2016 (5) TMI 473 - HC - Income Tax

Incorrect Rs. 14 Crores Capital Gain Addition; High Court Upholds Deletion Decision

The Tribunal found that the addition of Rs. 14 crores made under the head of capital gain was incorrect and ordered its deletion. The High Court upheld ... Capital gains - member of an AOP taxed in place of AOP - distribution of assets - relinquishment of rights - whether settlement agreement reveals there was an agreement for outright transfer of land together with all the rights and as per Sec.2(47) the word transfer includes relinquishment of rights? - Held that:- The right person should be taxed and merely because the right person could not be taxed, it is not open to the Revenue to tax a wrong person. Merely because the AOP at the relevant point of time could not be assessed for tax is not a valid ground to tax a member of an AOP at the time when AOP is dissolved and the properties are distributed AOP was formed in the year 1995. The activities of the AOP were also continued for some time and it is only in the year 2004, on account of dispute, settlement was entered into between the members of AOP and the properties were distributed. It has been correctly held by the Tribunal that when distribution of assets takes place the same is not transfer of assets. The assessment at ₹ 14 Crore is on the basis of 20% share of the profit which the assessee would have earned in future. The Tribunal has taken note of the fact that the share of the income is not taxable in the hands of the members. Ultimately, the Tribunal found that the addition of ₹ 14 Crore made under the head of capital gain was incorrect and the said addition is ordered to be deleted. - Decided against revenue Issues Involved:1. Formation of Association of Persons (AOP).2. Incidence of capital gain in the context of AOP.3. Impact of non-filing of return by AOP on the assessee.4. Deeming the money received by the assessee on extinguishment of AOP as capital gains.5. Determination of the date of transfer of the subject property.Issue-wise Detailed Analysis:1. Formation of Association of Persons (AOP):The Tribunal examined whether there was any intention by the parties to form an AOP. The essentials for an AOP, as defined by the Honorable Apex Court in CIT Vs. Indira Balakrishnan, include two or more persons joining in a common purpose, with the objective to produce income, profit, or gains, and the combination being voluntary. The Tribunal concluded that the parties had voluntarily combined for a common purpose to develop the property, sell the flats, and share the profits, thus satisfying the conditions for the formation of an AOP.2. Incidence of Capital Gain in the Context of AOP:The Tribunal considered whether there was an incidence of capital gain. According to Section 45(3) and Section 45(4) of the Act, profits or gains arising from the transfer of a capital asset by a person to an AOP or by way of distribution of capital assets on the dissolution of an AOP are chargeable to tax. The Tribunal found that the capital asset (land) could be considered as transferred to the AOP in the year the principal agreement was entered into, which was much before the impugned assessment year. Therefore, there was no capital gain on account of the land being introduced by the assessee into the AOP during the relevant previous years.3. Impact of Non-filing of Return by AOP on the Assessee:The Tribunal addressed whether the non-filing of return by the AOP would affect the stand or claim of the assessee. It concluded that the failure of the AOP to file a return of income would not shift the tax incidence to its members. The charging Section 4 of the Act does not give any power to the assessing officer to tax a member of an AOP in lieu of taxing the AOP.4. Deeming the Money Received by the Assessee on Extinguishment of AOP as Capital Gains:The Tribunal considered whether the money received by the assessee based on the settlement could be charged to capital gains. The settlement deed indicated that the AOP stood terminated, and the assessee agreed to receive Rs. 14 crores in lieu of the 20% share of profit which would have arisen in the future. The Tribunal concluded that the profit of the AOP was always taxable in the hands of the AOP at maximum rates, and by virtue of Section 86 read with Section 110 of the Act, the share income is not taxable in the hands of the members. The money received by the assessee was considered as capital receipts.5. Determination of the Date of Transfer of the Subject Property:The Tribunal examined the sequence of events and pertinent clauses of the MOU and the principal agreement to determine the date of transfer of the subject property. It concluded that the transfer of title in the land to M/s. PDP was nothing but the distribution of the capital assets of the AOP on its dissolution, which happened much before the impugned assessment year.Conclusion:The Tribunal found that the addition of Rs. 14 crores made under the head of capital gain was incorrect and ordered the deletion of the said addition. The High Court upheld the Tribunal's decision, noting that merely because the AOP at the relevant point of time could not be assessed for tax is not a valid ground to tax a member of an AOP at the time when AOP is dissolved and the properties are distributed. The appeal was dismissed, and no substantial question of law arose for consideration.