2024 (2) TMI 1559 - HC - Income Tax

Revision proceedings u/s 264 - petitioner received only a sum of Rs. 3, 60, 00, 000/- and that the agreement between the petitioner and the agent is reflected in the receipt executed by them in June 2020 AND second ground is that Section 48 of the Income Tax Act permits an assessee to claim a deduction in respect of expenditure incurred wholly and exclusively in connection with the transfer of the property concerned HELD THAT - On perusal of the sale deed it appears that the entire sale consideration was paid to the agent acting for and on behalf of the petitioner / principal. Therefore capital gains would have to be calculated based on such total sale consideration. The second contention raised by the petitioner is that he is entitled to claim a deduction in respect of expenditure incurred wholly or exclusively in connection with the sale of property. This contention is contained in the revision petition. On examining the impugned order particularly paragraph 4 thereof which is the operative part I find that the officer has not dealt with this contention and recorded reasons for rejecting the same. For such reason the impugned order calls for interference. Therefore the impugned order is quashed insofar as it relates to the computation of capital gains on the sale of the relevant immovable property and the matter is remanded for re-consideration. After providing a reasonable opportunity to the petitioner including a personal hearing the first respondent is directed to issue a fresh order on the above issue within a maximum period of three months from the date of receipt of a copy of this order.

Summary

The core legal questions considered in this judgment are:

1. Whether the capital gains arising from the sale of immovable property should be computed on the entire sale consideration of Rs. 4,00,00,000/- as per the sale deed, or only on the amount of Rs. 3,60,00,000/- actually received by the petitioner, given the agency agreement with the agent who received the balance Rs. 37,00,000/- as remuneration.

2. Whether the petitioner is entitled to claim a deduction under Section 48 of the Income Tax Act, 1961, for expenditure incurred wholly and exclusively in connection with the transfer of the property, which was not addressed in the impugned revision order.

Issue 1: Computation of Capital Gains Based on Sale Consideration

The legal framework relevant to this issue is the Income Tax Act, 1961, particularly the provisions relating to capital gains arising from the transfer of immovable property. The sale deed executed by the petitioner's agent records the total sale consideration as Rs. 4,00,00,000/-. The petitioner contended that he only received Rs. 3,60,00,000/- and that the agent's receipt of Rs. 37,00,000/- was as consideration for agency services, supported by an agreement between them.

The Court examined the sale deed and noted that the entire sale consideration was paid to the agent acting on behalf of the petitioner. The legal principle is that the transfer of capital asset and consequent capital gains are to be computed on the full consideration recorded in the sale deed, not merely on the amount physically received by the principal. The agency agreement and internal arrangement between the principal and agent do not affect the tax liability of the principal, as the tax burden cannot be shifted to the agent by private agreement.

The respondents relied on this principle to argue that the entire Rs. 4,00,00,000/- must be considered for capital gains computation, and the Court agreed. The petitioner's contention that only Rs. 3,60,00,000/- should be considered was rejected on the basis that the sale deed's terms govern the transaction for tax purposes.

Issue 2: Claim for Deduction under Section 48 of the Income Tax Act

Section 48 permits an assessee to claim deduction for expenditure incurred wholly and exclusively in connection with the transfer of a capital asset. The petitioner claimed such a deduction for the remuneration paid to the agent, arguing that it was an allowable expense in computing capital gains.

While this contention was raised in the revision petition under Section 264, the impugned order did not address or record reasons for rejecting this claim. The Court observed that the failure to consider this contention amounted to a procedural lapse warranting interference with the order.

The Court emphasized that the assessing officer must consider all relevant contentions and provide reasons for acceptance or rejection. The omission to deal with the deduction claim under Section 48 rendered the impugned order incomplete and unsustainable.

Conclusions and Directions

The Court quashed the impugned revision order insofar as it related to the computation of capital gains and the claim for deduction under Section 48. It remanded the matter to the assessing authority for fresh consideration of the issues, including the petitioner's entitlement to deduction, after affording a reasonable opportunity of hearing. The fresh order was directed to be passed within three months from receipt of the judgment.

Significant Holdings

"On perusal of the sale deed, it appears that the entire sale consideration was paid to the agent acting for and on behalf of the petitioner / principal. Therefore, capital gains would have to be calculated based on such total sale consideration."

"The execution of an agreement, in the form of a receipt, by and between the petitioner and his agent does not shift the tax burden to such agent."

"The officer has not dealt with this contention and recorded reasons for rejecting the same. For such reason, the impugned order calls for interference."

Core principles established include that the tax liability for capital gains is determined by the consideration stated in the sale deed, irrespective of internal arrangements between principal and agent, and that all contentions raised by the assessee, especially claims for deductions under the Income Tax Act, must be duly considered and reasoned in the assessment or revision order.