2022 (4) TMI 1177 - AT - Income Tax

Gain on surplus realised on surrender of rights to acquire the flats - Short term capital gains OR Long term capital gains shown by the Appellant - flats were surrendered after a period of 36 months - whether the documents, which denote that the names used by the builder as a representation for the assessee or it may be booked by these people on behalf of the assessee since all these individuals are related parties? - HELD THAT - Merely because the builder recognize this transaction on the representation basis, the ownership will not devolve on the individuals who are not party to the agreement. We observe that the agreement entered by the assessee even before the search took place. What is relevant is the existence of agreement and relevant payments made by the assessee, we observe that the substantial payments were made by assessee. It clearly indicate that the actual beneficiary is the assessee and the persons have acted in a representative capacity. We observe that atleast Mrs Sonia made certain payment, whereas Mrs Manju has not contributed in this transaction except her name was recorded by the builder, this does not give ownership right to Mrs Manju. In our considered view, the same Assessing Officer would not have accepted the genuineness of the ownership in case Mrs Manju claim without making any payment or contributing to anything in this transaction. There is ample evidence to show that the assessee has entered into agreement for the purchase of flats and made the substantial payment, therefore, we are in agreement with the claim made by the assessee that the compensation received by the assessee is long term considering the fact that the agreement was entered by the assessee in the year 1997. Accordingly, the ground raised by the assessee is allowed.

Issues Involved:
1. Classification of capital gains as short-term or long-term.
2. The validity of the rejection of an application for rectification under section 154.
3. Deletion of penalty levied under section 271(1)(c).

Detailed Analysis:

1. Classification of Capital Gains:

The primary issue revolves around whether the gains arising from the surrender of rights to acquire flats should be classified as short-term or long-term capital gains.

The assessee argued that the flats were surrendered after a period of 36 months, and hence, the surplus realized should be taxed as long-term capital gains. The Assessing Officer (AO) classified the gains as short-term, contending that the flats were originally allotted to other individuals and held in their names until January 1998. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view, leading the assessee to appeal.

The Tribunal observed that the assessee had entered into an agreement to purchase the flats on July 10, 1997, and substantial payments were made by the assessee, LKP Merchant Financing Ltd., and Sonia Chhabria. The Tribunal noted that the agreement and payments were made before the search took place and concluded that the individuals mentioned acted in a representative capacity for the assessee. The Tribunal ruled that the compensation received by the assessee should be treated as long-term capital gains, considering the agreement was entered into in 1997.

2. Validity of Rejection of Application for Rectification under Section 154:

The second issue pertains to the rejection of the assessee's application for rectification under section 154. The assessee contended that the short-term capital gains should be corrected to reflect a short-term capital loss after considering unaccounted investments assessed in the block assessment order.

The Tribunal noted that the block assessments were quashed by the ITAT, rendering the appeal against the rectification application infructuous. Consequently, the Tribunal dismissed the appeal as infructuous.

3. Deletion of Penalty Levied under Section 271(1)(c):

The third issue concerns the deletion of the penalty levied under section 271(1)(c). The revenue appealed against the CIT(A)'s decision to delete the penalty, arguing that the penalty was justified based on evidence unearthed during a search and seizure.

The Tribunal, having ruled in favor of the assessee on the quantum appeal, found that the penalty under section 271(1)(c) was not warranted. The Tribunal upheld the CIT(A)'s decision to delete the penalty, thus dismissing the revenue's appeal.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, ruling that the gains should be classified as long-term capital gains. It dismissed the appeal regarding the rectification application as infructuous and upheld the deletion of the penalty under section 271(1)(c). The revenue's appeal was dismissed, and the assessee's appeals were allowed.

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