Assessee's property sale through unauthorized agent deemed sham transaction to reduce tax liability

ITAT Ahmedabad held that the assessee's sale of immovable property through True Value as agent was a sham transaction designed to divert sale consideration and reduce tax liability. The tribunal found True Value lacked authority to act as agent, having no power of attorney or fiduciary relationship with the assessee. The actual sale consideration of Rs. 5,04,80,000 was correctly determined by AO, not the reduced amount claimed by assessee. The short-term capital gain was properly reduced from WDV of block assets, upholding disallowance of excess depreciation of Rs. 25,48,000. However, separate addition of Rs. 2.54 crores for expense disallowance was deleted as Revenue failed to prove it was separately debited in P&L account. Revenue's appeal was partly allowed.

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ISSUES:

1. Whether the sale consideration of the immovable property should be taken as the entire amount received by the assessee or the net amount after deducting payments made to a third party claiming booking rights.
2. Whether the payments made to the alleged booking agent and related entities constitute genuine expenses deductible from the sale consideration or are sham transactions.
3. Whether the agreements executed post-sale deed can be considered enforceable and binding for allowing claimed expenses and reducing capital gains.
4. Whether consequential depreciation claimed on the property sale is allowable where the sale consideration is adjusted against the written down value (WDV) of the block of assets.
5. Whether the addition of disallowed expenses as separate income is justified when the sale consideration has already been reduced by the full amount.

RULINGS / HOLDINGS:

1. The entire sale consideration of ? 5,04,80,000/- received by the assessee is to be treated as the sale consideration for the property; the third party claiming booking rights had no locus standi and no enforceable right to reduce this amount.
2. The payments amounting to ? 2.39 Crores and ? 15 Lacs to the alleged booking agent and related parties are held to be non-genuine and sham transactions, as these agreements were executed after the sale deed and lacked any enforceable authority or agency relationship.
3. The agreements entered into post-execution of the sale deed are not enforceable against the assessee and cannot be relied upon to reduce the sale consideration or allow expenses.
4. The consequential depreciation of ? 25,48,000/- claimed on the property sale is disallowed because the sale consideration must be reduced from the WDV of the block of assets in case of short-term capital gain, and depreciation cannot be claimed separately.
5. The addition of ? 2.54 Crores on account of disallowance of expenses is deleted because the expenditure was not separately debited in the profit and loss account, and the AO's action in making a separate addition is incorrect.

RATIONALE:

1. The legal framework applied includes provisions of the Income Tax Act, 1961, specifically Sections 147 and 143(3) relating to reassessment and assessment procedures, and the treatment of short-term capital gains on sale of capital assets.
2. The Court examined the conveyance and sale deeds, booking agreements, and related documents to determine the enforceability of claimed booking rights and agency relationships, finding no legal basis for the alleged booking agent's rights post-sale.
3. The Court applied the principle that for short-term capital gains, the entire sale consideration must be reduced from the written down value of the block of assets, and consequential depreciation cannot be separately claimed.
4. The Court identified that the post-sale agreements were contrived to divert sale consideration and reduce tax liability, classifying them as sham transactions lacking genuine commercial substance.
5. The Court clarified that disallowance of expenses already reflected in the adjustment of sale consideration cannot be converted into separate income additions unless the expenses were separately charged to the profit and loss account.

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