2025 (3) TMI 928 - AT - Income Tax

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

ACIT Circle-1 (2), Ahmedabad Versus Neptune Plastic Corporation, Ahmedabad

ITAT Ahmedabad held that the assessee's sale of immovable property through True Value as agent was a sham transaction designed to divert sale ... Short term capital gain arising on sale of immovable property - correct amount of sale consideration - action of the AO in reducing the WDV of stock-in-trade and disallowing the depreciation as well as the disallowance of expenses - what was the actual sale consideration received by the assessee on the sale of shop? - HELD THAT:- Assessee was required to obtain permission of the management body/vendor for sale of Shop No.4 and there was no stipulation that the permission has to be obtained from True Value as booking agent or that the booking agent was required to be involved in the future sale transactions. Thus, the contention of the assessee that it could not have sold the property without making an agreement with True Value is not found correct. As rightly held by the AO, neither the True Value had exclusive selling right of the property nor any such right could have been exercised in respect of the property already acquired by the assessee. Therefore, the involvement of True Value in the sale transaction of the property by the assessee has to be treated in the capacity of a mere agent only. There was no fiduciary relationship between True Value and the assessee and in the absence of any such relationship True value either explicitly or implicitly couldn’t have agreed to act on behalf of the assessee to sale the property owned by the assessee. It is also mentioned in this agreement that the booking price of Rs. 75 Lacs paid on 26.03.2012 by ASPL was received by True Value. Since, the True Value was neither the owner of the property nor power of attorney holder on behalf of the assessee and no reference of any agreement between the True Value and the assessee was appearing in this booking agreement, the payment of Rs. 75 Lacs could not have been received by True Value. In the absence of any evidence on record that True Value was an agent of the assessee, the booking agreement dated 1st March, 2012 was not at all enforceable and binding on the assessee. As rightly held by the AO, the commission payable to the agent for providing professional assistance was in the range of 2 to 5% and the payment of 50% of the sale consideration as commission to the agent was not justified. As already discussed earlier True Value had no locus standi in the transaction. Neither it was having any booking rights in respect of this property nor it was authorized by the assessee to sell the property on its behalf, by way of any power of attorney. All the arrangements were made post the date of actual sale of the property with an intention to divert the sale consideration and to reduce the tax liability. Therefore, the AO was correct in treating the transaction as sham transaction and in holding that the payment made by the assessee to True Value was not genuine. To that extent, the finding of the AO is upheld. AO was correct in treating the sale consideration of property at Rs. 5,04,80,000/-. As the profit derived from sale of property was in the nature of short-term capital gain, the same was required to be reduced from WDV of the block of assets. Accordingly, the action of the AO in reducing the sale consideration of Rs. 5,04,80,000/- from WDV of block of assets and thereby disallowing excess depreciation of Rs. 25,48,000/- is upheld. However, the action of the AO in making separate addition of Rs. 2.54 Crores on account of disallowance of expenditure cannot be held as correct. It has not been made out by the Revenue that this expenditure of Rs. 2.54 Crores was separately debited in the P&L account of the assessee. Therefore, the addition of Rs. 2.54 Crores in respect of disallowance of expense is deleted and the ground taken by the Revenue in this regard is dismissed. Appeal filed by the Revenue is partly allowed. ISSUES: 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. Whether the payments made to the alleged booking agent and related entities constitute genuine expenses deductible from the sale consideration or are sham transactions. Whether the agreements executed post-sale deed can be considered enforceable and binding for allowing claimed expenses and reducing capital gains. 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. 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: 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. 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. 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. 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. 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: 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. 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. 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. 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. 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.