2022 (8) TMI 906 - AT - Income Tax

Capital gain computation - whether the amount paid by the buyer to the tenant for the vacation of tenancy can be taxed in the hands of the tenants or owner of the capital asset? - HELD THAT - Purchaser of the property viz. M/s. Saravana Selvarathnam Retail Private Limited Chennai it is very clear that the purchaser has agreed to pay for vacation of tenants of the premises which was noted in the sized document by the Department and the purchaser has admitted to have made payment for vacation of tenants of the premises which means the purchaser has purchased encumbered property and in order to clear the encumbrances the purchaser paid lump-sum amount to the tenants/occupants of the property. Nowhere it was mentioned that the above sum was paid either to the seller or through the seller of the property. From the above statement it is also very clear that dealings are only between the purchaser of the property and tenants occupied in that premises - purchaser has not given any details/break-up for arriving the figure of Rs..7.40 crores/Rs..6.65 crores which it was aggrieved to pay for vacation of tenants of the premises or how many tenants have occupied in that premises. Under the above facts and circumstances we are of the considered opinion that whatever amount paid by the buyer to the tenant for the vacation of tenancy should not be taxed in the hands of the owner of the capital asset. Adoption of value of the property sold by the assessee - AO shall either adopt the value of the property under section 50C of the Act or DVO valuation of the property. Without any evidence the AO cannot adopt the value other than the above. In this case AO has neither referred for the valuation of FMV to the DVO nor considered the guideline value adopted for the stamp duty purposes by the SRO - Admittedly there was no search and seizure operation carried out in the premises of the assessees. There was absolutely no evidence to show that the assessee have received on-money for the sale of the property. When the Department is alleging receipt of on-money by the assessee the onus cast upon the Department to prove either by way of unaccounted cash deposits in their bank accounts or unaccounted purchase of any property or any other material evidence about the receipt of the on-money. No allegation shall be sustained without evidence - we set aside the order of the ld. CIT(A) in confirming the addition and direct the AO to adopt the guideline value adopted for the stamp duty purposes by the SRO as FMV of the property under section 50C of the Act and accordingly compute the capital gain. Additional capital gain u/s 54F - Since the assessees could not file the details of cost of constructions plan approval or PAN of Shri J. Suresh Consultant Civil Engineer Approved Value the Assessing Officer rejected the claim of the assessee. On appeal the assessees could not produce any details of cost of constructions plan approval etc. the ld. CIT(A) confirmed the order of the Assessing Officer in rejecting the claim of the assessees. Before us assessee has submitted that the assessee s are ready to file all the details before the Assessing Officer and prayed for remitting the matter back to the file of the AO for fresh consideration. By considering the submissions of the ld. Counsel we set aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of the Assessing Officer for de novo consideration afresh in accordance with law. The assessees are directed to furnish complete details before the Assessing Officer for verification and deciding the issue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the payment made by the buyer to the tenant for the vacation of tenancy can be taxed in the hands of the tenants or the owner of the capital asset.

2. The validity of the assessment based on a statement recorded under section 132 of the Income Tax Act, 1961, without allowing the assessees the opportunity for cross-examination.

3. The proper valuation method for the property sold, specifically whether the Assessing Officer should adopt the guideline value or the market value for computing capital gains under section 50C of the Income Tax Act, 1961.

4. The entitlement of the assessees to claim exemption under section 54 of the Income Tax Act, 1961, for the purchase of a new residential house.

ISSUE-WISE DETAILED ANALYSIS

1. Taxation of Payment for Vacation of Tenancy

- Relevant Legal Framework and Precedents: The issue concerns the taxation of payments made for the vacation of tenancy, which involves determining whether such payments should be attributed to the seller of the property or the tenants.

- Court's Interpretation and Reasoning: The Tribunal analyzed the statement from M/s. Saravana Selvarathnam Retail Private Limited, which indicated that payments were made directly to tenants for vacating the property. The Tribunal found no evidence that these payments were made to or through the sellers.

- Key Evidence and Findings: The Tribunal noted the absence of any mention of payments to the sellers in the purchaser's statement and concluded that the payments were made solely to tenants.

- Application of Law to Facts: The Tribunal determined that the payments for vacating tenants should not be taxed in the hands of the property owners.

- Treatment of Competing Arguments: The Tribunal rejected the Assessing Officer's assertion that the payments should be taxed as income for the sellers, citing a lack of evidence.

- Conclusions: Payments made by the buyer to tenants for vacating the property should not be taxed as income of the property owners.

2. Assessment Based on Section 132 Statement

- Relevant Legal Framework and Precedents: The assessment was challenged on the grounds that it relied on a statement recorded under section 132 without allowing cross-examination, violating principles of natural justice.

- Court's Interpretation and Reasoning: The Tribunal emphasized the importance of cross-examination as a fundamental right, referencing the Supreme Court's decision in Andaman Timber Industries.

- Key Evidence and Findings: The Tribunal found that the assessment was based on third-party information without corroborative evidence directly linking the assessees to the alleged on-money transactions.

- Application of Law to Facts: The Tribunal concluded that the assessment could not be sustained solely on the basis of unverified third-party statements.

- Treatment of Competing Arguments: The Tribunal sided with the assessees, highlighting the lack of opportunity for cross-examination.

- Conclusions: The assessment based on the section 132 statement was not valid due to the denial of cross-examination rights.

3. Valuation of Property for Capital Gains

- Relevant Legal Framework and Precedents: The issue pertains to the correct valuation method for computing capital gains, specifically the application of section 50C of the Income Tax Act.

- Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer failed to refer the valuation to the Departmental Valuation Officer (DVO) or consider the guideline value for stamp duty purposes.

- Key Evidence and Findings: The Tribunal found no evidence of on-money transactions and criticized the reliance on market value without proper valuation procedures.

- Application of Law to Facts: The Tribunal directed the Assessing Officer to adopt the guideline value for stamp duty purposes as the fair market value for computing capital gains.

- Treatment of Competing Arguments: The Tribunal rejected the Assessing Officer's valuation approach due to procedural lapses.

- Conclusions: The guideline value should be used for capital gains computation under section 50C.

4. Exemption under Section 54

- Relevant Legal Framework and Precedents: The assessees claimed exemption under section 54 for reinvestment in a new residential property.

- Court's Interpretation and Reasoning: The Tribunal acknowledged the assessees' failure to provide necessary documentation but allowed for the possibility of reconsideration.

- Key Evidence and Findings: The Tribunal noted the lack of cost of construction details and plan approvals in the initial proceedings.

- Application of Law to Facts: The Tribunal remitted the matter back to the Assessing Officer for fresh consideration, allowing the assessees to furnish the required details.

- Treatment of Competing Arguments: The Tribunal provided the assessees an opportunity to substantiate their claim for exemption.

- Conclusions: The matter was remitted for de novo consideration of the section 54 exemption claim.

SIGNIFICANT HOLDINGS

- Core Principles Established: The Tribunal reinforced the necessity of cross-examination in assessments based on third-party statements and emphasized proper valuation procedures under section 50C.

- Final Determinations on Each Issue: Payments for tenant vacation should not be taxed as seller income; assessments based on section 132 statements require cross-examination rights; guideline values should be used for property valuation; and the section 54 exemption claim was remitted for further consideration.

- Verbatim Quotes of Crucial Legal Reasoning: "Under the above facts and circumstances, we are of the considered opinion that whatever amount paid by the buyer to the tenant for the vacation of tenancy should not be taxed in the hands of the owner of the capital asset." "No allegation shall be sustained without evidence." "The assessees are directed to furnish complete details before the Assessing Officer for verification and deciding the issue."