2025 (3) TMI 928 - AT - Income Tax

Short term capital gain arising on sale of immovable property - correct amount of sale consideration - action of the AO in reducing the WDV of stock-in-trade and disallowing the depreciation as well as the disallowance of expenses - what was the actual sale consideration received by the assessee on the sale of shop? - HELD THAT - Assessee was required to obtain permission of the management body/vendor for sale of Shop No.4 and there was no stipulation that the permission has to be obtained from True Value as booking agent or that the booking agent was required to be involved in the future sale transactions. Thus the contention of the assessee that it could not have sold the property without making an agreement with True Value is not found correct. As rightly held by the AO neither the True Value had exclusive selling right of the property nor any such right could have been exercised in respect of the property already acquired by the assessee. Therefore the involvement of True Value in the sale transaction of the property by the assessee has to be treated in the capacity of a mere agent only. There was no fiduciary relationship between True Value and the assessee and in the absence of any such relationship True value either explicitly or implicitly couldn t have agreed to act on behalf of the assessee to sale the property owned by the assessee. It is also mentioned in this agreement that the booking price of Rs. 75 Lacs paid on 26.03.2012 by ASPL was received by True Value. Since the True Value was neither the owner of the property nor power of attorney holder on behalf of the assessee and no reference of any agreement between the True Value and the assessee was appearing in this booking agreement the payment of Rs. 75 Lacs could not have been received by True Value. In the absence of any evidence on record that True Value was an agent of the assessee the booking agreement dated 1st March 2012 was not at all enforceable and binding on the assessee. As rightly held by the AO the commission payable to the agent for providing professional assistance was in the range of 2 to 5% and the payment of 50% of the sale consideration as commission to the agent was not justified. As already discussed earlier True Value had no locus standi in the transaction. Neither it was having any booking rights in respect of this property nor it was authorized by the assessee to sell the property on its behalf by way of any power of attorney. All the arrangements were made post the date of actual sale of the property with an intention to divert the sale consideration and to reduce the tax liability. Therefore the AO was correct in treating the transaction as sham transaction and in holding that the payment made by the assessee to True Value was not genuine. To that extent the finding of the AO is upheld. AO was correct in treating the sale consideration of property at Rs. 5, 04, 80, 000/-. As the profit derived from sale of property was in the nature of short-term capital gain the same was required to be reduced from WDV of the block of assets. Accordingly the action of the AO in reducing the sale consideration of Rs. 5, 04, 80, 000/- from WDV of block of assets and thereby disallowing excess depreciation of Rs. 25, 48, 000/- is upheld. However the action of the AO in making separate addition of Rs. 2.54 Crores on account of disallowance of expenditure cannot be held as correct. It has not been made out by the Revenue that this expenditure of Rs. 2.54 Crores was separately debited in the P L account of the assessee. Therefore the addition of Rs. 2.54 Crores in respect of disallowance of expense is deleted and the ground taken by the Revenue in this regard is dismissed. Appeal filed by the Revenue is partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the payment made by the assessee to True Value Nirman Pvt. Ltd. (TVNPL) was a legitimate transaction or a sham intended to reduce tax liability.
• The correct amount of sale consideration to be considered for the property sold by the assessee.
• The appropriateness of the disallowance of depreciation by the Assessing Officer (AO) on the property sold.
• The legitimacy of the agreements between the assessee, TVNPL, and Ardor Structure Pvt. Ltd. (ASPL), and their enforceability.
• The validity of the expenses claimed by the assessee as transfer expenses and the correctness of the addition made by the AO.

ISSUE-WISE DETAILED ANALYSIS

1. Legitimacy of Payment to True Value Nirman Pvt. Ltd.

• Relevant Legal Framework and Precedents: The case hinges on whether the transaction was genuine or a sham to evade tax. The principles of determining genuine transactions and the role of agents in property sales are relevant.
• Court's Interpretation and Reasoning: The Tribunal found that True Value had no legitimate claim to booking rights for the property already owned by the assessee. The agreements made post-sale were seen as an attempt to divert funds and reduce tax liability.
• Key Evidence and Findings: The sale deed and agreements lacked any reference to True Value having rights or authority over the property. The Tribunal noted the absence of True Value in the original sale deed and the lack of any fiduciary relationship.
• Application of Law to Facts: The Tribunal applied the principle that an agent cannot claim rights over property already sold to a third party. The payment to True Value was treated as an unjustified commission.
• Treatment of Competing Arguments: The assessee's argument that True Value had exclusive booking rights was dismissed due to lack of evidence and enforceability.
• Conclusions: The Tribunal upheld the AO's finding that the transaction with True Value was not genuine.

2. Sale Consideration for the Property

• Relevant Legal Framework and Precedents: Determining the actual sale consideration is crucial for calculating capital gains tax.
• Court's Interpretation and Reasoning: The Tribunal determined that the full sale consideration of Rs. 5,04,80,000/- was received by the assessee, as evidenced by the sale deed and bank transactions.
• Key Evidence and Findings: The sale deed and RTGS payment records confirmed the full consideration amount.
• Application of Law to Facts: The Tribunal applied the principle that the sale consideration is the amount agreed upon and received by the seller.
• Treatment of Competing Arguments: The assessee's claim of receiving only Rs. 2.50 Crores was rejected based on documentary evidence.
• Conclusions: The Tribunal upheld the AO's treatment of the sale consideration as Rs. 5,04,80,000/-.

3. Disallowance of Depreciation

• Relevant Legal Framework and Precedents: The calculation of depreciation is based on the written down value (WDV) of assets.
• Court's Interpretation and Reasoning: The Tribunal found that the sale consideration should be reduced from the WDV, and any excess depreciation claimed was rightly disallowed.
• Key Evidence and Findings: The Tribunal noted the sale deed and financial records indicating the WDV adjustments.
• Application of Law to Facts: The Tribunal applied the principle of reducing sale consideration from WDV for calculating depreciation.
• Treatment of Competing Arguments: The assessee's contention against the disallowance was dismissed as the calculation was found correct.
• Conclusions: The Tribunal upheld the AO's disallowance of excess depreciation.

4. Validity and Enforceability of Agreements

• Relevant Legal Framework and Precedents: The enforceability of agreements depends on their legality and the authority of parties involved.
• Court's Interpretation and Reasoning: The Tribunal found the agreements post-sale to be non-enforceable as they were not supported by any legal authority or pre-existing rights.
• Key Evidence and Findings: The lack of references to True Value in the original sale deed and the timing of agreements indicated their non-enforceability.
• Application of Law to Facts: The Tribunal applied the principle that agreements made without authority or after the fact are not enforceable.
• Treatment of Competing Arguments: The Tribunal dismissed the assessee's reliance on these agreements due to their lack of legal standing.
• Conclusions: The Tribunal upheld the AO's finding that the agreements were not enforceable.

5. Legitimacy of Claimed Expenses

• Relevant Legal Framework and Precedents: The legitimacy of expenses claimed against capital gains is evaluated based on their necessity and genuineness.
• Court's Interpretation and Reasoning: The Tribunal found the claimed expenses to be unjustified as they were not separately debited in the Profit & Loss account.
• Key Evidence and Findings: The Tribunal noted the lack of separate accounting for these expenses in the financial records.
• Application of Law to Facts: The Tribunal applied the principle that only genuine and necessary expenses can be deducted from capital gains.
• Treatment of Competing Arguments: The Tribunal dismissed the assessee's claim due to lack of evidence for separate expense accounting.
• Conclusions: The Tribunal deleted the addition of Rs. 2.54 Crores on account of disallowance of expenses.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reinforced the principle that transactions must be genuine and supported by evidence to be considered for tax purposes. Sham transactions intended to evade tax will not be recognized.
• Final Determinations on Each Issue:
  • The payment to True Value was not genuine, and the transaction was deemed a sham.
  • The sale consideration was correctly determined as Rs. 5,04,80,000/-.
  • The disallowance of depreciation was upheld as correct.
  • The agreements post-sale were not enforceable.
  • The addition of Rs. 2.54 Crores for disallowed expenses was deleted due to lack of separate accounting.