2016 (7) TMI 750 - HC - Income Tax

Profit from the sale of residential units - taxability - non assessability in the hands of assessee as per ITAT - Held that - We find that both the CIT(A) as well as the impugned order have found that the shares of the respondent-assessee company carry with it right to occupy the premises in the building constructed by the respondent-assessee. In this case, M/s. Calico Associatesone of its shareholders had right to occupy 67 flats in the building constructed by the respondent-asseseee in subject assessment year in its capacity as its shareholder. Both the CIT(A) and the Tribunal have rendered a finding of fact that during the subject Assessment Year, the respondent-asseseee had not sold any asset including any flat. The only sale which took place was of its shares by M/s. Calico Associates i.e. it shareholder. Thus, shares which carry its right to occupy the flats has already been subjected to tax in the hands of the shareholder. Thus, the concurrent findings of fact rendered by the CIT(A) and the Tribunal not being shown to be perverse and/or arbitrary, no interference is called for. The questions as raised before us in respect of impairment of land (use of FSI) was not canvassed before the Tribunal. Therefore, the question as raised does not arise out of the Tribunal s order. In any case, the finding of fact rendered by the CIT(A) that land continues to be owned by the respondent-assessee and there is no transfer of any FSI attached to the land is not shown to be perverse and/or arbitrary. - Decided aainst revenue

Summary

Issues:
1. Assessment of profit from the sale of residential units in the hands of the assessee.
2. Application of the principle of mutuality in determining tax liability.
3. Interpretation of ownership of assets and taxation implications.

Analysis:

Issue 1: Assessment of profit from the sale of residential units
The respondent-assessee, engaged in construction business, constructed a building on its land and sold shares to a third party, entitling them to occupy flats. The Assessing Officer contended that the flats were owned by the assessee and profits were taxable. However, the CIT(A) and Tribunal held that the shareholder was the owner of the flat, and no asset was sold by the assessee, as the sale was of shares. The Tribunal confirmed that no asset sale occurred, leading to no taxable income for the assessee.

Issue 2: Application of the principle of mutuality
The respondent-assessee operated on the principle of mutuality, allowing shareholders to occupy flats at construction cost. The Assessing Officer alleged the principle was a tax avoidance scheme, but the CIT(A) and Tribunal found that the shareholder's right to occupy was tied to shares, not assets sold by the assessee. The tax on the sale of shares by the shareholder was upheld, negating tax liability for the assessee.

Issue 3: Interpretation of ownership of assets and taxation implications
The CIT(A) and Tribunal affirmed that the shares held by the respondent-assessee's shareholder conferred the right to occupy flats, not ownership of assets. The absence of asset sale by the assessee and the taxation of shareholder's capital gains on share transfer were crucial in determining the tax liability. The issue of land impairment due to FSI use was not raised before the Tribunal, and the ownership of the land and FSI by the assessee remained undisputed.

In conclusion, the High Court dismissed the appeal, upholding the lower authorities' findings that no taxable income arose for the respondent-assessee from the sale of residential units. The court found no substantial questions of law, as the ownership of assets and tax implications were correctly interpreted by the CIT(A) and Tribunal, warranting no interference.