2010 (1) TMI 1222 - AT - Income Tax

Summary

Issues involved:
Confirmation of disallowance of cost of construction, applicability of section 2(47) of the Income Tax Act, and direction for reassessment for Assessment Year 2001-02.

Confirmation of disallowance of cost of construction:
The appellant entered into an agreement with a sister concern for the development of immovable property, where the appellant had a 1/4th share. The Assessing Officer disallowed the excess apportioned cost of the project, amounting to Rs. 1,44,98,140, based on the terms of the agreement and the perceived non-profitable nature of the venture. The appellant contended that the allocation of expenses was in accordance with the agreement and the rejection of accounts was unjustified. The CIT (A) upheld the disallowance, citing the provisions of section 2(47) of the Act and the relinquishment of control by the appellant over the property and construction activities. The Tribunal, after considering the submissions, found in favor of the appellant, stating that the profit sharing at 20% instead of 25% was reasonable and commercially viable, given the circumstances of the agreement and project development.

Applicability of section 2(47) of the Income Tax Act:
The CIT (A) held that the transaction between the appellant and the co-developer constituted a sale under section 2(47) of the Act, affecting Assessment Year 2001-02. However, the Tribunal disagreed, noting that the ownership rights remained with the appellant until the project's completion and that the agreement for joint development was genuine. As the asset was stock-in-trade and income was offered under the head of "profits and gains of business or profession," the provisions of section 2(47) were deemed inapplicable. The Tribunal set aside the CIT (A)'s findings and directions for reassessment for Assessment Year 2001-02.

Conclusion:
The Tribunal allowed the appeal of the assessee, overturning the disallowance of cost of construction and rejecting the applicability of section 2(47) of the Income Tax Act. The directions for reassessment for Assessment Year 2001-02 were quashed, and the Tribunal directed the Assessing Officer to accept the profit shown by the assessee.