2010 (5) TMI 575 - AT - Income Tax

Addition - Rs. 1.73 crore under the head business income - Addition towards the value of 7,707 sq.ft. representing shops/flats at the rate of Rs. 2,250 per sq.ft. on the basis of statement of Shri Mohan Singhani, one of the continuing partners of the firm - The learned CIT(A) held that this addition was not sustainable on the ground that the income would be assessed in future years depending on the handing over of possession of 7,707 sq.ft. of built up area to the assessee and its subsequent sale. The learned A.R. has filed an application under Rule 27 of the ITAT Rules, 1963 contending that the learned CIT(A) failed to consider the correct valuation and area allocable. In support of his application, the learned A.R. put forth that the first appellate authority had not given any decision on the correct area and the aspect of valuation in view of his decision that income on this account would arise only when property is handed over to the assessee or subsequently sold. It was, therefore, contended that no addition be made in this year on account of the value of shops/flats and in the years of sale by the assessee, the correct area and value be directed to be considered - Appeal is partly allowed

Summary

Issues Involved
1. Deletion of addition of Rs. 1,73,45,250 on account of value of immovable property as consideration on transfer of development rights.
2. Whether the assessee's admission to and retirement from the partnership firm was genuine or a ploy.
3. Head under which the income from the transaction is taxable.
4. Computation of business income.
5. Deletion of addition of Rs. 4.10 lakhs and restricting disallowance to Rs. 90,000 in respect of consultancy charges.

Issue-wise Detailed Analysis

1. Deletion of Addition of Rs. 1,73,45,250
The revenue challenged the deletion of Rs. 1,73,45,250 by the Commissioner of Income-tax (Appeals) (CIT(A)). The assessee, a developer, was involved in a partnership and retired within 11 days, receiving Rs. 54.25 lakhs and rights to 7,707 sq.ft. of property. The Assessing Officer (AO) added Rs. 1,73,45,250 based on estimated property value, but the CIT(A) held that taxability should arise only when the property is handed over, not before. The Tribunal found the assessee's admission and retirement from the firm to be a ploy to defer tax liability and held that the entire consideration, including the value of the property, should be taxed in the current year.

2. Whether Assessee's Admission to and Retirement from Firm was Genuine or Ploy
The Tribunal found that the assessee's quick admission and retirement from the partnership firm was not genuine. The stamp papers for the retirement deed were purchased on the same day the partnership was formed, indicating a pre-planned transaction. The Tribunal concluded that this was a device to defer tax liability, and the real transaction was the sale of development rights in the Ghatkopar plot.

3. Head Under Which Income is Taxable
The assessee offered Rs. 30,61,451 as business income, but argued that Rs. 30 lakhs should be taxed as capital gains. The AO added Rs. 1.73 crore under business income, and the CIT(A) divided the income into business income and capital gains. The Tribunal, however, held that since the rights in the Ghatkopar plot were stock-in-trade, the entire income should be taxed as business income, not capital gains.

4. Computation of Business Income
The AO valued the 7,707 sq.ft. property at Rs. 2,250 per sq.ft., based on statements from the continuing partners, and added Rs. 1.73 crore to business income. The CIT(A) held that this addition was premature and should be taxed when the property is handed over. The Tribunal disagreed, stating that the income accrues when the right to receive is acquired, not when it becomes due. The Tribunal upheld the AO's valuation and area computation, rejecting the assessee's contention for lower valuation based on subsequent sales.

5. Deletion of Addition of Rs. 4.10 Lakhs and Restricting Disallowance to Rs. 90,000
The AO disallowed Rs. 5 lakhs in consultancy charges, claiming it should be capitalized as pre-operative expenses. The CIT(A) reduced this to Rs. 90,000, allowing Rs. 4.10 lakhs as deductible. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had discharged the liability and the amount pertained to the year in question.

Conclusion
The Tribunal partly allowed the appeal, holding that the entire income from the transaction should be taxed as business income in the current year and upholding the CIT(A)'s decision on consultancy charges. The Tribunal found the assessee's partnership transactions to be a ploy to defer tax liability and upheld the AO's valuation of the property.