2015 (10) TMI 943 - AT - Income Tax

Capital Gains - transfer of property post family arrangement in name of family members as per the directions of the Court - Addition made towards Long Term Capital Gain assessable in the hands of the assessee on sale of property situated at Delhi - Held that - A family arrangement by which each party takes a share in the property has been held as not amounting to a conveyance of property from a person who has the title to it to a person who has no title to it earlier. In CIT vs A.L.Ramanathan (1998 (12) TMI 36 - MADRAS High Court) the family arrangement was held to be not a transfer for the purpose of capital gains tax. Recognizing the family arrangement in the eyes of law, the action of the ld. AO in bringing to tax the long term capital gain is illegal and is hereby directed to be deleted in the hands of the assessee. - Decided in favour of assessee. Disallowance of interest paid on loans - Held that - It is seen that the borrowed fund has been used for repaying the old borrowings by the assessee which has been duly used for the purpose of business. It is not in dispute that the original borrowings were used by the assessee for the purpose of his business. Hence, the interest paid by the assessee on borrowings which were utilized by repaying the old business borrowings is squarely allowable as deduction. Accordingly, we direct the ld. AO to allow the sum towards interest paid on loan. - Decided in favour of assessee.

Issues Involved:

1. Addition of Rs. 2,12,78,361/- towards Long Term Capital Gain on sale of property.
2. Disallowance of Rs. 45,000/- towards interest paid on loans.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,12,78,361/- towards Long Term Capital Gain on sale of property:

The first issue revolves around whether the CIT(A) was correct in confirming the addition of Rs. 2,12,78,361/- towards Long Term Capital Gain in the hands of the assessee on the sale of a property situated in Delhi. The assessee sold the property for Rs. 2,41,30,000/- but argued that the property was transferred to his mother and wife through a family settlement approved by the Hon'ble Calcutta High Court.

The assessee initially obtained 50% of the property through a Will and acquired the remaining 50% from Smt. Kankawari Nahata. A family arrangement dated 30.04.2000, later subjected to an Arbitration Award and approved by the Hon'ble Calcutta High Court, mandated the transfer of the property to the assessee's mother and wife. The property was leased out by the mother and wife, and the rental income was duly offered in their respective returns.

The sale deed was executed by the assessee because the property was not mutated in the names of his mother and wife in the records of the Delhi Development Authority. The sale proceeds were invested in mutual funds by the assessee and later handed over to his mother and wife.

The AO added the entire Long Term Capital Gain on the grounds that the assessee failed to provide certified copies of relevant documents and questioned the genuineness of the family arrangement. The CIT(A) upheld the AO's findings, stating that the transfer through family settlement is not recognized as a transfer under the Income Tax Act.

The Tribunal, however, found that the family arrangement was genuine and acted upon, as evidenced by the balance sheets and tax returns of the mother and wife. The Tribunal noted that taxing the capital gains in the hands of the assessee would result in double taxation since the gains were already disclosed by the mother and wife. The Tribunal relied on judicial precedents recognizing family arrangements and held that the AO's action of adding the capital gain was illegal, directing its deletion.

2. Disallowance of Rs. 45,000/- towards interest paid on loans:

The second issue concerns whether the CIT(A) was justified in confirming the disallowance of Rs. 45,000/- towards interest paid on loans. The assessee borrowed a loan to repay an earlier business loan and claimed the interest as a deduction. The AO disallowed the interest, stating it was paid on borrowed funds used for earning dividend income, which is exempt.

The CIT(A) upheld the disallowance, noting that the interest was paid on loans utilized for earning exempt dividend income. The assessee contended that the borrowed funds were used to repay old business loans, not for earning dividend income.

The Tribunal found that the borrowed funds were indeed used for repaying old business loans, which were originally used for business purposes. Therefore, the interest paid on such borrowings was allowable as a deduction. The Tribunal directed the AO to allow the deduction of Rs. 45,000/- towards interest paid on loans.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of the addition of Rs. 2,12,78,361/- towards Long Term Capital Gain and allowing the deduction of Rs. 45,000/- towards interest paid on loans.

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