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2015 (10) TMI 2050 - ITAT MUMBAI

2015 (10) TMI 2050 - ITAT MUMBAI - TMI - Penalty u/s 271(1)(c) - transfer of title - diversion of income by overriding title - AO held that payment made to the legal heirs of the partner, Shri Pyarali Dholakia & Mrs. Pravin Dholakia cannot be allowed to be reduced from the gross consideration received, as the same belongs to the partnership and the entire amount should have been shown in the hands of the firm - whether the property belongs to the firm and the share of the legal heirs was paid to .....

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firm) had to be given to his sisters. Instead of receiving the whole amount in the hands of the partnership firm and including it as its income and paying taxes thereon, and then paying to the legal heirs which would have been the correct manner, he chose to give the amount directly to the legal heirs after paying the taxes.

Once assessee has complied with the terms of the Will and the family arrangement then, it cannot be held that at the time of filing of the return the assessee lac .....

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facts and circumstances, we hold that penalty levied by the Assessing Officer and confirmed by CIT(A) is unsustainable. - ITA No. : 1965/Mum/2014 - Dated:- 16-9-2015 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER For The Appellant by : Shri Chetan Karia For The Respondent by : Shri Rajesh Ranjan Prasad PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against the impugned order dated 04.12.2013, passed by CIT(A)-23, Mumbai in relation to th .....

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d for scrutiny by issuance of notice u/s 143(2) dated 18.08.2010. Thereafter, the assessee s revised its return of income on 02.08.2011 declaring total income of ₹ 27,03,01,900/- in the computation of long-term-capital-gain. The relevant facts qua the levy of penalty are that the assessee firm is a partnership came into existence in the year 1975. Prior to that it was proprietary concern of Shri Pyarali Dholakia which was converted into a partnership firm by admission of his daughter Natas .....

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ith the assessee firm granting of her share of property to the partnership in 2003, for a consideration of ₹ 35,05,000/-. This consideration was neither paid nor transferred to Mrs. Pravin Dholakia during her lifetime (she passed away on 26th November, 2006). On 8th May, 2006 the partnership firm entered into joint venture agreement for the development of the property and introduced the Development Rights to the property into joint venture with M/s Prestige Properties (Developer). Thus imm .....

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f this fact and has also given credit to sum of ₹ 17 crores, already considered for taxation. After the death of Mrs. Pravin Dholakia on 20.11.2006, daughter Meenaz was appointed as Executrix of her Will and her Estate by which she has bequeathed her property to her Husband (Shri Pyarali Dholakia). Later on, Mr. Pyarali Dholakia also expired on 19.09.2007 and again daughter Meenaz was appointed as Executrix of his Will and Estate. As per his Will, it was mentioned that, in the event of dev .....

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of Retirement, the assessee firm exited from the Joint Venture and continuing Members i.e. M/s Prestige Properties paid consideration to the assessee firm. All the legal heirs were also confirmatory party to the deed of retirement. Out of the consideration received on retirement from the joint venture, the assessee firm paid following sums to the three legal heirs (Daughters) as per the will aggregating to ₹ 17,74,22,070/- :- Name of the Legal Heir Gross Amount paid Tax thereon by grossin .....

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tirement from Joint Venture, was due to testament of the will of the father and family arrangement, hence it amounts to diversion by overriding title to the three legal heirs of Mr. Pyarali Dholakia. 3. However, the Assessing Officer held that, payment made to the legal heirs of the partner, Shri Pyarali Dholakia & Mrs. Pravin Dholakia cannot be allowed to be reduced from the gross consideration received, as the same belongs to the partnership and the entire amount should have been shown in .....

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eir share in the GMC property. At this state, the following issues are to be considered while deciding the taxability of income arising out of long term capital gain on sale of shares mentioned above : i. The assessee firm M/s Goldfilled Mercantile Co. is having absolute rights in the title of the property mentioned at a above. ii. None of the family members have any rights in the property at a and only the Assessee firm M/s GMC have rights in the JV and/or the property. iii. M/s Goldfilled Merc .....

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family members have staked any claim for any share in the property when the property ( a & b ) was transferred vide agreement dated 08/05/2006. vi. The only obligation for the Assessee firm was that to pay the mutually agreed compensation for land b . This is due to the fact that the Assessee firm was having only the selective rights on land b and the title was not in the name of the firm but in the name of Mrs. Pravin Pyarali Dholakia. vii. Similarly at the time of deed of retirement execu .....

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sons were having such right in the JV and/or in property, the same should have been reflected in the agreement dated 08/05/2006 and resultant computation of capital gain during AY 2007-08. x. Since, the rights in the title and development rights of property were only vested in the Assessee firm; the taxability of the long term capital gain would only be in the hands of the firm. xi. Payment to family members is only an application of income and cannot be considered as an allowable expense/deduct .....

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e legal heirs of the partners can be best be considered as application of income but such payment cannot be reduced from the gross consideration while computing the long term capital gains. As the absolute rights in the capital assets were only vested in the firm; the long term capital gain arising out of transfer of such capital asset would only and entirely accrue in the hands of the assessee firm M/s Goldfilled Mercantile Co . Accordingly, the entire gross sale consideration dated 21st May, 2 .....

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sessee though on behalf of the legal heirs. This adjustment in fact, resulted into refund of ₹ 13,29,566/- which is evident from the copy of the order passed by the Assessing Officer u/s 154. 4. Now, penalty has been levied on this claim of deduction of ₹ 17,74,22,070/-. In the penalty proceedings, the assessee s explanation has been summarized by the Assessing Officer in Penalty order in para 5.2, which for the sake of ready reference is reproduced hereunder i. They acknowledge that .....

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property and that this is a diversion by overriding title in favour of the estate of the partners of the assessee firm. iii. The way in which the income from capital gains was shown in the return of income was due to a particular view point taken at the time of filing of return of income which is based on the agreement entered into between the developer and the assessee firm and that there was no mala fide intention. iv. Various case laws are cited in support of their contention that penalty u/s .....

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the threshold, legal heir do not have the right on sale consideration, which can be said to have been diverted by overriding title. He also noted the fact that the amount paid to the legal heirs were out of the amounts standing in the credit of father and mother which to be paid as part of the family settlement amongst the legal heirs and this had no connection whatsoever with the taxability on the sale of the assets on which the capital-gains had accrued to the assessee. Under no circumstances .....

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ounts. Besides this, he has also discussed various case laws, including that of Supreme Court decisions in the case of Dharmendra Textiles Processors Reliance Petroproducts (P.) Ltd. and Delhi High Court in the case of Zoom Communications. 6. Before us the Ld. Counsel, Shri Chetan Karia, after explaining the entire facts, first of all, drew our attention to relevant documents, like joint venture agreement entered into between the assessee firm and the developer; family arrangement between father .....

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his will and who were his legal heirs and, therefore, the payment was made to them after calculating the on grossing-up the amount, that is, the gross amount paid and the taxes thereon. Thus, the assessee had paid more taxes on or behalf of the legal heirs. Secondly, the overall conduct of the assessee is required to be seen/gauged that there was no intention even remotely for evading the tax, because the assessee had paid more taxes on behalf of the legal heirs and if such an amount would have .....

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rrect assessee, he submitted that the said judgment is not applicable in the case of the assessee, because there the Assessing Officer has option to assess either the AOP or its member which fact is not applicable here in the case of the impugned assessee firm. The assessee had paid the amount to the legal heirs and genuinely believed that there was a diversion by overriding title by virtue of family arrangement, Retirement Deed and the Will. He also distinguished the decision of Hon ble Delhi H .....

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en in the penalty order as well as the impugned order of the CIT(A), submitted that there was never an dispute about, who will pay the taxes and whose liability it is. Assessee had filed the computation of long-term-capital-gain and thereby had claimed huge deduction of ₹ 17 crores from such computation by reducing the sale consideration. It is only when the matter was taken-up during the scrutiny proceedings, the assessee was forced to withdraw the claim of deduction and showed the correc .....

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e and there is no debatable issue at all or assessee had any bona fide belief. Thus, he strongly relied upon the order of the CIT(A). 8. We have heard the rival contentions, perused the relevant finding given in the impugned orders and also the material referred to before us. There is no dispute with regard to the facts discussed in the foregoing paragraphs. However, for the sake of brevity, the crucial facts, which are relevant for deciding the levy of penalty are hereby reiterated again. One, .....

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ern became part of the partnership firm on conversion in the year 1975 itself. A part of the said property which was owned by Mrs. Pravin Dholakia had entered into MOU for the grant of development rights of this property to the partnership firm in the year 2003 for a consideration of ₹ 35,05,000/-. However, this consideration was never paid to her. On 8th May -2006, partnership firm entered into joint venture agreement for the development of the property with one M/s Prestige Properties . .....

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19th September, 2007. Thereafter, a family agreement was entered into wherein, it was agreed that ₹ 4.50 crores was to be paid to each of the three daughters from the funds available from the firm from the sale of the property including the amount that the firm may receive on the retirement from the Joint Venture of the Developer. Thereafter, Retirement Deed was signed on 21.05.2008, whereby, a joint venture was ended and the Developer agreed to pay sum of 70 lakhs to the other Members of .....

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the taxes were paid by the assessee-firm though on account of / on behalf of the legal heirs. Thereafter, the assessee in the return of income, declared the long-term-capital-gain received from the Developer under the Retirement Deed and claimed deduction of ₹ 17,74,22,707/- paid to legal heirs. In the course of the assessment proceedings, the Assessing Officer held that in view of the decision of the Hon ble Supreme Court in the case of ITO vs Ch. Atchaiah (supra), the assessee should hav .....

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here was a bona fide belief that the amount paid to the legal heirs is not be included in the sale consideration of the capital gain shown by the assessee firm. Once, the Assessing Officer had taxed the whole amount in the hands of the assessee, the assessee agreed to this proposition and made an application before the Assessing Officer that the taxes paid by the firm on behalf of legal heirs should be given credit to the assessee, which in fact was duly accepted and was given by the Assessing O .....

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tify imposition of penalty in a given case, because consideration that arise in the penalty proceedings are separate and distinct then the assessment proceedings, because the assessee may adduce some fresh evidence or may rely on same material to show that he was not guilty of furnishing of inaccurate particulars of income or for concealment of income. The explanation given by the assessee, in the course of the penalty proceedings is a crucial and determinative factor, which needs to be scrutini .....

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he assessee at that time. The explanation merely raises a rebuttal presumption, which could be discharged in a given case by pointing out the factors and materials in favor of the assessee. It is from this stage the burden shifts upon the revenue. Here in this case, as discussed above, the assessee had no intention even remotely to evade the taxes by claiming the deduction of the amount given to the legal heirs which is evident from the fact that assessee firm acted bonafidely that the amount wa .....

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