2019 (6) TMI 1693 - AT - Income Tax

Short Term Capital Gains computation - sale of agricultural land - deduction paid towards cancellation of Banakhat - HELD THAT - All the parties have disclosed such compensation in their income tax return and have paid the due taxes on such compensation amount. This fact can be verified from the returns of income of the aforesaid parties - Accordingly we hold that impugned transaction cannot be said to have made to avoid the tax liability. It is also important to note that the Revenue has accepted the aforesaid compensation paid by the assessee in the case of the co-owner namely Ramji Bhai P Patel in the assessment framed u/s 143(3) of the Act. The copy of the assessment order is placed on record. Thus we hold that once the Revenue has accepted the impugned transaction in the case of the co-owner the same transaction cannot be disputed/disturbed in the case of another co-owner. We are of the considered view that there cannot be any addition to the total income of the assessee on account of the compensation paid to the parties. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Deduction of Rs. 94,90,000/- paid towards cancellation of Banakhat while computing Short Term Capital Gains (STCG) on the sale of agricultural land.

Issue-Wise Detailed Analysis:

1. Deduction of Rs. 94,90,000/- Paid Towards Cancellation of Banakhat:
The primary issue raised by the assessee was the disallowance of Rs. 94,90,000/- paid towards the cancellation of Banakhat deeds while computing the STCG on the sale of agricultural land. The assessee argued that these payments should be deducted as they were incurred to avoid disputes in the title of the property and to waive the rights of proposed purchasers.

Facts of the Case:
The assessee, an individual generating income from various sources, sold agricultural land during the relevant assessment year. The land was co-owned, and the assessee's share was 23.50%. The assessee declared STCG after deducting the cost of acquisition and the payments made towards the cancellation of Banakhat deeds.

Submissions and Observations:
- The assessee purchased the land along with four co-owners and subsequently entered into Banakhat deeds with two parties, which were later canceled. Payments were made to these parties to avoid disputes and to waive their rights.
- The AO observed that the Banakhat deeds were not registered, and there was no mention of any payment on cancellation in the deeds. Additionally, the second Banakhat was executed without canceling the first one, raising doubts about the genuineness of these transactions.
- The AO concluded that the payments were not related to the acquisition or improvement of the property and were not incurred wholly and exclusively in connection with the transfer. The AO disallowed the deduction, viewing the transactions as a colorable device to reduce tax liability.

Appeal to CIT (A):
- The assessee reiterated the submissions made before the AO, emphasizing that the payments were made through account payee cheques and were reflected in the bank passbook. The recipients of the payments had also shown them in their income tax returns.
- The CIT (A) referred to the terms of the Banakhat deeds and concluded that no right was created in favor of the parties merely by executing the Banakhat deeds. Therefore, the payments made by the assessee were not incurred wholly and exclusively in connection with the transfer. The CIT (A) confirmed the AO's order.

Appeal to ITAT:
- The assessee argued that the compensation paid was disclosed by the recipients in their income tax returns, and similar compensation was allowed in the case of co-owners.
- The ITAT observed that the assessee would have earned more income had the Banakhat deeds not been canceled, indicating a possible colorable device to avoid tax liability. However, the ITAT noted that the recipients had disclosed the compensation in their returns, and the Revenue had accepted the compensation in the case of a co-owner.

Judgment:
- The ITAT held that the impugned transaction could not be said to have been made to avoid tax liability, as the compensation was disclosed by the recipients in their returns.
- The ITAT also noted that the Revenue had accepted the compensation in the case of a co-owner, and the same transaction could not be disputed in the case of another co-owner.
- The ITAT allowed the appeal of the assessee, concluding that there could not be any addition to the total income on account of the compensation paid to the parties.

Conclusion:
The ITAT ruled in favor of the assessee, allowing the deduction of Rs. 94,90,000/- paid towards the cancellation of Banakhat deeds while computing the STCG on the sale of agricultural land. The ITAT emphasized the consistency in treatment of similar transactions among co-owners and the disclosure of compensation by the recipients in their income tax returns.