2022 (1) TMI 600 - HC - Income Tax

Disallowance u/s 40 a ia - income from the sale of property under consideration - to be taxed as capital gains or as income from business - HELD THAT - It is ex-facie apparent that based on a letter said to have been written by the assessee who is no more to Sri.Rami Reddy which is said to have been found in possession of one Sri.Purushotham Reddy, AO has arrived at a conclusion that the transaction in question was taxable as business income and not capital gains. It is significant to note that the said property was held by the assessee as long term capital asset. Tribunal being the last fact finding authority, has recorded a finding that the contents of the letter alleged to have been written by the assessee to his partner do not clearly establish as to whether the assessee was really carrying on the activity of adventure in the nature of trade or that these properties were considered as trading assets by the assessee. Similarly, as regards the sale consideration of the property in question, addition has been made by the Assessing Officer merely based on the statement of Sri.Purushotham Reddy which is not substantiated by any other material evidence. Disallowance under Section 40 a ia of the Act by the Assessing Officer cannot be sustained in view of the income from the sale of property under consideration is now held to be taxed as capital gains and not as income from business. Even the other ground of challenge inasmuch as the Tribunal remitting the matter to the Assessing officer with a direction to examine and verify whether the compound wall was actually constructed around the schedule land and the expenditure allegedly incurred towards the construction of the compound wall, paid to GK Associates, has no merit. Indeed, the factual aspects have to be examined at the ground level by the Assessing Officer. The judgment relied upon by the Revenue is not applicable in the present facts and circumstances of the case. Moreover, the Hon'ble Apex Court has observed that in reaching the conclusion that the transaction is an adventure in the nature of trade, the Tribunal has to find primary evidentiary facts and then apply legal principles. It is evident that the Tribunal has rightly considered the factual aspects and then applied the legal principles. There being no perversity or arbitrariness in the order of the Tribunal impugned, the same requires to be confirmed. The issues involved relates to pure questions of facts, no substantial questions of law arises for our consideration.

Summary

Issues:
1. Whether the Tribunal correctly determined if the assessee was engaged in an adventure in the nature of trade.
2. Whether the Tribunal was right in not accepting the Revenue's contention of suppression of sale consideration.
3. Whether the Tribunal correctly set aside the disallowance under Section 40[a][ia] of the Act.

Analysis:

Issue 1:
The appeal challenged the Tribunal's decision on whether the assessee was engaged in an adventure in the nature of trade. The Assessing Officer treated income from land sale as business income, not capital gains. The Commissioner of Income Tax [Appeals] and the Tribunal disagreed, holding it as capital gains. The Tribunal found no clear evidence that the assessee considered the properties as trading assets. The Tribunal's decision was upheld as the last fact-finding authority.

Issue 2:
Regarding the suppression of sale consideration, the Revenue contended that the assessee understated the sale value. However, the Tribunal found the Assessing Officer's decision lacking substantial evidence, as it was solely based on a statement without corroboration. As the income was treated as capital gains, the disallowance under Section 40[a][ia] was not upheld.

Issue 3:
The Tribunal set aside the disallowance under Section 40[a][ia] of the Act. The Tribunal remanded the matter to verify if the compound wall was constructed and the expenditure incurred was genuine. The Tribunal's decision was based on factual aspects that needed examination at the ground level by the Assessing Officer. The Tribunal's approach was deemed appropriate, considering the circumstances of the case.

In conclusion, the High Court dismissed the appeal, finding no perversity in the Tribunal's decision. The judgment emphasized the importance of establishing primary evidentiary facts before applying legal principles. The issues raised were factual in nature, and no substantial questions of law were identified for consideration.