2017 (9) TMI 810 - AT - Income Tax

Assessment u/s 153A - non disclosure of portion of taxable income - Held that - A notice u/s.153A of the Act can be issued in the cases where action u/s.132 is carried out. As far as additions are concerned same can be made on the basis of some seized material. But he case before us is unique as the assessee herself has admitted that by mistake she had not disclosed a portion of her taxable income. It was never argued by the assessee that she had not earned income from cancellation of booking of a flat. So in our opinion, she cannot raise any objection about the taxability of transactions in question. If we consider the peculiar facts of the case it becomes clear that after the assessee admitted the inadvertent mistake he AO accepted her claim in principle. In light of the peculiar facts and circumstances of the case decide the jurisdictional issue against the assessee. Addition on account of compensation arising from surrender of allotment of flats - whether it is in nature of capital gain? - Transfer u/s 2(47) - Held that - The income arising out of surrendering the flat to the builder had to be taxed under the head capital gains and not under the head income from other sources. Considering the period of holding of the asset he assessee is entitled to benefit of indexation and the disputed amount is to be taxed as long-term capital gain. See CIT Versus Vijay Kumar Ajit Kumar Vijay Flexible Containers 1989 (9) TMI 16 - BOMBAY High Court . Second effective ground of appeal is decided in favour of the assessee.

Issues Involved:
1. Addition of ?1.77 crores on account of compensation from surrender of allotment of flats.
2. Jurisdictional issue regarding the addition made without incriminating material.
3. Head of income under which the compensation should be assessed.
4. Entitlement to indexation benefit if taxed as capital gains.

Issue-wise Detailed Analysis:

1. Addition of ?1.77 crores on account of compensation from surrender of allotment of flats:
The assessee filed her return of income on 23/05/2007, declaring total income of ?18.02 lakhs. The AO completed the assessment u/s.143(3) on 31/10/2008, determining the income at ?18,02,940/-. During a search and seizure action u/s.132 in March 2011, it was found that the assessee had received ?4.04 crores from Rajesh Construction Co. (RCC) for cancellation of a flat booking, which included ?2.89 crores as compensation. The AO added this compensation to the assessee's income, determining her total income at ?3.07 crores.

2. Jurisdictional issue regarding the addition made without incriminating material:
The assessee argued before the First Appellate Authority (FAA) that no incriminating material was found during the search and that the addition was based on enquiries carried out by the AO during assessment proceedings. The FAA held that section 153A/153C did not restrict additions to incriminating material found during the search and that the mandate of section 153A was the assessment of total income. The FAA rejected the assessee's contention, stating that the undisclosed income was discovered consequent to the search operation.

3. Head of income under which the compensation should be assessed:
The FAA and AO held that the compensation received was not a capital gain as the assessee did not acquire any right that could be termed as a capital asset. They assessed the compensation under the head "income from other sources." The FAA noted that the assessee had only booked flats by paying token advances and had not signed any formal agreement with the builder.

4. Entitlement to indexation benefit if taxed as capital gains:
The assessee argued that the compensation should be taxed as capital gains and that she was entitled to indexation benefits. The FAA rejected this, stating that the booking of flats did not create any right in a capital asset. However, the Tribunal referred to the cases of Madhu Kaul and Vijay Flexible Containers, which held that rights acquired under an agreement to purchase property are capital assets. The Tribunal concluded that the compensation received should be taxed under the head "capital gains" and that the assessee was entitled to indexation benefits, considering the period of holding the asset.

Conclusion:
The Tribunal decided that the compensation received by the assessee should be taxed under the head "capital gains," granting her the benefit of indexation. The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the second effective ground of appeal. The order was pronounced on 1st September 2017.

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