2015 (11) TMI 1272 - AT - Income Tax

Income from long term capital Gains - sale of agricultural land - chargeability to tax - Held that - The said agricultural land was although registered in the name of the assessee but the same was owned by the partnership firm MCS , the assessee being partner of MCS. The sale proceed of the said land was duly deposited in the bank account of the firm,MCS and the due taxes on capital gain arising from the sale of the said agricultural land being Gut no 405 in Village Bhukum , Taluka Mulshi , District Pune, Maharashtra have been duly paid to Revenue albeit by the partnership firm M/s Marine Container Services although it was technically registered in the name of the assessee. Thus, in nut shell, the assessee has brought on record cogent material to substantiate his contentions that the capital gain arising thereof from sale of the said agricultural land is chargeable to tax in the hands of the partnership firm MCS and the said firm has duly included the said capital gain in the income chargeable to tax and paid due taxes to the revenue. We have observed that no prejudice has been caused to the Revenue as the Revenue has got the due taxes although the same has been paid by the partnership firm MCS and the case of MCS was also processed by the Revenue under scrutiny u/s 143(2) read with Section 143(3) of the Act where by the assessing officer of the MCS has duly mentioned about the inclusion of afore-stated income from capital gain of ₹ 80 lacs earned by MCS in the total assessed income of MCS for assessment year 2009-10. Accordingly, we delete the addition of ₹ 76,57,948/- as made by the assessing officer and as confirmed by CIT(A). We order accordingly. Estimation of annual rental value of house property on notional basis by treating a single combined unit as two distinct properties - Held that - We have observed that the assessee is the owner of two adjoining flats which are used for residential purposes, the assessee is entitled for exemption u/s 23 of the Act with respect to one flat while the second flat shall be chargeable to tax as per provisions of section 23 of the Act. We have also observed that the assessing officer has brought to tax income from house property on ad- hoc basis without bringing on record any cogent evidence as to the prevailing market rent in the area for which the property is reasonably expected to be let out as per mandate of Section 23 of the Act. Hence, we restore this issue to the file of the assessing officer to determine the annual lettable value being income from house property with respect to one flat based upon the cogent evidence. Needless to mention, the assessing officer shall allow the assessee a reasonable opportunity of being heard in accordance with the principles of natural justice as enshrined in the doctrine of audi alteram partem.before computing annual lettable value of one flat as per Section 23 of the Act We order accordingly.

Summary

Issues Involved:
1. Addition of Rs. 76,57,548 towards income from long-term capital gains.
2. Taxation of notional income from house property amounting to Rs. 1,80,000.

Issue-wise Detailed Analysis:

1. Addition of Rs. 76,57,548 towards income from long-term capital gains:

The primary issue revolves around the addition of Rs. 76,57,548 towards income from long-term capital gains in the hands of the appellant. The Commissioner of Income Tax (Appeals) confirmed this addition, failing to appreciate that the property in question was not owned by the appellant but by a partnership firm, M/s Marine Container Services (MCS), in which the appellant was a partner. The payment for the purchase of the property was made from the firm's books and disclosed as an asset in its balance sheet. The sale and resulting capital gains were also disclosed in the firm's income tax return and assessed under section 143(3) in the firm's hands.

During the assessment proceedings, the appellant explained that the agricultural land was sold by MCS, and since the firm cannot hold land in its name under Maharashtra law, it was registered in the appellant's name on behalf of MCS. The sale proceeds were credited to MCS's bank account, and the capital gain was declared in MCS's revised income computation during its assessment proceedings. However, the assessing officer held that since the land was registered and sold in the appellant's name, the capital gain was chargeable to tax in the appellant's hands.

Upon appeal, the CIT(A) rejected the appellant's contention, noting that the sale agreement was in the appellant's name, the firm was not mentioned in the sale deed, and the sale proceeds given to the firm would only increase the partner's capital balance. The CIT(A) also pointed out that the land, being agricultural, could not be owned by a firm in Maharashtra, and there was no separate listing of the land in the firm's balance sheet. Furthermore, the capital gain was not disclosed in the firm's original return but only in a revised return filed during scrutiny proceedings.

The appellate tribunal, however, observed that the land was owned by MCS, and the sale proceeds were deposited in the firm's bank account. The capital gain was included in the firm's income, and taxes were duly paid. The tribunal concluded that no prejudice was caused to the revenue as the due taxes were paid by MCS, and thus, the addition of Rs. 76,57,948 was deleted.

2. Taxation of notional income from house property amounting to Rs. 1,80,000:

The second issue pertains to the assessment of notional income from house property. The appellant owned two adjoining flats, which were treated as a single combined unit. The appellant claimed interest paid on the housing loan as a loss under income from house property. The assessing officer, however, treated the two flats as distinct properties and brought to tax the notional rental income of Rs. 1,80,000 for one of the flats, while allowing the benefit of statutory deduction for repair and maintenance and interest paid on the housing loan.

The CIT(A) upheld this view, stating that the appellant could treat only one flat as self-occupied, and the second flat had to be treated as deemed to be let out.

Upon appeal, the tribunal noted that the two adjoining flats were used for residential purposes by the appellant. The tribunal observed that the assessing officer had brought the notional rent to tax on an ad-hoc basis without any evidence of the prevailing market rent. Therefore, the tribunal restored the issue to the assessing officer to determine the annual lettable value based on cogent evidence, ensuring the appellant is given a reasonable opportunity of being heard.

Conclusion:

The tribunal partly allowed the appeal, deleting the addition of Rs. 76,57,948 towards long-term capital gains and remanding the issue of notional rental income back to the assessing officer for re-evaluation based on evidence. The order was pronounced in the open court on September 28, 2015.