2010 (10) TMI 1108 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of bogus purchases.
2. Tax treatment of surplus from transfer of plots to Satyam Builders and Brahma Builders.
3. Year of taxability for surplus from transfer of plots.
4. Tax treatment of surplus received for return of land to Waghire.

Detailed Analysis:

1. Disallowance of Bogus Purchases:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance of Rs. 41,28,262/- made by the Assessing Officer (AO) on account of bogus purchases to 50%. The AO noted that the assessee failed to produce bills and vouchers for verification, leading to the determination of bogus purchases. The CIT(A) restricted the disallowance to 50%, considering the necessity of expenses for business operations. However, the Tribunal found that the CIT(A) did not provide sound reasoning for the 50% allowance and emphasized that the onus is on the assessee to prove the genuineness of expenditures. The Tribunal modified the disallowance to 75% instead of 50%, partly allowing the Revenue's appeal.

2. Tax Treatment of Surplus from Transfer of Plots:
The Revenue contested the CIT(A)'s decision to treat the surplus from the transfer of plots to Satyam Builders (Rs. 3,19,97,000/-) and Brahma Builders (Rs. 3,07,81,300/-) as "capital gains" instead of "business income." The AO argued that the land acquired by the assessee, a developer, was a business asset and thus the surplus should be taxed as business income. The CIT(A) held that the land was a capital asset, noting that the assessee's intention was investment, not development, and that the land was subject to various legal and regulatory constraints. The Tribunal disagreed, highlighting that the land was acquired for development purposes and the transactions were business activities. The Tribunal concluded that the surplus should be treated as business income, setting aside the CIT(A)'s order.

3. Year of Taxability for Surplus from Transfer of Plots:
The Revenue also challenged the CIT(A)'s decision on the year of taxability for the surplus from the transfer of plots. The CIT(A) held that the surplus should be taxed in the year when the agreement is fully executed or when the last installment is received. The Tribunal found that the agreements were registered and possession was given during the relevant assessment year. Since the assessee follows the mercantile system of accounting, the income should be taxed in the year the agreements were executed. The Tribunal upheld the AO's decision to tax the surplus in the impugned assessment year.

4. Tax Treatment of Surplus Received for Return of Land to Waghire:
The Revenue disputed the CIT(A)'s decision to treat the surplus of Rs. 49,03,620/- received from Waghire as a capital receipt. The AO had taxed it as business income, noting that the assessee, a developer, returned the land as part of its business activities. The CIT(A) accepted the assessee's argument that the surplus was compensation for relinquishing legal rights and should be treated as a capital receipt. The Tribunal, however, held that the compensation was for the loss of future profits and should be considered revenue in nature. The Tribunal set aside the CIT(A)'s order and upheld the AO's treatment of the surplus as business income.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, modifying the disallowance of bogus purchases to 75%, treating the surplus from the transfer of plots as business income, and confirming the taxability of the surplus in the relevant assessment year. Additionally, the Tribunal held that the surplus received for the return of land to Waghire should be treated as business income.