ITO Vs Lakshmi Brick Industries (ITAT Chennai)
ITAT Chennai held that profit on transfer of flats to partners is computable in the hands of firm, however, benefit of deduction u/s 80IB(10) of the Income Tax Act duly available even on transfer of flats to the partners by way of MOU.
Facts- The assessee is a partnership firm engaged in the business of land development and construction of residential buildings. During the course of assessment proceedings, AO noticed that the assessee has transferred 26 flats measuring 30,313 sq.ft. by way of unregistered MOU dated 20.11.2008 to its partners. Similarly, the assessee has transferred another 20 flats measuring 24,648 sq.ft. by way of unregistered MOU dated 08.10.2009 to its partners. The first transfer of 26 flats is supported by necessary evidence including payment of service tax etc. The second lot of 20 flats transferred during the impugned assessment year is not supported by any evidences.
Therefore, AO called upon the assessee to explain as to why transfer of flats to its partners cannot be treated as sales and consequent income should be assessed for tax. AO, after considering relevant submissions of the assessee and also taken note of certain facts observed that, the assessee could not substantiate transfer of 20 flats measuring 24,648 sq.ft. to its partners and corresponding income offered to tax in the hands of the firm. Further, in absence of corroborative evidence to support MOU dated 08.10.2009 coupled with the fact that the asset in the form of stock in trade was reflected in the financials of the firm up to A.Y. 2013-14, the contentions of the assessee cannot be acceded and thus, sale value of 20 flats has been assessed in the hands of the firm.
CIT(A) directed AO to allow the benefit of exemption claimed u/s 80IB(10) of the Act. Being aggrieved, revenue has preferred the present appeal.
Conclusion- It is clear that the assessee is eligible for 100% deduction towards profit derived from housing project u/s. 80IB(10) of the Act. In light of above fact, if you examine transfer of 20 flats by way of MOU dated 08.10.2009 to partners, and taxability of profit from said transfer in the hands of the firm, no doubt transfer of 20 flats to partners by way of MOU should be treated as sales in the hands of the firm and consequent profit should be offered to tax, because the assessee has classified properties as stock in trade in the hands of the firm. But fact remains that, even if you compute profit from transfer of 20 flats to partners in the hands of the firm, but because the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act for 100% profit derived from housing project, the assessee could very well claim the deduction u/s. 80IB(10) of the Act towards profit, if any, derived from transfer of 20 flats to its partners by way of MOU dated 08.10.2009.
Since, the assessee is enjoying the benefit of deduction u/s. 80IB(10) of the Act, we are of the considered view that, whatever profit computed by the AO in the hands of the firm, consequent to transfer of 20 flats to partners by way of MOU dated 08.10.2009, is also eligible for deduction u/s. 80IB(10) of the Act and thus, we direct the AO to compute profit towards transfer of 20 flats to its partners and further, allow benefit of deduction u/s. 80IB(10) of the Act to entire profit derived from transfer of flats to its partners.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals), Chennai, dated 21.09.2020 and pertains to assessment year 2014-15.
2. The revenue has raised the following grounds of appeal:
“1. The order of the learned CIT(A) is erroneous in law and facts and opposed to the facts and circumstances of the case.
2. CIT(A) erred in deleting the addition made towards profit on sale of 20 flats not disclosed in the P& L a/c.
3. CIT(A) ought to have noted that the flats were sold by the firm and not by the partners as evident from the registered sale deed for sale of UDS in lands. He erred in ignoring the fact that the consideration was also received by the firm beg the owner of transferred asset and hence the profit therefrom was rightly assessed in the hands of assessee firm by the AO.
4. CIT(A) erred in giving evidentiary Value to the MOU dated 08.10.2009 even though it is not registered.
5. CIT(A) erred in holding that since AO accepted the transfer through MOU dated 20.11.2008 as genuine, he ought to have accepted the transfer through MOU dated 08.10.2009 also. CIT(A) ought to have noted that sales though MOU dated 20.11.2008 is supported by declaration of such sales contemporaneously before the service tax authorities whereas there is no such evidence in support of the alleged MOU dated 08.10.2009 and such transaction not disclosed for service tax purpose; the facts are not identical.
6. CIT(A) erred in holding that attachment of property by I.T. Department is a reason for non-payment of service tax. He ought to have noted that according to assessee, transfer took place by way of MOU dated 08.10.2009 whereas attachment by I.T. Department is much later ie. on 24.12.200 and hence assessee ought to have paid service tax, of which liability fell on 08.10.2009.
7. CIT(A) erred in relying on the decision of the Apex Court in the case of Bankipur Club Ltd, when facts are distinguishable.
8. CIT(A) erred in granting deduction u/s80IB(l0) when role of assessee is only as a land owner and not as a developer /builder.
9. CIT(A) ought to have noted that the decision of ITAT has not become final and appeal is pending before the High Court.
10. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
3. The brief facts of the case, are that the assessee is a partnership firm engaged in the business of land development and construction of residential buildings. The appellant firm filed its return of income for the assessment year 2014-15 on 30.09.2014, declaring total income of Rs. 14,01,020/-, after claiming deduction u/s. 80IB of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), towards profit derived from housing project for Rs. 81,36,667/-. During the course of assessment proceedings, the AO noticed that the assessee has transferred 26 flats measuring 30,313 sq.ft. by way of unregistered MOU dated 20.11.2008 to its partners. Similarly, the assessee has transferred another 20 flats measuring 24,648 sq.ft. by way of unregistered MOU dated 08.10.2009 to its partners. The first transfer of 26 flats is supported by necessary evidence including payment of service tax etc. The second lot of 20 flats transferred during the impugned assessment year is not supported by any evidences.
Therefore, The AO called upon the assessee to explain as to why transfer of flats to its partners cannot be treated as sales and consequent income should be assessed for tax. In response, the assessee submitted that it has transferred 20 flats measuring 24,648 sq.ft. to its partners and said transfer has been made for book value and thus, even if you consider said transfer as sales, there is no profit from the transfer and thus, the question of making additions does not arise. The assessee, further contended that assuming for a moment, profit derived from transfer of flats to partners at cost is assessable to tax, even then there is no tax effect because the assessee is claiming benefit of deduction u/s. 80IB(10) of the Act for 100% profit and thus, there is no question of making any addition. The AO, after considering relevant submissions of the assessee and also taken note of certain facts observed that, the assessee could not substantiate transfer of 20 flats measuring 24,648 sq.ft. to its partners and corresponding income offered to tax in the hands of the firm. Further, in absence of corroborative evidence to support MOU dated 08.10.2009 coupled with the fact that the asset in the form of stock in trade was reflected in the financials of the firm up to assessment year 2013-14, the contentions of the assessee cannot be acceded and thus, sale value of 20 flats has been assessed in the hands of the firm. The relevant findings of the AO are as under:
The submissions made by the assessee are carefully considered. The first unregistered MOU dated 20/11/2008 by which 26 flats measuring 30,313 Sq. feet is transferred by the firm to its partners is supported by corroborative evidence in the form of payment of service tax. The service tax is paid by the firm on account of transfer of 26 flats to partners of firm who happens to be the family members. But the fact of the matter is the second unregistered MOU dated 8/10/2009 by which 20 flats measuring 24648 Sq. Feet is transferred by the firm to its partners is not supported by any corroborative evidence so as to substantiate the document. It is pertinent to mention that assessee has not paid any service tax on the 20 flats transferred to partners by the firm on the basis of purported MOU dated 8/10/2009.
In the absence of any corroborative evidence to support the MOU dated 8/10/2009 coupled with the fact that the assets in the form of stock in trade were reflected in the financials of the firm until A Y 2013-14 the contentions of the assessee cannot be acceded to. Accordingly the sale value of 20 flats is assessed in the hands of the firm. The details are as under:
