1983 (4) TMI 81 - AT - Income Tax

Summary

Issues Involved:
1. Assessability of capital gains in respect of the sale of a factory.
2. Levy of penalty under Section 271(1)(c).
3. Levy of penalty under Section 271(1)(a).

Detailed Analysis:

1. Assessability of Capital Gains in Respect of Sale of a Factory:
The primary issue in the appeal was whether the sale of a factory, evidenced by a registered sale deed, was a genuine transaction or a sham. The assessee argued that the sale was a sham transaction conducted to raise a loan of Rs. 6 lakhs, and no actual sale took place. The factory was allegedly sold to M/s Mandi Dabwali Haryana Hand-made Paper Chemicals and General Works Production-cum-sale Cooperative Society Ltd. and then re-purchased by the assessee within the same accounting year.

The Tribunal initially rejected the assessee's contention, holding that the registered sale deed was final and refused to consider other evidence. However, the High Court directed the Tribunal to reassess the matter, taking into account all the evidence provided by the assessee.

Upon re-evaluation, the Tribunal considered various pieces of evidence, including affidavits, statements from witnesses, certificates from the Municipality, Electricity Department, and Sales Tax Department, and a civil court judgment annulling the sale. The Tribunal concluded that the sale transaction was indeed a sham, as the factory was not operational at the time of the alleged sale, and no money exchanged hands. The Tribunal noted that the property was merely a plot of land and not a functioning factory as claimed in the sale deed.

2. Levy of Penalty under Section 271(1)(c):
The second issue involved the levy of penalty under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income. Given the Tribunal's finding that the sale transaction was a sham, it was held that the capital gains could not be subjected to tax. Consequently, the basis for the penalty under Section 271(1)(c) was invalidated. The Tribunal, therefore, ruled that the penalty could not be levied as the underlying transaction itself was found to be non-existent.

3. Levy of Penalty under Section 271(1)(a):
The third issue concerned the levy of penalty under Section 271(1)(a) for the late filing of the return. The AAC had previously canceled this penalty, and the revenue had appealed against this cancellation. However, given the Tribunal's finding that the sale transaction was a sham and no capital gains were assessable, the penalty under Section 271(1)(a) was also deemed unsustainable. The Tribunal held that since the primary basis for the penalties was invalidated, the penalties could not be enforced.

Conclusion:
The Tribunal allowed all three appeals of the assessee. It held that the sale transaction was a sham, thereby nullifying the assessability of capital gains and invalidating the penalties under Sections 271(1)(c) and 271(1)(a). The Tribunal emphasized that the evidence overwhelmingly supported the assessee's claim that no actual sale took place, and the registered sale deed was a fake transaction.