2018 (4) TMI 1121 - AT - Income Tax

Addition on account of Long Term Capital Gain on sale of mining lease - assessee s ownership of such capital asset - transfer u/s 2(47) - assessees are legal heirs of late Shri Kailash Chand Mangal who has leasehold rights of the mines in question and as per the family arrangement as well as will the ownership of the mining rights were given to Shri Sunil Agarwal uncle of the assessee - Held that - In view of the admitted position by all the assessees that the real owner the mining rights is Shri Sunil Agarwal and the Revenue has not challenged that finding of the ld. CIT(A) in case of Shri Sunil Agarwal we do not find any substance or merits in the appeals of the Revenue in case of Shri Sanjay Managal and Shri Vijay Mangal. Assessment of capital gain - transfer of rights - Held that - Though the mining rights per se are not transferred being subject to the renewal of the lease however, by virtue of the agreement dated 10.06.2010 the assessee has transferred and surrendered his rights in the said asset as on the date of agreement and is bound to transfer the leaseholds rights in favour of M/s J.K. Cements whenever the same are renewed by the Government. Hence, this agreement dated 10.06.2010 has definitely transfer a right in favour of the M/s J.K. Cements and relinquished right on the part of the assessee as he cannot transfer these leasehold mining rights in favour of any other persons then M/s J.K. Cements. The amount of ₹ 25 lacs received by the assessee for execution of the said agreement would be the income of the assessee. This consideration was received in relation to the rights in a capital asset therefore, the said amount is liable to be assessed as capital gain as considered by AO. Direct the AO to assess the capital gain in the hand of the assessee Shri Sunil Agarwal by considering ₹ 25 lacs as a consideration subject to allowable other deductions being cost of acquisition which we will deal with in the Cross Objection of the assessee. Disallowance of expenses u/s 57 - Held that - AO as well as ld. CIT(A) decided this issue for want of any documentary evidence in support of the claim that the expenditure was incurred for earning the income from other sources. Nothing has been produced before us to show that the said alleged expenditure incurred by the assessee for earning of income from other sources accordingly, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Cost of acquisition of the capital asset being the Fair Market Value (FMV) as on 01.04.1981 - Held that - As per provisions of Section 55(2)(a)(b) r.w.s. section 55(3) assessee has exercised his option that the cost of acquisition of the capital shall be the fair market value as on 01.04.1981 then, the cost of acquisition of capital asset of the previous owner becomes irrelevant for the purpose of computing the capital gain. The previous acquired the leasehold rights prior to 01.04.1981 therefore, the fair market value of the property as on 01.04.1981 has to be considered as cost of capital asset for the purpose of sections 48 and 49 - we direct the AO to compute the capital gain after allowing the cost of acquisition being the fair market value as on 01.04.1981. Once, this benefit is allowed against the capital gain in the year under consideration, the same will not be allowed at the time of transfer of the leasehold rights on renewal by the government.

Issues Involved:
1. Deletion of addition on account of Long Term Capital Gain.
2. Validity of initiation of proceedings under Section 147.
3. Determination of whether the transaction constituted a 'transfer' under Section 2(47) of the Income Tax Act.
4. Consideration of the agreement's cancellation.
5. Correct calculation of the cost of acquisition and indexation.
6. Disallowance of expenses under Section 57.
7. Contradiction in the assessment regarding the cost of acquisition and capital receipts.

Detailed Analysis:

1. Deletion of Addition on Account of Long Term Capital Gain:
The Revenue challenged the deletion of ?1,10,00,485/- on account of Long Term Capital Gain from the sale of mining lease, arguing that the assessee was the owner of the capital asset. The assessee contended that there was no sale, only an agreement subject to certain conditions, and the renewal process was pending. The AO assessed the capital gain based on a registered agreement dated 10.06.2010, which included an advance payment and subsequent payments totaling ?1,28,00,000/-. The CIT(A) held that the ownership of the mining lease vested with Shri Sunil Agarwal and no addition could be made for the other two brothers. The CIT(A) also found that no title or ownership was conveyed to M/s J.K. Cements Ltd., and the agreement was canceled. Therefore, the addition was deleted.

2. Validity of Initiation of Proceedings under Section 147:
The Cross Objection argued that the initiation of proceedings under Section 147 was illegal and unjustified. However, the tribunal did not find any substance or merits in this argument and dismissed the ground.

3. Determination of Whether the Transaction Constituted a 'Transfer' under Section 2(47) of the Income Tax Act:
The AO considered the transaction as a transfer under Section 2(47) since the leasehold rights were transferred under the agreement against consideration, and part payment was received. The CIT(A) found that the transfer was subject to the renewal of lease rights, which was a precondition for the balance payment. The tribunal referred to the Supreme Court decision in CIT vs. Shri Balbir Singh Maini, which stated that no profit or gain arises from a transaction that never materialized due to the lack of necessary permissions. Therefore, the tribunal concluded that the agreement did not constitute a transfer under Section 2(47) as the lease renewal was pending.

4. Consideration of the Agreement's Cancellation:
The CIT(A) noted that M/s J.K. Cements Ltd. sent a letter for the agreement's cancellation, indicating that no transfer occurred within the meaning of Section 2(47). The tribunal upheld this finding, stating that the agreement did not convey any title, ownership, or interest in the leasehold rights to the second party.

5. Correct Calculation of the Cost of Acquisition and Indexation:
The Cross Objection argued that the AO erred in not taking the fair market value as on 01.04.1981 as the cost of acquisition and not providing indexation. The tribunal directed the AO to compute the capital gain after allowing the cost of acquisition as the fair market value as on 01.04.1981, as per Section 55(2)(ii)(b).

6. Disallowance of Expenses under Section 57:
The CIT(A) confirmed the disallowance of ?1,98,759/- claimed under Section 57, as the assessee failed to provide documentary evidence that the expenses were incurred wholly and exclusively for earning income from other sources. The tribunal upheld this decision due to the lack of evidence.

7. Contradiction in the Assessment Regarding the Cost of Acquisition and Capital Receipts:
The Cross Objection argued that the AO's action was contradictory, taking the cost of acquisition as NIL while not considering the alleged receipts as capital receipts. The tribunal found that the agreement dated 10.06.2010 transferred a right in favor of M/s J.K. Cements, and the amount of ?25 lacs received was to be assessed as capital gain, subject to allowable deductions for the cost of acquisition.

Conclusion:
The tribunal dismissed the appeals of the Revenue in ITA No. 276 & 278/JP2017 and the CO of the assessee in CO No. 12 & 13/JP/2017. The appeal of the Revenue in ITA No. 277/JP2017 and the CO of the assessee in CO No. 11/JP/2017 were partly allowed.

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