2023 (3) TMI 1140 - AT - Income Tax

Tribunal denies tax exemption, deems gift deed a tax evasion scheme

The Tribunal upheld the disallowance of exemption under Section 54F of the Income Tax Act, 1961, amounting to Rs. 2,63,67,705, finding that the assessee's ... Exemption u/s 54F - Denial of claim as assessee has used a colourable device to claim exemption u/s. 54F - as per revenue there is artificial transfer of one house by way of gift deed just prior to the effective date - HELD THAT:- In the present case, as seen assessee was engaged in the artificial transfer of one house by way of gift deed just prior to the effective date - As u/s 23 and 24 of the Indian Contract Act, 1872, when the object is to defeat any provisions of law, and when consideration is of such nature that, if permitted, it would defeat the provisions of any law, the contract will be void. In the present case, per se gift deed was not executed on account of natural love and affection but was executed by the assessee to artificially avail the deduction u/s 54F. We cannot countenance the assessee's conduct and allow the assessee to misuse and exploit the beneficial provisions of section 54F - Undoubtedly, as per the assessee, he is an individual having a high net worth and paying huge taxes. The assessee artificially created a gift deed of the property with a view to fit into the provisions of section 54F, so that he can claim the deduction against the sale of capital asset. The act of the assessee was prearranged step for execution, and it served no commercial purpose but was motivated to avoid paying taxes. The orders passed by the assessing officer and ld.CIT(A) were within the four corners of law and do not require any interference. Appeal of the assessee is dismissed. Issues Involved:1. Disallowance of exemption under Section 54F of the Income Tax Act, 1961.2. Allegation of using a 'colourable device' to evade taxes.Summary of Judgment:Issue 1: Disallowance of Exemption under Section 54F of the Income Tax Act, 1961The assessee filed an appeal against the order of the CIT(A) which upheld the disallowance of exemption under Section 54F of the Income Tax Act, 1961, amounting to Rs. 2,63,67,705/-. The CIT(A) and the Assessing Officer (AO) concluded that the assessee used a 'colourable device' by gifting a property to his father just before selling another property to claim the exemption under Section 54F.Issue 2: Allegation of Using a 'Colourable Device' to Evade TaxesThe AO and CIT(A) found that the gift deed executed by the assessee in favor of his father was a 'colourable device' designed to evade taxes. The AO noted that the gift was made just before the sale of another property, suggesting it was a prearranged step to claim tax benefits. The CIT(A) supported this view, stating that the gift was intended to keep the property within the family while availing the tax exemption.Findings and Conclusion:1. Assessment of Transaction Timing and Intent: The Tribunal observed that the assessee executed the gift deed just three days before entering into an agreement of sale, raising doubts about the intention behind the gift. The Tribunal noted that the assessee continued to live in the gifted property, indicating that the gift was not genuine but a strategy to claim tax exemption.2. Legal Precedents and Tax Planning: The Tribunal acknowledged the assessee's argument that tax planning within the framework of law is permissible. However, it emphasized that the gift deed in this case was a 'colourable device' used to avoid taxes, which is not permissible. The Tribunal cited various judgments to support its view that abusive tax avoidance schemes, even if appearing legitimate, should not be entertained.3. Commercial Purpose and Legal Validity: The Tribunal concluded that the gift deed served no commercial purpose and was executed solely to claim the exemption under Section 54F. It held that the transaction was void under Sections 23 and 24 of the Indian Contract Act, 1872, as it was designed to defeat the provisions of the law.Final Decision:The Tribunal upheld the orders of the AO and CIT(A), dismissing the appeal of the assessee. The Tribunal found that the assessee's actions were a prearranged step to avoid paying taxes and did not warrant any interference. The appeal was dismissed, and the disallowance of the exemption under Section 54F was confirmed.