2019 (1) TMI 100 - AT - Income Tax

Revision u/s 263 - computation of Long-Term Capital Loss shown by the assessee on the sale of flats is erroneous and prejudicial to the interest of revenue - Held that - Here, it is not exchange of share with the flat rather the flats have been acquired for prefixed and agreed consideration between the transferor and the transferee and hence it is akin to sale under settlement with an agreed stipulation to withdrawal of suit and complaint. Thus purchase/acquisition mode and price cannot be disturbed and tinkered with some other value. Finding of the CIT to a logical conclusion that there are two transactions, that is, one of transfer of shares; and other of transfer of flat then consequentially there would be two computation of capital gains as on 01.11.2010; firstly, computation on sale of shares; and secondly, sale of flat. For the first transaction of transfer, the full market value of shares as determined by the Ld. CIT is ₹ 1,21,95,000/- and undisputedly the cost of acquisition would be ₹ 4,60,75,000/- which is the total amount of consideration agreed, then the resultant loss subject to indexation would be Rs.(-)3,38,80,000/-. For the second transfer (of flats), the computation of capital gain would be full value of consideration of the flat price in which it has been sold is ₹ 1,07,00,000/- and if the cost of acquisition as determined by the ld. CIT is ₹ 10,97,500/-, then the resultant capital gain would be ₹ 96,02,500/-. Thus, in this year there would be capital loss on sale of shares of ₹ 3,38,80,000/- and capital gain of ₹ 96,02,500/-, resultantly, there would be a Long- Term Capital Loss. Hence it cannot be held that it is prejudicial to the interest of revenue. Thus we hold that the order of the ld. CIT cannot be sustained, as the assessment order accepting the claim of Long-Term Capital Loss by the AO is not prejudicial to the interest of revenue as the assessee has rightly taken the cost of acquisition as per the actual consideration settled by the parties at the time of acquisition of flat. The reason being that it is not in dispute that the flat has not been acquired under the settlement but by some other means for which the cost of acquisition of the flat needs to be determined. The price of acquisition under the facts and circumstances cannot be changed at all and accordingly the resultant computation of capital gain would result in Long Term Capital Loss which has rightly been allowed by the AO. Disallowance u/s.14A, it has been admitted by both the parties that there was no dividend income earned by the assessee which has been claimed as exempt, and therefore, there would be no triggering factor of disallowance under section 14A in view of the judgment of Hon ble Delhi High Court in the case of Cheminvest Ltd vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT . Thus, on merits, we hold that assessment order may be termed as erroneous as he may not have conducted detailed inquiry on the points raised by him, but it cannot be held that such an assessment order is prejudicial to the interest of revenue and therefore in one of the condition is not satisfied, then the assessment order cannot be cancelled or set aside u/s.263 in view of the settled principle in the case of Malabar Industries Company Ltd. Vs. CIT 2000 (2) TMI 10 - SUPREME COURT . - Decided in favour of assessee.

Issues Involved:
1. Initiation of proceedings under Section 263 of the Income Tax Act, 1961.
2. Understanding and treatment of the Memorandum of Understanding (MOU) between the parties.
3. Calculation of the cost of acquisition of flats.
4. Valuation report from the registered valuer.
5. Application of Section 50C of the Income Tax Act.
6. Application of Section 14A of the Income Tax Act.
7. Principle of apportionment of expenditure and its applicability.
8. Validity of the order under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Initiation of proceedings under Section 263 of the Income Tax Act, 1961:
The assessee challenged the initiation of proceedings under Section 263, arguing that the original order was passed by the Assessing Officer (AO) after due application of mind, verification, and inquiries as required under the law. The Tribunal held that the assessment order may be termed erroneous due to a lack of detailed inquiry but cannot be deemed prejudicial to the interest of revenue. Therefore, the initiation of proceedings under Section 263 was not justified.

2. Understanding and treatment of the Memorandum of Understanding (MOU) between the parties:
The Principal Commissioner of Income Tax (Pr. CIT) treated the MOU as a mere agreement between two parties and an unregistered document. The Tribunal found that the MOU was executed between the assessee-company, M/s. Yashraj Containers Ltd., and M/s. VAS Infrastructure Ltd., and was acknowledged by the Hon'ble Calcutta High Court. The Tribunal concluded that the terms of the settlement agreement and MOU were genuine and should not be questioned.

3. Calculation of the cost of acquisition of flats:
The Pr. CIT calculated the cost of acquisition of the flat based on the market value of the shares, ignoring the settlement agreement. The Tribunal held that the cost of acquisition should be based on the actual consideration settled by the parties at the time of acquisition of the flat, which was ?1,80,37,500/- for each flat. The Tribunal found the Pr. CIT's method of valuing the shares and flats to be inappropriate and upheld the assessee's computation.

4. Valuation report from the registered valuer:
The Pr. CIT ignored the valuation report from the registered valuer, which provided the fair market value of the flat at ?1,79,52,000/-. The Tribunal did not specifically address this issue but implicitly supported the assessee's valuation by accepting the cost of acquisition as per the settlement agreement.

5. Application of Section 50C of the Income Tax Act:
The Pr. CIT held that the AO did not verify the value of consideration under Section 50C. The Tribunal noted that the circle rate provided by the assessee was ?84,29,300/-, and the sale consideration of the flat was ?1.07 Crores. The Tribunal found no infirmity in the assessee's compliance with Section 50C and upheld the AO's acceptance of the assessee's computation.

6. Application of Section 14A of the Income Tax Act:
The Pr. CIT argued that the AO did not examine the applicability of Section 14A read with Rule 8D. The Tribunal noted that the assessee did not earn any exempt income during the year, and therefore, the disallowance under Section 14A was not applicable. The Tribunal cited the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd vs. CIT, which supports the non-applicability of Section 14A in the absence of exempt income.

7. Principle of apportionment of expenditure and its applicability:
The Pr. CIT contended that the principle of apportionment of expenditure was not applicable as the assessee did not earn any exempt income. The Tribunal agreed with this contention, reinforcing that without exempt income, the principle of apportionment under Section 14A does not apply.

8. Validity of the order under Section 263 of the Income Tax Act:
The Tribunal concluded that while the assessment order might be termed erroneous due to a lack of detailed inquiry, it was not prejudicial to the interest of revenue. Citing the Hon'ble Supreme Court's decisions in Malabar Industries Company Ltd. Vs. CIT and CIT vs. Max India Limited, the Tribunal held that the conditions for invoking Section 263 were not satisfied. Therefore, the order under Section 263 was invalid and the appeal of the assessee was allowed.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the assessment order was not prejudicial to the interest of revenue, and the conditions for invoking Section 263 were not met. The Tribunal upheld the cost of acquisition as per the settlement agreement and found no basis for disallowance under Section 14A in the absence of exempt income. The order under Section 263 was quashed.

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