2023 (3) TMI 849 - AT - Income Tax

Taxability in the hands of partners v/s firm - Undisclosed profit on sale of 20 flats - transfer of capital asset by firm to partners - Addition in hands of firm - transfer of flats to partners by way of unregistered MOU - whether flats were sold by the firm and not by the partners ? - HELD THAT - We find that the assessee had transferred 20 flats by way of unregistered MOU to its partners and claimed that said transfer does not give rise to any income and consequent income cannot be assessed in the hands of the partnership firm. There is no merit in the arguments advanced by assessee, that transfer of flats to partners by way of MOU does not give rise to any income in the hands of the firm, because as per provisions of section 45(4), transfer of capital asset by firm to partners is a transfer which need to be dealt in accordance with law. Assuming for a moment, what was transferred by the assessee firm is not a capital asset, but stock in trade, when the assessee has treated asset as stock in trade, then sale of said asset to partners is as good as sales to outsiders and the assessee needs to consider profit derived from sales in the hands of the firm. Thus to this extent the findings of the facts recorded by CIT(A) that transfer of flats to partners by way of unregistered MOU does not give rise to any income in the hands of the firm and reasons given by the CIT(A) to reach said conclusion is not correct. Whether is there any tax impact on transfer of flats by the firm to its partners, more particularly when the firm is enjoying the benefit of exemption u/s. 80IB(10)? - Since, the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act, we are of the considered view that, whatever profit computed by the AO in the hands of the firm, consequent to transfer of 20 flats to partners by way of MOU dated 08.10.2009, is also eligible for deduction u/s. 80IB(10) of the Act and thus, we direct the AO to compute profit towards transfer of 20 flats to its partners and further, allow benefit of deduction u/s. 80IB(10) of the Act to entire profit derived from transfer of flats to its partners. In this case, although we do not appreciate the findings of the ld. CIT(A) in allowing relief to the assessee on the aspect of taxability of income in the hands of the firm, but yet the assessee is entitled for deduction u/s. 80IB(10) of the Act on entire profit and further, the CIT(A) has allowed deduction claimed u/s. 80IB(10) of the Act to entire profit, in our considered view, there is no error in the reasons given by the ld. CIT(A) to delete additions made by the AO towards profit derived from transfer of flats to its partners. Thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss appeal filed by the revenue.

Summary

Issues Involved:

1. Deletion of addition towards profit on sale of 20 flats not disclosed in the P&L account.
2. Consideration of unregistered MOU dated 08.10.2009 as genuine.
3. Eligibility for deduction u/s 80IB(10) of the Income-tax Act, 1961.

Detailed Analysis:

1. Deletion of Addition Towards Profit on Sale of 20 Flats Not Disclosed in the P&L Account:

The revenue challenged the deletion of the addition made by the AO towards profit on the sale of 20 flats, which were not disclosed in the P&L account. The AO noticed that the assessee transferred 20 flats to its partners via an unregistered MOU dated 08.10.2009 without any supporting evidence like payment of service tax. The AO assessed the sale value of these 20 flats in the hands of the firm, resulting in a profit of Rs. 6,94,87,778/-. The CIT(A), however, accepted the transfer as genuine and directed the AO to exclude the sale proceeds from the business income, considering the firm was eligible for 100% deduction u/s 80IB(10) of the Act. The Tribunal upheld the CIT(A)'s decision, noting that the firm could claim the deduction for the entire profit derived from the housing project, including the transfer of flats to partners.

2. Consideration of Unregistered MOU Dated 08.10.2009 as Genuine:

The AO disbelieved the transfer of 20 flats via the unregistered MOU dated 08.10.2009 due to the absence of corroborative evidence, such as payment of service tax. The CIT(A) observed that the non-payment of service tax was due to the IT Department's attachment of the property, which prevented the assessee from making the payment. The CIT(A) also noted that the transfer of the first batch of 26 flats via a similar MOU was accepted as genuine. The Tribunal agreed with the CIT(A) that the non-payment of service tax, in this case, was not a sufficient reason to disbelieve the transfer, especially since the partners had offered the sale proceeds of these flats in their individual returns.

3. Eligibility for Deduction u/s 80IB(10) of the Income-tax Act, 1961:

The AO denied the deduction claimed u/s 80IB(10) on the grounds that the assessee was merely a land contributor and not a developer. However, the CIT(A) followed the decision of the ITAT in the assessee's own case for earlier years, which was upheld by the Hon'ble Jurisdictional High Court of Madras, confirming the assessee's eligibility for the deduction. The Tribunal noted that since the assessee was eligible for 100% deduction u/s 80IB(10) for the profit derived from the housing project, any profit from the transfer of 20 flats to partners would also be eligible for this deduction. Therefore, the Tribunal upheld the CIT(A)'s decision to allow the deduction and dismissed the revenue's appeal.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition towards profit on the sale of 20 flats and confirming the assessee's eligibility for deduction u/s 80IB(10) of the Act. The Tribunal noted that the transfer of flats via the unregistered MOU dated 08.10.2009 was genuine and that the firm could claim the deduction for the entire profit derived from the housing project, including the transfer of flats to partners.