Income cannot be excluded from taxation by an internal arrangement

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘E’: NEW DELHI)

BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER

And

SHRI T. S. KAPOOR, ACCOUNTANT MEMBER

ITA No.5668/DEL/ 2012

(Assessment Year: 2009-10)

ACIT

Circle-1

Meerut

(APPELLANT)

Vs.

Mukesh Rastogi

S/o Parmanand,

32, Janta Nagar, Garh Road

Meerut

PAN: AANPR7714F

 (RESPONDENT)

REVENUE BY: Mrs. A. S. Awasthi, Sr.DR.

ASSESSEE BY: Shri R. K. Garg, Adv.

ORDER

PER T. S. KAPOOR, AM

This is an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) Meerut dated 08.08.2012 for the assessment year 2009-10. The grounds taken by the Revenue are as under:

“1. Whether in the facts and circumstances of the case the Ld. CIT (A) has erred in law in deleting the addition of Rs.45,72,000/- on a/c of long term capital gain ignoring the fact mentioned in the sale deed that the assessee was co-owner of the properties sold by him with M/s Amit Kumar HUF.

2. Whether in the facts and circumstances of the case the Ld. Commissioner of Income Tax (appeals) has erred in law in not considering the Assessing Officer’s finding that merely by entering into an MOU or filing affidavit the fact of assessee’s ownership over the property by way of registered sale deed could not be changed or altered nor it could be treated that the assessee had no interest in the sold properties which were not only jointly held by the assessee but he was also duly and admittedly receiving the rent there from an MNC.

3. Whether the Ld. CIT (A) has erred in law in ignoring that any income cannot be excluded from taxation by an internal arrangement like executing an MOU between two parties or filing affidavit which are nothing but of self serving nature whereas the properties were jointly owned by the assessee as per registered sale deeds and the income out of sale of the same was statutorily and proportionately taxable in the hands of the assessee.

4. Whether the Ld. CIT (A) has erred in law in discarding the ownership of the assessee based upon the registered sale deed merely on the flimsy grounds of entering into an MOU and filing an affidavit which had no legal sanctity but merely a colorable device for avoidance of tax as held in Mcdowell and Co. Ltd. Vs. CTO (1985) 154 ITR 148 (SC)- since in accordance to a legal registered sale deed the sale is transferred as of property as envisaged under the Transfer of Property Act on which the provisions of long term capital gain shall apply in case of the real owner(s) of such property irrespective of any colorable arrangement entered into between them.

5. That the appellant craves leave to add, modify and/or delete any ground(s) of appeal.

6. In the facts and circumstances of the case, the order of the CIT (A) may be set aside and that of the Assessing Officer restored.”

2. The brief facts of the case are that return of the assessee was selected for scrutiny. The assessee had declared income from house property, share of profit, remuneration from one firm and income from other sources. In this case AIR information was received that assessee had purchased two immovable properties for Rs.22,40,000/- and Rs.72,90,000/- respectively.

On questioning the assessee vide reply dated 22.11.2011 stated that he did not purchase any such properties. In the meantime information was also called from the Sub Registrar Office, Meerut. Sub Registrar Meerut vide his letter dated 26.11.2011 furnished copies of two sale deeds of flats executed by the assessee on 08.05.2008 and 10.07.2008 for Rs.15,00,000/- each and it was stated that assessee had not purchased any property but had executed sale of these two flats. The Assessing Officer observed that assessee had not declared sale of these two flats in his return of income. Therefore, he show caused the assessee as to why the sale consideration of above said properties should not be considered for taxation in his hands. The assessee in his reply submitted that he had no direct or indirect interest in the above properties as no part of sale consideration was received by him and he was made a party to the transaction for the satisfaction of the buyer only. The Assessing Officer observed that the name of assessee was there in the sale deed and as joint owner there was no mention in the sale deed that the property belonged to M/s Amit Kumar HUF only as claimed by the assessee. The Assessing Officer further observed the circle rates of these properties was different than the amounts for which sale deeds were executed and therefore applying the provisions of section 50C he took the circle rates for calculation of capital gain in the hands of assessee. While making calculations the Assessing Officer did not reduce cost of property or indexed cost of property as the cost of acquisition was not provided to the Assessing Officer and since percentage of share in the properties sold were not mentioned in the sale deed, therefore, he took 50% of deemed sale consideration as capital gain earned by the assessee.

3. Dissatisfied with the order, the assessee filed appeal before CIT (A) and submitted as under:

“That the appellant had purchased certain lands, jointly with M/s. Amit Kumar HUF, in financial year 2005-06 and the total area of land was about 2049 sq. yards, which was purchased vide six different ‘sale deeds’. The appellant was a joint owner in only two ‘sale deeds’ and his share were about 367 sq. yards which is approximately 1/6th of total land area. That the entire land was developed and constructed as residential as well as commercial complex by M/s Amit Kumar HUF and during construction period there were certain disputes

between appellant and M/s Amit Kumar HUF and to avoid litigation and buy peace of mind a MOU dated 18.07.2007 was signed between the two parties. That vide this MOU the two parties had physically divided the constructed properly two with the intention that both the parties shall have certain specified portion in the whole complex and they shall negotiate, sell, hold the same in future and shall not inter-fear in each other’s specified portions.

That Shri Amit Kumar HUF sold two flats from their portion in the complex during the year for a total consideration of Rs.30,00,000/-. As per the terms of the MOU appellant had signed

these ‘Sale Deeds’ to facilitate the transfer and just for the satisfaction of buyer.

That the entire sale consideration was received by Shri Amit Kumar HUF and was included in his gross income for the purpose of calculation of taxable income. An affidavit of M/s Amit Kumar HUF was also filed at the time of assessment proceedings stating and affirming the above facts.”

4. The Ld. CIT (A) after obtaining the remand report from Assessing Officer and after going through the submissions deleted the addition made by Assessing Officer by holding as under:

“I have considered the Assessing Officer’s order, Assessing Officer’s remand report, AR’s rejoinder and plethora of documents placed on record. The following facts unmistakably emerge:

i. The appellant had purchased certain lands jointly with M/s Amit Kumar HUF, a builder, in financial year 2005-06. Appellant’s share in the total land purchased was 1/6th.During the period of construction the appellant and Shri Amit Kumar HUF entered into an MOU dated 18.07.2007 to avoid disputes and litigation. By the MOU the two parties divided the entire property between themselves. As per clause 6 of the MOU both parties were free to sell, let out or transfer in any manner their property out of their portion and both of them were bound to agree and sign the sale deed/ transfer deed/ lease deed etc. of the property of each other. This was, as stated, necessitated due to ownership of the title deeds of entire land on which a big complex was constructed.

ii. M/s. Amit Kumar, HUF has clarified in his affidavit dated 15.12.2011 that he sold two flats for Rs.15 lakhs each out of his portion of property. The entire sale proceeds were received by cheque by him and nothing was received or receivable by Shri Mukesh Rastogi. M/s Amit Kumar HUF declared the profits arising from these sale transactions in his return for A. Y. 2009-10 filed with ITO, ward 1(1), Meerut with PAN AAFHA02409.

iii. On a consideration of all relevant facts, it emerges that the appellant had no beneficial interest in the two properties sold. He was only a signatory on the sale-deed for reasons more than duly clarified through the MOU referred to above. Entire sale proceeds were received by cheques by Shri Amit Kumar HUF. The profit arising from the sale transactions were declared by Shri Amit Kumar HUF in his return of income for A. Y. 2009-10. The Assessing Officer has not brought anything on record which could show that the appellant had any beneficial interest in the two properties sold.”

5. Aggrieved, the Revenue is in appeal before us. At the outset, the Ld. Departmental Representative submitted that Ld. CIT (A) has ignored the owner ship of land which was in the name of the assessee through a registered purchase deed. It was contended that Ld. CIT (A) had ignored these facts and have relied upon a memorandum of understanding entered into between these two parties, which was not a registered document and it was merely a device to avoid taxes under transfer of property Act and under Income Tax Act and hence CIT (A)’s order should be set aside.

6. The Ld. AR on the other hand explained the facts of the case and invited our attention to page 12 of paper book where a complete break up of various pieces of land purchased by assessee along with Shri Amit Kumar HUF and those purchased by Shri Amit Kumar HUF individually were placed. Our attention was also invited to memorandum of understanding dated 18.07.2007 placed at paper book page 8 to 11 and on the strength of MOU along with division of constructed area between the parties as placed on paper book page 12, the Ld. AR argued that constructed property was divided and as per this division the flats sold had become the property of Shri Amit Kumar HUF and signature of assessee were taken on sale deeds just for the satisfaction of buyer. It was further submitted that total sale consideration was declared by Shri Amit Kumar HUF in his return of income and in this respect our attention was invited to paper book page 13 to 14 wherein a copy of an affidavit of Shri Amit

Kumar HUF was placed. In view of the above, facts and circumstances, it was argued that Ld. CIT (A) has gone through all these facts and, therefore, had deleted the addition.

7. We have heard the rival parties and have gone through the material placed on record. From paper book page 12, we observe that in all there was a total land measuring 2049 sq. yards out of which on a land measuring 734 sq. yards share of assessee was 50% and, therefore, the

share in total land worked out to be 1/6th to assessee and remaining 5/6th to Shri Amit Kumar HUF. As per MOU dated 18.07.2007 placed at paper book page 8 to 11, the assessee was entitled to the following properties:

1) One hall measuring 1830 sq. fit on plot no.323 on land owned by assessee.

2) Two flats of 1625 sq. fit each on ground floor and first floor on land owned by Shri Amit Kumar HUF.

8. The rest of the property came towards the share of other person which included flats out of which two were sold during the year. As per clause 5 of such MOU expenditure on construction already incurred or to be incurred was to be shared between the assessee and other parties as 1/6^th and 5/6th respectively. However, the assessee has submitted an affidavit of Shri Amit Kumar HUF placed at paper book page 13 and 14 wherein vide clause 5. M/s Amit Kumar HUF has stated that all construction cost was borne by him, which is contrary to the terms and conditions of division as arrived at through MOU dated 18.07.2007. Moreover, the MOU entered into between parties is not a registered document and neither any decree was taken from a court for division of the properties. Further in the sale deeds of flats executed by assessee and other party Shri Amit Kumar HUF, there is no mention of the fact of any memorandum of understanding reached out between assessee and other party which could have clarified the facts. Since, there is violation of the terms and conditions of MOU as

assessee did not contribute anything towards cost of construction as per affidavit of Shri Amit Kumar HUF, whereas he had to bear 1/6th of cost therefore, MOU cannot be relied upon specifically in the absence of it being unregistered and its terms not been complied with by the parties. Though the assessee has submitted copies of form no.16A regarding rent income in respect of hall which came as his share but in the absence of validity of MOU, these cannot be accepted, as the assessee might have created all these ways and means to avoid taxes under Transfer of Property Act and under Income Tax Act.

9. The Assessing Officer has also not given benefit of cost of acquisition and indexation thereof and has taken 50% share as belonging to assessee without considering the entire facts and circumstances of the case. Therefore, in the interest of justice, we are of the opinion that Assessing Officer should readjudicate on the above case by investigating all relevant facts and circumstances and arrive at the amount of correct capital gain if any. Needless to say that assessee will be provided reasonable opportunity of being heard.

In view of the appeal filed Revenue is allowed for statistical purposes.

Order pronounced in Open Court on 5th /07/ 2013

Sd/- Sd/-

(Rajpal Yadav) (T.S. Kapoor)

Judicial Member Accountant Member

Dated the 5th day of July, 2013

S.Sinha

Copy forwarded to:

1. APPELLANT

2. RESPONDENT

3. CIT

4. CIT (A)

5. CIT (ITAT), New Delhi.

AR, ITAT

NEW DELHI.