2025 (11) TMI 459 - AT - Income Tax

Properties transferred under section 2(47)(vi) to retired partner who enjoyed use and received sale proceeds

ITAT held the properties were transferred within the meaning of section 2(47)(vi) to the retired partner, who enjoyed and used them for business and ... Addition u/s. 50C - property as transferred within the meaning of provisions of section 2(47)(vi) - Ownership of property - assessee has executed a sale deed for sale of 3 immovable properties but has not offered any capital gains in the return of income - assessee submitted that the properties have been transferred to the retired partner Shri Vinod Kumar B Goenka who has been using the same for his own business purpose HELD THAT:- Sub-clause (vi) was inserted to over ride the recognition of ownership only through registration which is a requirement under section 54 of the Transfer of Property Act. On perusal of the CIT(A)'s order we notice that the CIT(A) has recorded a finding that the impugned properties have been used by Shri Vinod Kumar B Goenka for his business purposes after receiving them post retirement. Therefore it is an undisputed fact that the impugned properties have been enjoyed by Shri Vinod Kumar B Goenka by using the same for his business purposes. Accordingly, there is merit in the submission of the AR that the property has been transferred within the meaning of provisions of section 2(47)(vi) of the Act to Shri Vinod Kumar B Goenka. The fact that the entire sale consideration has been received by Shri Vinod Kumar B Goenka also supports the contention that Shri Vinod Kumar B Goenka is the owner of the property and the sale deed is executed by the firm only for the reason that on records the assessee continued to be the owner. It is also relevant to mention here that Shri Vinod Kumar B Goenka has not declared the capital gain by filing the return of income cannot be a reason for taxing the gain on the transfer of properties in the hands of the assessee since it is the fundamental principle under the Act that the income must be assessed in the hands of the correct person who has earned it. Appeal of the revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether addition under section 50C can be sustained in the hands of the partnership firm where impugned immovable properties were sold but the firm alleges beneficial ownership had earlier passed to a retired partner by a family settlement and accounting entries. 2. Whether a non-registered family settlement and passing of book entries, combined with subsequent use of the properties and receipt of sale proceeds by the retired partner, suffice to treat the retired partner as the person who 'transferred' the property within the meaning of section 2(47)(vi) of the Income Tax Act, 1961. 3. Whether the fact that the retired partner did not file a return or declare capital gains precludes assessing the transfer in the hands of the retired partner and/or justifies assessing the capital gain in the hands of the firm that executed the registered sale deed. 4. Whether the mere naming of the firm as seller in the registered sale deed and statutory NOCs in the sale deed conclusively establish the firm as legal owner for income-tax purposes despite other documentary and factual indicia of transfer to the retired partner. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustenance of addition under section 50C against the firm where beneficial ownership allegedly passed to retired partner Legal framework: Section 50C applies to computation of capital gains where transfer of a capital asset is by a person; it mandates adoption of stamp duty valuation for computing full value of consideration where sale consideration declared is less than stamp value. Assessment must be made in the hands of the person who has earned the income. Section 2(47)(vi) expands 'transfer' to include transactions that transfer or enable enjoyment of immovable property even if registration is absent. Precedent Treatment: No binding precedent was relied upon by the parties or the Tribunal in the text; Tribunal applied statutory interpretation and factual assessment. Interpretation and reasoning: The Tribunal accepted the CIT(A)'s factual findings that (a) the family settlement (though unregistered) and retirement deed were executed in the relevant year; (b) accounting entries and reconstituted partnership records reflected transfer; (c) the retired partner used the properties for his business thereafter; and (d) sale proceeds were received by the retired partner as evidenced by bank details and receipts. The Tribunal noted the legislative purpose of section 2(47)(vi) to tax the person who enjoys or receives income from the property irrespective of registered title, and that this purpose overrides reliance solely on registration under Transfer of Property Act. The Tribunal also relied on the administrative acceptance in the assessment year immediately following retirement (AY 2004-05), where the Department made no adverse finding on the transfer, treating that as relevant contemporaneous acceptance of the transaction. Ratio vs. Obiter: Ratio - where contemporaneous documentary and factual indicia (retirement deed, family settlement, accounting adjustments, possession/use by payee, and receipt of sale proceeds) establish that beneficial ownership and enjoyment passed to the retired partner, the capital gain arising on sale ought to be assessed in the hands of that retired partner under the concept of 'transfer' in section 2(47)(vi), and not in the hands of the firm merely because the registered sale deed names the firm as seller. Conclusion: Deletion of addition under section 50C in the hands of the firm was upheld because the Tribunal found the retired partner to be the person who had the beneficial ownership and received sale proceeds; thus the firm was not the taxable transferor. Issue 2 - Effect of non-registration of family settlement and reliance on accounting/book entries and contemporaneous conduct Legal framework: Transfer of property for purposes of Transfer of Property Act requires registration for certain contracts; however, tax law via section 2(47)(vi) treats arrangements transferring enjoyment as 'transfer' for taxability even absent formal registration. Evidentiary value of contemporaneous documents and conduct is relevant to determine who enjoyed or received the economic benefit. Precedent Treatment: None cited; Tribunal relied on statutory purpose and factual matrix. Interpretation and reasoning: The Tribunal recognized that the family settlement was not registered, but held that the non-registration did not negate the tax characterization under section 2(47)(vi). The Tribunal placed weight on: (i) the retirement cum reconstitution deed and memorandum recording family settlement executed in the earlier year; (ii) book entries and transfer from firm's business accounts to the retired partner's capital account; (iii) use of the premises by the retired partner for his business; (iv) receipt of sale consideration by the retired partner evidenced by banking instruments; and (v) prior assessment where the Department did not dispute transfer. These facts collectively demonstrated transfer of beneficial ownership and enjoyment irrespective of registry formalities. Ratio vs. Obiter: Ratio - non-registration of the family settlement does not automatically rebut the factual finding of transfer of beneficial ownership where contemporaneous documentary and transactional evidence and conduct establish that the retired partner enjoyed and received the benefits of the property; section 2(47)(vi) captures such situations for tax purposes. Conclusion: The Tribunal held that the non-registration of the settlement did not preclude treating the retired partner as the transferee/owner for income-tax purposes; the CIT(A)'s factual conclusion was sustainable. Issue 3 - Consequence of retired partner not filing return or declaring capital gains Legal framework: Taxation requires income to be assessed in the hands of the person who earned it. Failure of the actual owner to file return does not automatically render the person appearing on recorded title as the taxable person if evidence establishes beneficial ownership elsewhere. Precedent Treatment: None cited. Interpretation and reasoning: The Tribunal emphasized the fundamental principle that income must be assessed in the hands of the correct person who earned it. The fact that the retired partner did not file a return or declare capital gains cannot justify assessing the gain in the hands of a different person (the firm) if the balance of evidence shows the retired partner was the owner and recipient of proceeds. The Tribunal rejected the Revenue's contention that absence of declaration by the retired partner is a ground to tax the firm, noting that correct assessment follows substance over form. Ratio vs. Obiter: Ratio - non-declaration by the person entitled to income does not justify taxing another person who did not earn the income where substantive evidence indicates the income accrued to the former. Conclusion: The Tribunal held that absence of return/undeclared capital gains by the retired partner does not support sustaining the addition against the firm; the gain must be assessed in the hands of the person who actually received and enjoyed the proceeds. Issue 4 - Reliance on registered sale deed naming the firm and statutory NOCs as conclusive proof of firm's ownership Legal framework: Registered sale deed is a significant legal document but assessment for income tax looks to the true incident of ownership, enjoyment and receipt of proceeds. Section 2(47)(vi) and the tax code allow consideration of arrangements and conduct beyond registered title. Precedent Treatment: Not specified; Tribunal considered documentary evidence collectively rather than treating the registered deed as conclusive. Interpretation and reasoning: The Tribunal acknowledged that the registered sale deed names the firm as seller and includes NOCs, but it also noted the deed itself contains clauses authorizing the retired partner to collect sale proceeds and acknowledges ownership of the retired partner and his wife in certain recital pages. The Tribunal treated the registered deed and related documents contextually with other contemporaneous documents (retirement deed, family settlement, accounting entries, bank receipts). The Tribunal concluded that the firm's appearance as seller on records reflected continuing registered title and record-keeping, not necessarily beneficial ownership, and that substance (actual receipt and enjoyment by the retired partner) controlled taxability under section 2(47)(vi). Ratio vs. Obiter: Ratio - a registered sale deed naming an entity as seller is not conclusive for income-tax purposes where other contemporaneous documentary and factual evidence establishes beneficial ownership and receipt of sale proceeds by another person; the statutory concept of 'transfer' in section 2(47)(vi) permits looking beyond formal registries. Conclusion: The Tribunal found no error in the CIT(A)'s approach of weighing the registered sale deed alongside other evidence; it affirmed that the firm's naming as seller in the deed did not, by itself, mandate sustaining the addition against the firm. Overall Disposition The Tribunal upheld the CIT(A)'s deletion of the addition under section 50C in the hands of the partnership firm, concluding that on the facts and documents the retired partner was the person who had the beneficial ownership, used the properties, and received the sale consideration; accordingly, the firm was not the correct person to be assessed for the capital gains arising on sale.