IN THE ITAT PANAJI BENCH
Mavany Bro.
v.
Deputy Commissioner of Income-tax, Circle-1, Panji, Goa
DR. SATISH CHANDRA, JUDICIAL MEMBER
AND B.R. KAUSHIK, ACCOUNTANT MEMBER
IT APPEAL NO. 24 (PANJ) OF 2005
[Assessment year 1996-97]
January 15, 2007
Section 48 of the Income-tax Act, 1961 - Capital gains -
Computation of - Assessment year 1996-97 - Two members of a family owned a
building - Dispute arose between said two members which was resolved by a
family settlement in terms of which 70 per cent of property was allocated to
one legal heir of a member and 30 per cent of property was allocated to six
legal heirs of other member - Those seven persons constituted assessee-firm
determining share ratio in proportion to their rights in property - On same
day, assessee-firm transferred said property for remodeling to a developer who
was to pay Rs.66 lakhs to assessee and 35 per cent of developed property in
lieu of 65 per cent developed property to be retained by it - Amount of Rs. 66
lakhs was taken by 6 partners for retirement from partnership - Assessing
Officer took proportionate cost of construction for 35 per cent of total
constructed area to be given to assessee in addition to Rs. 66 lakhs as total
sale consideration and after deducting therefrom cost of 65 per cent of land
area transferred to developer, determined capital gain - Assessee’s claim that
Rs. 66 lakhs paid to six partners for acquiring their 30 per cent share in
property should be considered as cost of property while determining capital
gain was rejected by Assessing Officer, holding that it was internal
arrangement of firm - Whether on facts, computation of capital gains by
Assessing Officer was justified - Held, yes
FACTS
The Assessing
Officer reopened assessee-firm’s assessment on the ground that it did not
declare the capital gains on a theatre/cinema building transferred to a
developer for converting the same into a commercial complex under a contract
for Rs.66 lakhs in addition to 35 per cent of the developed area received by
the assessee in lieu thereof. Earlier, the said property, which belonged to two
members of one family, became the subject matter of dispute between the two
members ‘L’ and ‘T’ and the same was resolved by their legal heirs as per the
family settlement reached on 8-8-1995 in terms of which 70 per cent of the
share of the building of cinema theatre was allocated to a legal heir of late L
and 30 per cent of shares were allocated to six legal heir of late T. On the
same day, the assessee-firm was constituted by those seven persons and the
property in question was transferred to the developer for remodeling. While
determining the capital gain, the
Assessing Officer obtained the details from the developer regarding the cost of
construction of the project and since the assessee had received 35 per cent of
the total constructed area, the proportionate amount of Rs. 50,75,000 in
addition to Rs. 66,00,00 was considered the total consideration for the
transfer of 65 per cent of the land area of the aforestated building to the
developer and taking the cost as per inflated index for the 65 per cent of the
land transferred to the developer at Rs. 44,46,825, the capital gain was
determined at Rs. 72,46,825. The assessee’s claim that Rs. 66 lakhs paid to six
legal heirs of late ‘T’ for acquiring their 30 per cent rights in the property
in question should be considered as the cost of the property while determining
the capital gains, was rejected by the Assessing Officer, holding that it was
internal arrangement of the firm and application of the fund received by it
from the developer as part of the transfer consideration. On appeal, the
Commissioner (Appeals) confirmed the impugned action and upheld the reopening of
the assessment under section 147.
In the instant
appeal, the assessee contended that the Assessing Officer estimated the
construction cost on enquiry which was extraneous to the fact before him and no
adequate opportunity was given by him on that point ; that there could not be
any tax implication or transfer in view of the family settlement ; and that the
developer had a vested interest in over-stating the high construction cost
inasmuch as the same would reduce its tax liability. The assessee also objected
to the reopening of the assessment on the ground that the confidential report
for forming the belief for reopening was not made available to it.
HELD
The reasons
recorded before issuing notice under section 147 were duly supplied and the
Assessing Officer had sufficient material to arrive at the belief that the
income had escaped the assessment. The objections of the assessee had no merits
and the validity of the assessment was to be upheld. [
(1) The
theatre property was transferred to the developer as per agreement dated
8-8-1995 in view of the provisions of section 2(47) because the developer was
given a right to demolish the existing structure of the cinema hall and carry
out the development and construction work for the new commercial complex ; (2) the property was transferred by the
assessee constituted on 8-8-1995 for a consideration of Rs. 66 lakhs as initial
payment and 35 of the newly constructed premises ; (3) the payment of Rs. 66
lakhs to the outgoing partners being the legal heirs of late ‘T’ was only an
application of the funds receivable by the assessee as part of the contract to
transfer property and direct payment of the amount by the assessee to those
partners was on behalf of the assessee because the amount was duty entered into
its books of amount ; (4) the capital gain was, therefore, liable to be assessed
in the hands of the assessee as on 8-8-1995 i.e.
the date of transfer which was relevant to the previous year 1995-96 and the
assessment year 1996-97; (5) the payment of Rs. 66 lakhs to the outgoing
partners could not be considered as cost of the property because the amount was
paid to them at the time of their retirement in lieu of their shares of profit and the claim of the assessee that it
was a part of the family arrangement was of no relevance because a valid
partnership was constituted on 8-8-1996 and the said property was shown as its
asset and the outgoing partners were paid the amount of Rs. 66 lakhs on their
retirement from the firm ; (6) even if it was clear from the legally
constituted firm on 8-8-1995, the contract entered between the developer and
the firm on 8-8-1995 itself and the immediate retirement of the partners
belonging to late ‘T’ group and reconstitution of the firm, that the family
members had entered into an arrangement but the assessee could not be allowed
to take advantage of its own arrangement and defeat the purpose of law by
claiming otherwise having faced with the tax liabilities ; (7) the cost of
construction was rightly worked out by the Assessing Officer and correctly
confirmed by the Commissioner (Appeals); (8) the submission of the assessee
that Rs. 66 lakhs should be allowed as the cost of construction could not be
accepted because had the firm not been the owner of the property and the
transfer could have been without constitution of a firm as per the agreement
dated 8-8-1995, the respective owners would have required to bear the capital
gain on the share of their transfer consideration ; (9) the assessee itself had
admitted that the firm came into existence on 8-8-1995 by the deed of
partnership whereby the cinema theatre became its asset and it was also admitted that Rs. 66
lakhs were paid to the outgoing partners on their retirement. The assessee
could not, therefore, be allowed to claim that the payment of Rs. 66 lakhs was
for the purchase of 30 per cent shares of the heirs of late ‘T’ ; (10) the cost
of construction was certified by the developer and even if the claim of the
assessee that no proper opportunity was given in that regard by the Assessing
Officer was considered to be correct, adequate opportunity were allowed by the
Commissioner (Appeals) in exercise of his coterminus powers and the assessee
could not successfully challenge the cost of construction. The cost of
construction as certified by the developer could not be rejected merely on the
basis of self-serving statement that said developer had inflated the cost in
order to reduce its tax liability, because the assessee had failed to give any
evidence in support of its submission and successfully challenge the cost so
certified ; (11) the cost of acquisition taken by the lower authorities had
also not been successfully challenged.
[
Therefore,
there was no reason to interfere with the decision of the Commissioner
(Appeals). [
As a result,
the appeal of the assessee was to be dismissed. [