2022 (6) TMI 794 - AT - Income Tax

Capital gain computation or Income from other sources - compensation received by the assessee on extinguishment of his right in property - transfer of asset u/s 2(47) - whether relinquishment of right in property is transfer within definition of section 2(47)? - HELD THAT - In this case the assessee had acquired right in a property and said right has been extinguished in favour of the builder and received compensation. The builder has paid compensation through proper banking channel after deducting necessary TDS as per law. The parties have confirmed transactions. AO has never disputed these facts, however, denied benefit of long term capital gain only for reason that authenticity of stamp paper purchased by the assessee to enter into MOU is doubtful. In our considered view, reasons given by the AO to reject claim of the assessee on the basis of authenticity of stamp paper is not correct, because if at all, the AO is having any doubt on authenticity of stamp paper, the A.O. should have conducted necessary inquiries to ascertain facts whether stamp paper purchased by the assessee is genuine or fake one. In absence of any inquiry, the AO cannot come to a conclusion that stamp paper purchased is not genuine one and consequently, on that basis the transaction between the parties cannot be questioned, more particularly, when other evidences filed by the assessee, including confirmation from buyer reveals that transaction took place between the parties. Extinguishment of rights therein also includes within definition of capital asset and consequently, comes under transfer as defined u/s.2(47) Thus what was received by the assessee by virtue of MOU is consideration received for transfer of rights in property and thus, same is assessable under the head income from capital gains . The learned CIT(A), after considering relevant facts has rightly held that the Assessing Officer has erred in assessing compensation under the head income from other sources . Hence, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue

Issues Involved:
1. Genuineness of the Memorandum of Understanding (MOU)
2. Classification of the transaction as a "sham" to claim long-term capital gain
3. Validity of the MOU as an incomplete contract
4. Assessment of compensation received under the correct head of income

Detailed Analysis:

1. Genuineness of the Memorandum of Understanding (MOU):

The Revenue questioned the authenticity of the MOU on the grounds that the stamp paper lacked a serial number and was issued from a different treasury office. The Assessing Officer (A.O.) found the MOU to be unregistered and without witness signatures initially, which cast doubt on its reliability. The A.O. also noted that the assessee failed to substantiate the advance payments claimed with necessary evidence. However, the learned Commissioner of Income Tax (Appeals) [CIT(A)] held that the Assessing Officer did not provide valid reasons to question the transaction's genuineness based on these defects. The CIT(A) emphasized that such errors are rectifiable under the Stamp Duty Act and do not invalidate the transaction itself.

2. Classification of the Transaction as a "Sham" to Claim Long-Term Capital Gain:

The A.O. argued that the transaction was a sham intended to claim the benefit of long-term capital gain. The A.O. pointed out inconsistencies such as the absence of efforts by the assessee to question project delays and the lack of proof for the arbitration process mentioned in the MOU. The CIT(A), however, found that the A.O.'s conclusions were based on mere assumptions and doubts. The CIT(A) cited judicial precedents, including the High Court of Madras in K.R. Srinath Vs ACIT (2004) 268 ITR 436 (Mad), to establish that relinquishment of rights in a property constitutes a transfer under Section 2(47) of the Income Tax Act, 1961. The CIT(A) concluded that the transaction was genuine and not a sham.

3. Validity of the MOU as an Incomplete Contract:

The Revenue contended that the MOU was incomplete as it did not lead to a definitive agreement and lacked statutory approvals for the project. The CIT(A) countered this by stating that there is no legal requirement for an MOU to be registered or canceled by another MOU. The CIT(A) also noted that the delay in project approvals was well-documented and beyond the assessee's control, further validating the transaction's legitimacy.

4. Assessment of Compensation Received Under the Correct Head of Income:

The A.O. assessed the compensation received by the assessee for relinquishing his rights in the property under the head "income from other sources." The CIT(A) disagreed, holding that the compensation received for extinguishing rights in a property falls under the definition of "transfer" as per Section 2(47) of the Income Tax Act, 1961. The CIT(A) cited various judicial precedents, including the Bombay High Court in TATA Tele Services Ltd. (1980) 122 ITR 594 (Bom) and the Kerala High Court in CIT Vs. Grace Collis (2001) 248 ITR 323, to support this view. The CIT(A) concluded that the compensation should be assessed under the head "income from capital gains."

Conclusion:

The appeal filed by the Revenue was dismissed, and the cross-objection filed by the assessee was deemed infructuous. The Tribunal upheld the CIT(A)'s findings that the transaction was genuine, the MOU was valid, and the compensation received should be assessed under the head "income from capital gains." The decision emphasized that extinguishment of rights in a property constitutes a transfer under Section 2(47) of the Income Tax Act, 1961.

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