2021 (12) TMI 764 - AT - Income Tax

Revision u/s 263 by CIT - determination of true nature and character of income arising to the assessee on sale of rights in land parcel along with other proposed co-purchasers as confirming parties - case was selected for scrutiny through CASS under limited scrutiny category - allegations made in the revisional order passed against the assessee can be capsulated as (1) wrong characterisation of income under the head capital gains as claimed on the ground that such income arose to the assessee by way of compensation on release of rights in land parcel bearing Survey No.847 PCIT viewed that such gains are susceptible to tax under the income from other sources (2) incorrect claim of exemption and cost of improvement in respect of sale of other two plots HELD THAT - It is trite that the revenue cannot step into the shoes of the contracting parties to determine the expediency of payment. Where the seller and purchasers have consciously decided to pay compensation for relinquishment of right arising from an erstwhile banakhat and suitable clause to this effect was put up in the registered sale deed, the revenue cannot displace the legal effect of such express terms duly registered. In the factual matrix, the gains arising by virtue of such arrangement is either chargeable under the head capital gains or not chargeable at all. There is no scope for bringing such income to tax under the head income from other sources . Scope of powers under revisionary jurisdiction are not unfettered. Whereas the A.O. had rightly endorsed the corroborated claim of the assessee in this regard, the PCIT, in our view, has attempted to substitute his wisdom by views of the A.O. without any definite basis. If the view of the PCIT towards the banakhat allegedly hollow or unenforceable is accepted, no income can be recognised at all. The view taken by the A.O. is clearly plausible in law and could not have been displaced in a revisionary proceedings by a very untenable or a debatable view. Having come to a conclusion that the income should be taxed under the had income from other sources it was not open to the PCIT to direct the A.O. to make enquiries and verifications without keeping the issue open for him to be determined afresh. It is evident that the issue was foreclosed in the revisional order itself and the A.O. was simply directed to follow the dotted lines in the garb of lack of proper enquiries or verifications. The PCIT has also failed to spell out as to what further enquiry or verifications are required to be made independently where all the evidences are already perused. Manifestly, the revisional order does not pass the test of prerequisites of jurisdiction embedded in section 263 of the Act. In our view, the PCIT has failed to demonstrate any perceived error in the assessment order. Noticeably, the assessee claims a converse situation where the prejudice, if any, has caused to assessee for offering such gains as chargeable to tax, where judicial view is also available for its non chargeability at the threshold. We are thus inclined to agree with various pleas raised on behalf of the assessee for setting aside the revisional order and restore the assessment order in so far as taxability of receipts attributable to impugned land parcel bearing survey no. 847 is concerned. The revisional order is accordingly set aside on the point of taxability of capital gains on sale of land parcel bearing survey no.847 in question. In the light of concession given on behalf of the assessee, the grievance of the Assessee in respect of other land parcels (other than survey no. 847) are, however, answered in negative and against the assessee. Appeal of the assessee is partly allowed.

Issues Involved:
1. Justification of the revisional action of the PCIT under section 263 of the Income Tax Act, 1961.
2. Characterization of income from compensation received on release of rights in land parcels.
3. Correctness of deduction claims and cost of improvement in respect of other land plots.

Detailed Analysis:

1. Justification of the Revisional Action of the PCIT under Section 263:
The PCIT issued a show cause notice under section 263 of the Income Tax Act, 1961, to the assessee, questioning the assessment order passed by the AO on the grounds that it was erroneous and prejudicial to the interest of the revenue. The PCIT contended that the compensation received by the assessee should have been assessed under the head "income from other sources" instead of "capital gains." The Tribunal noted that the AO had conducted inquiries and verifications as mandated under 'limited scrutiny' and had endorsed the claim of capital gains based on the revised computation of income. The Tribunal held that the PCIT's action was based on re-appreciation of existing facts and was merely a manifestation of his perception. The Tribunal emphasized that the revisional authority cannot interfere with a legally plausible view taken by the AO without a definite basis. Consequently, the Tribunal set aside the revisional order, restoring the assessment order concerning the taxability of receipts attributable to the land parcel bearing survey no. 847.

2. Characterization of Income from Compensation Received on Release of Rights in Land Parcels:
The Tribunal examined whether the compensation received by the assessee for relinquishing rights in land parcels should be characterized as "capital gains" or "income from other sources." The assessee had entered into a Banakhat (MOU) with the landowners, acquiring certain rights in the land parcels. The land parcels were eventually sold to a third party, with the assessee and other co-purchasers receiving compensation as confirming parties to the sale agreement. The Tribunal observed that the compensation received by the assessee was directly attributable to the Banakhat agreement and the subsequent sale deed. The Tribunal held that the compensation received for relinquishing rights in the land parcels falls within the definition of "capital asset" under section 2(14) of the Act and is taxable as "capital gains." The Tribunal rejected the PCIT's view that the compensation should be taxed under "income from other sources," emphasizing that the revenue cannot determine the expediency of payment between contracting parties.

3. Correctness of Deduction Claims and Cost of Improvement in Respect of Other Land Plots:
The Tribunal noted that the assessee did not press against the revisional directions concerning the capital gains arising from the sale of other land parcels (plot no. 594/2 and plot no. 868/1/2). The assessee acknowledged that a positive consequential order had already been passed by the AO on appreciation of facts and evidence. Consequently, the Tribunal did not adjudicate on the merits of the issue related to other land parcels, as no prejudice subsisted at present.

Conclusion:
The Tribunal allowed the appeals of the assessees partly, setting aside the revisional order of the PCIT concerning the taxability of compensation received on the release of rights in land parcel bearing survey no. 847, while declining to interfere with the revisional directions in respect of other land parcels. The Tribunal emphasized the importance of adhering to the legally plausible view taken by the AO and the limitations of the revisional authority under section 263 of the Act.

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