2019 (3) TMI 636 - AT - Income Tax

ITAT Decision: Section 45(3) Prevails, Exemption under Section 54F Allowed

Assistant Commissioner of Income Tax-Range 16 (1), Mumbai Versus Moti Ramanand Sagar

The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal. It upheld the CIT(A)'s decision on the primacy of Section 45(3) over Section ... Computation of capital gains on transfer of land to partnership firm - invoking the provisions of section 50C and applying DM circle rates - HELD THAT:- The assessee made the entire payment including stamp duty charges and recorded the same in the books under the head 'Land'. A portion of the said land was subsequently sold to SICC on which long-term capital gain was offered by the assessee, adopting fair market value as on 1-4-1981 as the cost of acquisition. The revenue, however, disputed this and adopted nil value as cost of acquisition on the ground that the assessee had shown nil value in the books. Later, the assessee entered into a partnership with SICC and 'A' as partner and contributed a large portion of its remaining land to the partnership as its capital contribution, and its value was recorded in the books of the partnership. In the partnership firm, the assessee was given 5 per cent shares whereas SICC and 'A' were given 90 per cent and 5 per cent shares respectively. For the purpose of computing capital gains on transfer of land to partnership firm, the Assessing Officer by invoking the provisions of section 50C and applying DM circle rates, computed the total consideration for the transfer and calculated long-term capital gains. AO while applying the provisions of section 50C mentioned that considering the terms and conditions of the partnership, transfer of land to the firm was only a sale, and that section 50C would be applicable even in a situation covered by section 45(3) In Chiraayu Estate & Dev. Pvt. Ltd. [2011 (8) TMI 1316 - ITAT MUMBAI] has held that the profits or gains would arise only when the transfer has been made at a price which is more than the cost price and the difference between the cost price and amount at which the transfer has taken place can be charged u/s 45(3). It further held that as per provisions of section 45(3), price of land recorded in the books of joint venture is required to be considered as receipt of full value of consideration received or accrued as a result of transfer of capital assets. Once the price recorded in the joint venture’s books is treated as full value of consideration, the provisions do not permit substitution of any value so as to make the addition u/s 45(3). Claim u/s 54F disallowed observing that he had more than one house property - HELD THAT:- Referring Hon’ble Madras High Court in Dr. Smt. P.K.Vasanthi Rangarajan v. CIT [2012 (7) TMI 563 - MADRAS HIGH COURT] wherein it is held that joint ownership of a property could not be held to stand in assessee’s way of claiming exemption u/s 54F, dismissed the appeal filed by the revenue. Disallowance of 15% of expenses - HELD THAT:- Disallowance has been made on ad-hoc basis without any specific finding. Such being the case, we delete the disallowance made by the AO. Thus the 2nd ground of appeal is allowed. Issues Involved:1. Applicability of Section 50C vs. Section 45(3) of the Income Tax Act.2. Disallowance of exemption claimed under Section 54F of the Income Tax Act.3. Ad-hoc disallowance of expenses.Issue-wise Detailed Analysis:1. Applicability of Section 50C vs. Section 45(3) of the Income Tax Act:The primary issue in the Revenue's appeal was whether the CIT(A) erred in directing the deletion of the value of the land as determined by the AO under Section 50C and upholding the value of consideration as derived by the assessee under Section 45(3). The AO argued that Section 50C, being a special provision, overrides Section 45(3), which is a general provision. The AO computed Long Term Capital Gains (LTCG) based on the stamp valuation as per Section 50C, which was higher than the value recorded in the firm's books. The CIT(A) and the ITAT, however, relied on previous ITAT decisions, particularly in the case of ITO v. Chirag Estate Developers Pvt. Ltd., and held that Section 50C could not be applied when Section 45(3) is in force, as Section 45(3) specifically deals with special cases of transfer of capital assets to a partnership firm. The ITAT upheld the CIT(A)'s decision, emphasizing that Section 45(3) creates a deeming fiction for the value of consideration and that Section 50C cannot override this in cases where the transfer is not registered under the Registration Act and no stamp duty is paid.2. Disallowance of Exemption Claimed under Section 54F of the Income Tax Act:The assessee's appeal concerned the disallowance of exemption claimed under Section 54F. The AO disallowed the exemption on the grounds that the assessee owned more than one residential property at the time of transfer, including an undivided share in another property held jointly with his daughter. The CIT(A) upheld this disallowance. However, the ITAT referred to its previous decision in the assessee's own case for AY 2011-12, where it was held that joint ownership does not preclude the assessee from claiming exemption under Section 54F. The ITAT followed the precedent set by the Hon'ble Madras High Court in Dr. Smt. P.K. Vasanthi Rangarajan v. CIT, which supported the assessee's position. Consequently, the ITAT allowed the assessee's appeal on this ground.3. Ad-hoc Disallowance of Expenses:The assessee also contested the ad-hoc disallowance of 15% of expenses amounting to Rs. 8,21,238/- made by the AO on the grounds of personal element. The CIT(A) had confirmed this disallowance, following the order of his predecessor for previous assessment years. The ITAT found that the disallowance was made on an ad-hoc basis without any specific finding or evidence. Therefore, the ITAT deleted the disallowance, allowing the assessee's appeal on this ground as well.Conclusion:The ITAT dismissed the appeal filed by the Revenue and allowed the appeal filed by the assessee. The ITAT upheld the CIT(A)'s decision regarding the applicability of Section 45(3) over Section 50C and allowed the exemption claimed under Section 54F. Additionally, the ITAT deleted the ad-hoc disallowance of expenses made by the AO.