2017 (1) TMI 1765 - AT - Income Tax

Disallowance u/s.14A r.w. Rule 8D of the I.T. Rules - Sufficiency of own funds - HELD THAT - Since in the instant case admittedly the own capital of the assessee is much more than the investment towards capital in the partnership firms and shares of Indian Companies the income of which is exempt from tax, therefore no disallowance u/s.14A in the instant case is called for. We, therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the disallowance made by him u/s.14A of the I.T. Act. Ground raised by the revenue is accordingly dismissed and the ground raised by the assessee on this issue is allowed. Addition of capital gain - transfer of the capital asset and performance of various obligations - Co-ownership in asset - HELD THAT - Admittedly the assessee along with other co-owners was having land admeasuring 70 acres situated at Wagholi and was not having 108 acres of contiguous land that had been agreed upon to be sold at the relevant time. Further the sale deed contained certain obligations on the part of the assessee and the co-owners to be fulfilled and the assessee has received only 50% of the consideration during the impugned assessment year. We find from the letter addressed by Mr. Atul Chordia, Director of Wagholi Properties Pvt. Ltd.,in response to notice u/s.226(3) for recovery of dues in case of the assessee, he has categorically stated that the balance amount of ₹ 17.01 crores is payable only after fulfillment of certain conditions mentioned in the agreement. In our opinion, the contents of the agreement has to be read as a whole and the revenue cannot re-write the agreement. As in the instant case the right to receive the consideration is on fulfillment of certain obligations. Further, the assessee has offered the balance amount to tax in A.Y. 2014-15 as business income - we are of the considered opinion that assessee is liable to capital gain tax only on 50% of the consideration that has been received during the year. We, therefore, set aside the order of the CIT(A) and allow the grounds raised by the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
2. Addition of capital gains in respect of the transfer of land.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules:
The primary issue pertains to the disallowance of ?68,86,009 made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules. The assessee, engaged in the business of builders, promoters, and developers, filed a return declaring a total income of ?8,55,29,700. During the assessment, the AO observed substantial investments yielding exempt income, primarily from shares and partnership firms. The AO was not satisfied with the assessee's explanation that interest-free funds exceeded the investments and invoked Rule 8D to disallow ?68,86,009, considering the interest of ?2,30,08,188 (?2,26,91,805 + ?3,16,383).

Upon appeal, the CIT(A) partially agreed with the AO but reduced the disallowance to ?10,53,815, citing that the capitalized interest related to land purchases should not be included. The Tribunal found merit in the assessee's argument that own capital and free reserves exceeded the investments and ruled that no disallowance under Section 14A was warranted. The Tribunal directed the AO to delete the disallowance, thereby allowing the assessee's appeal and dismissing the revenue's appeal.

2. Addition of Capital Gains in Respect of Transfer of Land:
The second issue involves the addition of capital gains amounting to ?12,15,54,375 related to the transfer of land situated at Gat No.1277 & 1278, Village Wagholi, Pune. The AO noted that the assessee, along with co-owners, sold 70 acres of land for ?1,75,80,04,250 but considered only ?12,15,54,375 for capital gains computation, arguing that the balance was contingent on fulfilling certain obligations.

The AO rejected the assessee's claim, asserting the entire sale consideration should be taxed as capital gains. The CIT(A) upheld this view, emphasizing that the sale deed was registered, possession transferred, and full consideration shown for stamp duty purposes. The CIT(A) dismissed the assessee's argument that the transaction had two limbs: transfer of land and performance of obligations.

On appeal, the Tribunal found force in the assessee's argument that the right to receive the balance amount was contingent upon fulfilling specific obligations. Citing the Bombay High Court's decision in CIT Vs. Mrs. Hemal Raju Shete and the Supreme Court's ruling in CIT Vs. Hindustan Housing and Land Development Trust Ltd., the Tribunal concluded that the capital gains should be taxed only on the amount received during the year. The Tribunal set aside the CIT(A)'s order, directing that only 50% of the consideration received be taxed as capital gains, thereby allowing the assessee's appeal.

Conclusion:
The Tribunal ruled in favor of the assessee on both issues. It directed the deletion of the disallowance under Section 14A and limited the capital gains tax to the amount received during the year, contingent upon the fulfillment of specific obligations. The Tribunal's decision underscores the importance of considering the entirety of contractual obligations and the actual receipt of income in determining tax liabilities.