, the exemption would be available if the assessee purchased the residential house within two years after the date when transfer took place. As per the judgment of Hon’ble Karnataka High Court, the provisions of section 54F(4) would not be attracted in the event if the assessee has purchased or constructed the residential house within the period prescribed under section 54(1) of the Act. In the case in hand, there is no dispute with regard to the fact that the assessee had purchased within two years [the period prescribed u/s.54(F(1)] a new asset on 05/10/2009 from the date of transfer of the original asset. The Revenue has not cited or placed on record any contrary judgment by the Hon’ble Jurisdictional High Court or Hon’ble Supreme Court. Therefore, respectfully following the ratio laid down by the Hon’ble Karnataka High Court in the case of CIT v. K. Ramachandra Rao (supra), we hereby set aside the impugned order and direct the AO to re-compute the assessed income after granting the benefit of section 54F of the Act to the assessee.”

Requirement to deposit net consideration as per Section 54F(4) not attracted if assessee has purchased a new residential house within due date specified under Section 139(4)

Section 54F exemption eligible on amount not deposited but invested in purchase of new house within due date specified under Section 139(4)

Observation of the court

In that view of the matter, the Hon’ble Karnataka High Court has been pleased to laid down the ratio to this effect that when the assessee has purchased a new residential house within due date specified under Section 139(4) of the Act from the date of transfer of the original asset, requirement to deposit net consideration received by the assessee in capital gain account scheme as per Section 54F(4) of the Act, would not be attracted and the assessee would be eligible to benefit of exemption under Section 54F of the Act. Taking into consideration the ratio laid down by the Hon’ble Karnataka High Court, we find that the assessee’s case is squarely covered under the same, as the assessee within one year from the sale of asset at a consideration of Rs.60 Lakhs the long term capital gain whereof was also offered to tax by filing original return, purchased the residential house on 07.10.2015 for a sum of Rs.12 Lakhs and claimed deduction of Rs.10,53,975/- under Section 54F of the Act by filing revised return of income and entitled to relief as claimed for exemption under Section 54F of the Act to the tune of Rs.1,10,53,975/-. Thus, the addition made by the Revenue is not justifiable and hence, deleted.

In the result, assessee’s appeal is allowed.

This Order pronounced on 30/05/2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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June, 27
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Since no right, title, or interest in the property has been transferred, the amount is exempt from capital gains tax

Fact and issue of the case

The present batch of four appeals has been filed by different assessees challenging separate impugned orders of even date 02/03/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–50, Mumbai, [“learned CIT(A)”], for the assessment year 2011–12.

Since the factual matrix giving rise to the impugned addition in all the appeals is the same, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order. With the consent of the parties, the appeal being ITA no.802/Mum./ 2023 (in Mahendra Corporation) is taken up as a lead case, since the addition in this appeal has been made on a substantive basis, while in other appeals the addition is on a protective basis. ITA no. 802/Mum./2023 Assessee’s Appeal – A.Y. 2011–12 (Mahendra Corporation) 3. In this appeal, the assessee has raised the following grounds:

The Commissioner of Income Tax (Appeals) -50, Mumbai (hereinafter referred to as “the CIT(A)”] erred in upholding the action of the Assessing Officer [hereinafter referred to as “the AO”] in reopening the case of the assessee u/s 147/ 148 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] without appreciating that where an assessment is pursuant to search proceedings. assessment ought to be made with recourse to procedure laid in section 153A of the Act. Accordingly, the impugned reassessment proceedings and the reassessment order u/s 143(3) r.w.s 147 of the Act is bad in law and liable to be quashed:

The AO/CIT(A) failed to appreciate that the sum of Rs. 135 crores received-by the assessee was a capital receipt and not chargeable to tax and accordingly reopening the case of the assessee dehors “reason to believe” that income chargeable to tax has escaped assessment, renders the reassessment proceedings bad in law and liable to be quashed;

The CIT(A) erred in upholding the action of the AO in reopening the case of the assessee although the same was on a borrowed satisfaction based upon the report of the investigation wing without independent application of mind;

The CIT(A) erred in upholding the action of the AO in taxing a sum of Rs.134,58,72,917/- as long term capital gains with respect to the consideration received towards “right to sue”. The reasons given by him for doing so, are wrong, contrary to the facts of the case and against the provision of law;

Observation of the court

Therefore, the Hon’ble jurisdictional High Court in the aforesaid decision held that the consent terms may constitute an agreement or contract between the parties, however, a consent decree is passed after the said terms are placed before the Court and the Court applies its mind and records a satisfaction that the terms are not contrary to law or public policy. Thus, the suit is not disposed off on the basis of the agreement between the parties but on the basis of the consent order passed by the Court after the application of its mind. Accordingly, the Hon’ble jurisdictional High Court held that once the suit for specific performance has been refused then the receipt of monetary sum cannot be taxed as claimed by the Revenue as the same is in the nature of compensation in money for breach of the contract. Since in the present case also, pursuant to the consent decree in a suit for specific performance amount was paid, therefore, the said amount cannot be said to be liable to capital gains tax.

Further, as regards the reliance placed on Clause No.10 of the consent decree, we are of the considered view that the said clause is merely an arrangement amongst the parties, whereby the payment will be directly made to the partners as set out in the consent terms instead of the assessee and thus, cannot be said to be a relinquishment of any right in favour of the partners giving rise to any capital gains in the hands of the assessee.

Therefore, in view of the above, we are of the considered opinion that the amount of Rs.135 crore received by the assessee pursuant to the consent decrees dated 20/01/2011 and 15/07/2015 passed by the Hon‟ble Bombay High Court is not in respect of the transfer of any right, title, or interest in the property i.e. Villa Nirmala, and therefore, cannot be taxed under the head „capital gains‟ in the hands of the assessee. As a result, grounds No. 4 and 5 raised in assessee‟s appeal are allowed.

In the result, the appeal by the assessee is partly allowed. ITAs no. 803-805/Mum./2023 Assessee’s Appeal – A.Y. 2011–12 (Shirin Mahendra Shah, Pratibha Mahindra Shah and Emvee Shah Real Estate Pvt. Ltd.) 22. In case of other assessees, namely Shirin Mahendra Shah, Pratibha Mahindra Shah and Emvee Shah Real Estate Pvt. Ltd. being partners in Mahendra Corporation, the AO, by placing reliance on Clause No.10 of the consent decree dated 28/01/2011, made an addition of one-third (i.e. 33.33%) of capital gains on a protective basis. The learned CIT(A) vide impugned order in appeals of the partners directed deletion of the addition made on a protective basis, since substantive addition was upheld in the hands of the firm. However, the learned CIT(A) further directed that if in the future the said substantive addition is reduced in the case of the firm then the protective addition shall become substantive to that extent. Since we have already concluded in the case of the firm that the amount received pursuant to consent decree is not taxable as capital gains and have also found Clause No.10 to be merely an arrangement for payment being made directly to the partners, therefore the addition in hands of the partners, either on a substantive basis or protective basis, also do not survive. Accordingly, grounds no.4-6 raised on merits in the other appeals are allowed. While grounds no.1-3 challenging the initiation of reassessment proceedings under section 147 of the Act are dismissed as not pressed. 23. In the result, the appeals being ITAs no. 803-805/Mum./2023 are partly allowed.

To sum up, all the appeals are partly allowed.

Order pronounced in the open Court on 29/05/2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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Mahendra-Corporation-Vs-DCIT-ITAT-Mumbai-2

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June, 22
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The sale of a joint property cannot be used to credit a single co-owner with capital gains

Fact and issue of the case

This appeal is filed by the Assessee against order dated 13.01.2023 passed by the CIT(A), National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2011-12.

The Assessee has raised the following grounds of appeal :-

Being aggrieved by the order of ITO Ward 4(2)(1) passed u/s.142(1), this appeal petition is being submitted on the following grounds, which are prayed and may be considered without prejudice to one another.

CIT(A) failed to consider the fact that House sold by Assessee is in Joint Name.The joint owner of the property is Mr. SURESHCHANDRA ASHWINBHAI PATEL.

The consideration of immovable property sold will be distributed in 2 parts i.e. sale consideration of property is Rs.16,00,000/-. Amount of Rs.8,00,000/- will be sales consideration of Mr. ASHWINBHAI SOMNATH PATEL i.e. assessee.

CIT(A) has considered the same base on which AO has charged full amount of consideration as income and charged tax. But as per Valuation Certificate, the Sold Property was purchased in 2006, the value of the same is Rs.6,83,500/- (as per Valuation Certificate)

CIT(A) is failed to reduce Purchase cost of year 2006 of Rs.3,41,750/-(total cost 6,83,500/- due to joint owner the cost of property in the name of Assessee will be of Rs.3,41,750/-) and without considering purchase cost of asset, CIT(A) has calculated tax.

The working must be after considering purchase cost of property and benefit of indexation must be given.

Sr.	Particulars	Amount
1.	Sales consideration from sales of immovable property	8,00,000/-
2.	Less : Indexed cost of Purchase (as per valuation report)	4,68,178/-
3.	Capital Gain Income	3,31,822/-

The assessee was of 95 years old at the time of filing and CIT Appeal. Unfortunately we have loss assessee in Covid Pandemic. During assessment year 2011-2012, assessee was of 87 years. Considering the age and health of assessee, assessee is not being able to response any of income tax notices issued on various dates. Also he has not filed income tax return of AY 2011-2012.

Considering death of assessee, I request you to reduce the penalty and interest at the minimum value of zero.

Therefore, it has been requested before honorable ITAT(A) to annul the demand raised through assessment made under section 142.

We are submitting Death Certificate of assessee, authority letter of legal heir, order u/s.144, order passed by CIT(A), valuation certificate for your consideration

The assessee has not filed any return of income for the year under consideration under Section 139(1) of the Income Tax Act, 1961. As per the information, the Assessing Officer observed that the assessee has sold immovable properties of Rs.16,00,000/-. Notice under Section 148 of the Act was issued after obtaining necessary approval on 26.03.2018 and was duly served to the assessee. However, the assessee did not respond and, therefore, no return was filed. The Assessing Officer passed Assessment Order under Section 144 read with Section 147 of the Act and made addition on Long Term Capital Gain and proposed addition of Rs.16,00,000/- treating the same as undisclosed income for A.Y. 2011-12.

Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

The Ld. AR appeared as party in person before us and submitted that the assessee was 95 years old and sold the property in two parts, one part is to that of assessee and the other part is to that of assessee’s son, as the property belonged in joint name. The assessee in person submitted that notices issued by the CIT(A) was never received and in between the assessee died and, therefore, being legal heir the notices were not duly received by the assessee. The assessee in person stated that the matter may be remanded back to the file of the CIT(A) for proper adjudication of the issues contested therein as the property sold was jointly owned by the assessee and his son and, therefore, the value of Rs.8,00,000/- should have been taken in assessee’s account.

The Ld. DR relied upon the Assessment Order and the order of the CIT(A).

Observation of the court

Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the fact remains that the property sold in question was jointly owned by the assessee and his son. Thus, the entire value of consideration of Rs.16,00,000/- cannot be treated as Long Term Capital Gain of the Assessee. The other aspects also was not verified either by the Assessing Officer or by the CIT(A). As the Assessing Officer also passed ex-parte order, it will be appropriate to remand back the issues contested by the assessee in the appeal filed before the CIT(A) to the file of the CIT(A) for adjudicating the same on merit. The assessee be given opportunity of hearing by following the principles of natural justice and the CIT(A) should take all the cognisance of the evidences filed by the assessee. The CIT(A) is directed to pass order within the reasonable time after giving proper notices to the assessee. The assessee also should co-operate with proceedings before the CIT(A).

In the result, appeal filed by the assessee is partly allowed for statistical purpose.

Order pronounced in the open Court on this 10th day of May, 2023.

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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June, 12
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Payment on behalf of the Assessee by the Husband & Son is qualified for the Section 54F exemption

Fact and issue of the case

This appeal has been filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)–Kanpur-4, (“CIT(A)”) dated 20.09.2021 pertaining to the Assessment Year (“AY”) 2018-19

The Revenue has taken the following grounds

On facts and circumstances of the case and in. law, the Ld. CIT(A) erred in restricting the addition to the tune of Rs. l4,93,596/- as the Ld. CIT(A) has appreciated the fact that the investment in the purchase of new property was not made by the assessee herself but was made by the other family members

On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of surrendered income of Rs, 1,00,00,000/- as the surrendered was made by the son of assessee, voluntarily and alter due consultation with the assessee, and the surrendered was based on the difference of stock and unexplained cash found during the course of survey proceedings

On facts and circumstances of the case and in law, the CIT(A) failed to allude to the relevant facts & circumstances and misread the facts to arrive at the conclusion

The assessee is an individual engaged in the business of purchase and sale of gold, silver and diamond jewellery in the name & style M/s. Pushpanjali Jewels. Survey under section 133A of the Income Tax Act, 1961 (the “Act”) was conducted at her business premises on 30.05.2018. During the course of survey, the stock was got valued by an approved valuer who valued the stock at Rs. 5,57,34,223/- as against the value as per books at Rs. 4,63,31,680/-. During survey, statement of Shri Himanshu Mittal, Son of the assessee was recorded. He surrendered an amount of Rs. 1 crore as undisclosed income for the previous year relevant to AY 2018-19

For AY 2018-19 the assessee e-filed her return on 31.10.2018 declaring income of Rs. 23,44,850/-. The case was selected for scrutiny. Statutory notices along with questionnaire were issued and complied with. The assessee submitted written reply and supporting documents before the Ld. Assessing Officer (“AO”) who completed the assessment on total income of Rs. 1,52,39,610/- including therein addition of Rs. 28,94,757/- on account of denial of exemption under section 54F claimed by the assessee and addition of Rs. 1 crore under section 69A of the Act being the amount surrendered by Shri Himanshu Mittal, son of the assessee during the course of survey

The assessee appealed before the Ld. CIT(A)

The Ld. CIT(A) applied the provisions of section 54F(1)(b) of the Act, and computed the exempt value of capital gain at Rs. 14,93,596/- as against the assessee’s claim of Rs. 28,94,757/- by recording his findings in para 6.4 to 6.8 as under

I have carefully perused the observation of the AO in the matter of disallowance of claim of exemption u/s 54F of .IT Act of Rs. 28,94,757/-. The AO observes that in the matter of claim of exemption u/s 54F, the payments towards new property have been made by SH. Sharad Chand Mittal (HUF), SH. Sharad Chand Mittal in his individual capacity and Sh. Himanshu Mittal along with the appellant, however the same is required to be made out of sales of the old property on which capital gain is derived. On the other hand, the AR submits that, the facts of the case are that the assessee had sold old property for a consideration of Rs. 58,50,000/- and computed LTCG of Rs. 28,94,757/- which was claimed exempt u/s 54F because assessee purchased a property on 19.09.2018. These facts are not in dispute since appellant purchased the property in her name and made the payment of Rs. 9,05,478/- from her account and the balance payment of Rs. 20,49,765/-was made by her husband on individual capacity and on the capacity of Karta of HUF and her son for purchase of new property. The AR submits that the disallowance of capital gain of Rs. 28,94,757/- is patently wrong since the new property has been purchased and the investment has been made in the name of the appellant. The appellant also submits that as per the provisions of section 54F of IT Act there is provision that the new asset should be purchased in the name of the appellant and the same has been done therefore underlying condition of benefit of exemption is duly fulfilled

From the facts of the case, it has been found that the appellant had sold immovable property on 03.03.2018 at Rs. 58,50,000/- and for computation of capital gain, she claimed Indexed Cost of Acquisition of Rs 29, 55,243/-, thus capital gain has been computed at Rs. 28,94,757/-. Further the appellant purchased a residential property vide sale deed dated 19.09.2018 and the payments for the same are made as under

Date	Amount	Remarks
17.10.2012	3, 28,000/-	Ch No 281071 by Sharad Chand Mittal HUF (Karta is Husband)
17.10.2012	4,21,000/-	Ch No 281070 by Sharad Chand Mittal HUF (Karta is Husband)
09.01.2013	4, 21,000/-	Ch No 15141 by Sh Sharad Chand Mittal (Husband)
18.01.2013	3,28,000/-	Ch No 285804 by Sh. Himanshu Mittal (Son)
19. 10.2016	6, 00, 000/-	Ch. No 106321 by Sh. Himanshu Mittal (Son)
21.05.2018	9,05,478/-	Ch No. 830172 by Smt. Anjali Mittal (Assessee)

From the above it is clear that the total payment of Rs. 30,03,478/- has been made which includes cost of new asset of Rs. 28,31,600/- as per sale deed dt. 19.09.2018 and stamp duty. These payments for purchase of property have been made by Sh. Sharad Chand Mittal (HUF), Sh. Sharad Chand Mittal and Sh. Himanshu Mittal along with the appellant

The appellant has relied on the decision of CIT vs Kapil Kumar Agarwal, (2016) 66 taxmann.com 191 (Punjab & Haryana) in which it has been observed that the assessee has to purchase or construct a house property during the period specified under Section 54F of the Act in order to get benefit there under. Section 54F of the Act nowhere envisages that the sale consideration obtained by the assessee from the original capital asset is mandatorily required to be utilized for the purchase or construction of a house property No provision has ‘been made by the statute that in order to avail benefit of Section 54F of the Act, the assessee has to utilize the amount received by him on sale of original capital asset for the purposes of meeting the cost of the new asset. Once that is so, the assessee was entitled for benefit under section 54F of the Act. Further reliance has been placed on the following decisions

Neelam Handa vs. 1TO; 1TA No. 384/Del/2016; (ITAT-Delhi)

ITO vs K.C Gopalan; (1999) 107 Taxman 591 (Ker)

Sunil Sachdeva vs. ACIT; ITA No. 4179/Del/2011 (ITAT Delhi)

From the careful perusal of the above judicial pronouncements, it can be seen that there is no limitation that only the sales proceeds of the original asset should be used for the purchase of the new asset to avail the benefit of exemption u/s 54F of IT Act. Therefore the benefit of exemption available u/s 54F of IT Act is allowed to the appellant

Observation of the court

We have carefully considered the rival submissions and perused the record. The case of the assessee during assessment and appellate proceedings was that no difference was found in the quantity of stock. The difference of stock mentioned by the Ld. AO was only due to the fact that the approved valuer valued the stock on the basis of market price whereas the assessee had valued the closing stock as per accounting policy, namely cost or realisable value whichever is lower which method the assessee had followed year after year consistently. Since it is not a case where excess stock in quantity was found in survey, difference on account of valuation cannot form the basis of any addition. The assessee had produced before the Ld. AO all the bills which constituted the stock as on the date of survey which has not been considered and reliance was placed on the value adopted by the approved valuer as prevailing on the date of survey. This approach is not correct

Before the Ld. CIT(A) the assessee challenged the authority of the son to the impugned surrender without her written authority and in her absence when she was hospitalised and her son too was under influence of medication. Copy of discharge summary of the assessee and medical prescription of her son was brought on record. During survey it was brought to the notice of the survey team that the assessee who actively looks after the affairs of business was not available owing to her ill-health and was admitted in hospital. On such facts and circumstances of the case, it can not be said that the surrender was voluntary and after due consultation with the assessee. Hon’ble Supreme Court has held in Khader Khan Son’s case (supra) that section 133A does not empower any Income Tax authority to examine any person on oath, hence, any such statement has no evidentiary value and any admission made during such statement cannot by itself be made the basis for addition. Moreover, the Ld. CIT(A) considered the statement of the son of the assessee recorded during survey and noticed that he had explained that the shortage in cash and cash found at the time of survey was due to the fact that all the entries in the account books were not written up to date. To our mind, the delay in retraction by the assessee as pointed out by the Ld. AO cannot be of much significance when admittedly the assessee did not declare the surrendered amount in the return filed by her on 31.10.2018 just after a few months of the survey. This is also indicative of the fact that the surrender was not voluntary and with the consent of the assessee. The CBDT circulars mentioned by the Ld. CIT(A) in para 7-8 of his appellate order emphasise that there should be no coercion to admit undisclosed income and that admissions should be backed by credible evidence. Facts reveal that during survey, element of coercion cannot be ruled out and credible evidence to support the surrender was also lacking. We, therefore, concur with the findings of the Ld. CIT(A) and reject ground No. 2

Ground No. 3 is of general nature not requiring adjudication

In the result, appeal of the Revenue is dismissed

Order pronounced in the open court on 6th April, 2023

Conclusion

In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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DCIT-Vs-Anjali-Mittal-ITAT-Delhi-2

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May, 6
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Capital Gain

Transfer of goodwill is not considered company income but rather a capital gain

Fact and issue of the case

Observation of the court

Conclusion

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Agricultural Land Stock Profit is Exempt, but Not Business Receipt: ITAT

Fact and issue of the case

Observation of the court

Conclusion

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Regardless of a controlling interest, shares held as investments are subject to the capital gains tax

Fact and issue of the case

Observation of the court

Conclusion

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When capital gains are taxed in a given year, ITAT directs AO to examine Section 54 Exemption Eligibility.

Fact and issue of the case

Observation of the court

Conclusion

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Wife’s mistakenly paid capital gain tax must be returned and reclaimed from the assessee

Fact and issue of the case

Observation of the court

Conclusion

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Land owned as an investment is taxable under the “capital gain” heading

Fact and issue of the case

Observation of the court

Conclusion

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Investment made in a new home within the delayed return due date is eligible for the Section 54F Exemption

Fact and issue of the case

Observation of the court

Conclusion

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Since no right, title, or interest in the property has been transferred, the amount is exempt from capital gains tax

Fact and issue of the case

Observation of the court

Conclusion

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The sale of a joint property cannot be used to credit a single co-owner with capital gains

Fact and issue of the case

Observation of the court

Conclusion

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Payment on behalf of the Assessee by the Husband & Son is qualified for the Section 54F exemption

Fact and issue of the case

Observation of the court

Conclusion

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