2004 (3) TMI 771 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of capital gains taxed by the AO.
2. Consideration of the difference in the rate of interest as deemed consideration.
3. Applicability of Sections 45 and 48 of the IT Act.
4. Determination of the reasonableness of the interest rate.
5. Allegation of the lease agreement as a device to evade tax.

Issue-Wise Detailed Analysis:

1. Deletion of Capital Gains Taxed by the AO:
The primary issue in this case was whether the CIT(A) erred in deleting the capital gains of Rs. 51,39,366 taxed by the AO. The AO had taxed the capital gains by treating the difference in the rate of interest as deemed consideration. The CIT(A) held that the concept of adopting the full value of consideration was not applicable to bona fide transactions unless it was shown that the consideration mentioned in the deed had been understated and the assessee had actually received more than what was stated in the document.

2. Consideration of the Difference in the Rate of Interest as Deemed Consideration:
The AO considered the long-term lease of the land as covered by the definition of 'transfer' under Section 2(47) of the IT Act. The AO stated that the assessee received Rs. 2.5 crores as a deposit at a concessional rate of interest of 9% per annum, whereas the normal market rate was 18%. The AO worked out the concessional interest on the deposit and considered it as deemed consideration for the lease. However, the CIT(A) observed that the AO had not analyzed the object of the deposit, nature of the transaction, and the relationship between the parties before concluding that the 9% rate was concessional. The CIT(A) opined that the amount of deposit, period of deposit, and annual rent were pertinent factors to judge the reasonableness of the interest rate.

3. Applicability of Sections 45 and 48 of the IT Act:
The AO computed the capital gains by considering the differential interest as deemed consideration, but the CIT(A) held that the provisions of Sections 45 and 48 could not be invoked on assumptions and presumptions. The CIT(A) emphasized that the charging Section 45(1) could not be construed as a deeming provision but must be strictly interpreted to charge capital gains tax based on statutory legal fiction. The CIT(A) also pointed out that the full value of consideration, which had not been shown to have actually received or accrued to the assessee, could not be computed.

4. Determination of the Reasonableness of the Interest Rate:
The CIT(A) mentioned that the deposits were in the nature of security deposits and the interest was on the refundable advance taken by the assessee for the performance of the agreement. The CIT(A) stated that the refundable advance deposit of Rs. 2.5 crores was almost equal to the value of the land, suggesting that the deposit was not unreasonable as a security deposit. The CIT(A) concluded that the low rate of interest agreed upon between the parties could not by itself cause the provisions of Sections 45 and 48 to be invoked.

5. Allegation of the Lease Agreement as a Device to Evade Tax:
The AO alleged that the lease agreement was a device to evade tax. However, the CIT(A) stated that the AO was duty-bound to unveil the device and determine the true character of the transaction from the documents or the conduct of the parties. The CIT(A) noted that the AO had not gathered any evidence or material to support the finding that the lease agreement was a device to evade tax. The CIT(A) concluded that the transaction was bona fide and the consideration mentioned in the lease deed was genuine.

Conclusion:
The Tribunal upheld the order of the CIT(A), stating that the AO's working was based only on assumptions and presumptions and not on factual positions. The appeal was dismissed, confirming that the differential interest could not be considered as value of consideration for the transfer of the capital asset.