2021 (7) TMI 211 - AT - Income Tax

Addition u/s 68 - addition in hands of the assessee society - liability of individual members - sale deeds which have been executed during the financial year relevant to assessment year under consideration - HELD THAT - Assessee society has received a total sum in terms of aforesaid three sale deeds and the same is clearly emerging from perusal of the contents of the sale deeds. It is also an admitted position that the said amount has been credited by the assessee society in individual members account in its books of accounts. The source of such receipts is clearly discernable from the sale deeds duly executed and the same cannot therefore be termed as amount received from undisclosed sources. The identity of the members in whose name the flats were allotted and have sold the flats, the identity of the buyers, the mode and manner of receipt of amount is clearly discernable from the sale deeds which are duly executed and registered with the stamp duty authorities and are therefore clear pieces of evidence in support of known sources of receipts which cannot be ignored in absence of any other contradictory and compelling documentary evidence brought on record. Therefore, as far as addition u/s 68 is concerned, there is no legal basis for such addition in hands of the assessee society which has been assessed as a separate assessable person in the status of AOP and the same is hereby directed to be deleted. Why the amount of sale consideration has been received by the assessee society and not retained by individual members who have executed the impugned sale deeds and in whose name the flats were initially allotted ? - We find that where there is an understanding between the individual members and the assessee society that the latter shall carry out the construction on behalf of the former and the former will bear the cost, it is clearly an obligation on part of the individual members to pay to the assessee society towards the cost of construction. In the instant three cases, we find that the respective members have not fully discharged their obligation towards the assessee society in the past in terms of cost of construction and the amount received on sale of the flats have therefore been paid by them to the assessee society towards cost of construction of their respective flats and which has been credited in their individual members account in the books of assessee s society. Taxability of profits arising on sale of three flats through execution of sale deeds - Once the assessee society has been assessed as a separate person, it carries its identity distinct from its members and revenues in the hands of members need not be revenues in the hands of the society. Even if we were to consider the receipts as revenues in the hands of the society, no basis has been spelt out as to how the 15% profit percentage has been arrived at by the AO or where any third party comparable data has been considered, the details of such data. In contrast, we find that we have the construction cost figures as per the assessee s society financial statements before us. If we look at the cumulative construction cost as on the close of the financial year 2008-09 relevant to impugned assessment year, proportionate cost of construction for three flats out of total eight flats comes to ₹ 46,67,392/- as against total receipts of ₹ 46,60,000/- received during the year resulting in shortfall of ₹ 7,392/. Therefore, in absence of any surplus, the question of taxability doesn t arise for consideration and addition of profits of ₹ 6,99,000/- made by the AO deserve to be deleted. Both the additions made in the hands of the assessee society are hereby directed to be deleted. Undisclosed investment - liability of power of attorney holder - HELD THAT - there is nothing on record that the sale consideration has been received by the assessee in his personal capacity rather as we have noted above, the sale consideration has been paid by respective members to M/s VIP Group Housing Society towards discharge of their past obligations towards cost of construction. Therefore, in light of the aforesaid discussion, there is no basis to hold the assessee as liable to discharge any tax obligation in his individual capacity on profits on sale of the flats. Thus the amount of sale consideration has been credited in individual members accounts in the books of M/s VIP Group Housing Society and not in the individual account of the assessee nor the same has been received by him, therefore, the question of taxability doesn t arise in his hands and even addition towards undisclosed investment therefore deserve to be deleted. In the result, both the additions are deleted

Summary

Issues Involved:
1. Applicability of the principle of mutuality.
2. Addition of the entire sale proceeds in the hands of the society.
3. Lack of cogent reasons for the decision by CIT(A).
4. Confirmation of 15% profit on the sale of flats.
5. Assessment of capital gains in the hands of original flat owners.
6. Substantive assessment in the hands of the assessee society.
7. Protective assessment in the hands of the individual (President of the Society).

Issue-Wise Detailed Analysis:

1. Applicability of the Principle of Mutuality:
The assessee argued that the society operated on a mutuality basis, meaning it was not for profit and any surplus should not be taxed. The society was formed by eight members who collectively obtained a plot from the Jaipur Development Authority (JDA) and constructed flats. The assessee cited various legal precedents to support the principle of mutuality, emphasizing that the society's activities were for the benefit of its members and not for profit. The Tribunal accepted this argument, referencing several judicial decisions that upheld the principle of mutuality for both registered and unregistered societies.

2. Addition of the Entire Sale Proceeds in the Hands of the Society:
The Assessing Officer (AO) added ?46,60,000 to the society’s income, treating it as undisclosed income. The assessee contended that this amount was received from the sale of flats by individual members and was not the society's income. The Tribunal found that the sale proceeds were indeed received by the society from its members and credited to their individual accounts, thus not constituting undisclosed income of the society.

3. Lack of Cogent Reasons for the Decision by CIT(A):
The assessee argued that the CIT(A) failed to provide proper reasons for rejecting their explanations and submissions. The Tribunal noted that the CIT(A) confirmed the AO's additions without adequately addressing the detailed submissions made by the assessee. The Tribunal found this approach to be lacking in proper reasoning and justification.

4. Confirmation of 15% Profit on the Sale of Flats:
The AO estimated a profit of 15% on the sale proceeds without providing a basis for this percentage. The assessee argued that this estimation was arbitrary and lacked any comparable case citations. The Tribunal agreed, noting that no basis was provided for the 15% profit estimation. The Tribunal also considered the actual construction costs and found that there was no surplus to be taxed, thus directing the deletion of the ?6,99,000 addition.

5. Assessment of Capital Gains in the Hands of Original Flat Owners:
The assessee argued that any capital gains from the sale of flats should be assessed in the hands of the original flat owners, not the society. The Tribunal found that the sale proceeds were paid to the society towards the cost of construction and not retained by the individual members, thus supporting the assessee's argument that the society should not be taxed for these amounts.

6. Substantive Assessment in the Hands of the Assessee Society:
The AO made substantive assessments in the hands of the society, treating it as an Association of Persons (AOP). The Tribunal found that the society operated on a mutuality basis and the receipts were from known sources (sale of flats by members), thus there was no basis for substantive assessment of these amounts in the society's hands.

7. Protective Assessment in the Hands of the Individual (President of the Society):
The AO also made protective assessments in the hands of the society's president, arguing that he was the real beneficiary. The Tribunal found that the president signed the sale deeds as a power of attorney holder and not as the owner. There was no evidence that he received the sale consideration in his personal capacity. Therefore, the Tribunal directed the deletion of the protective assessments made in his hands.

Conclusion:
The Tribunal directed the deletion of both the substantive and protective assessments made by the AO, finding that the society operated on a mutuality basis, the sale proceeds were from known sources, and the president did not personally benefit from the transactions. The appeals were disposed of in favor of the assessee.