Alleged Sham Transaction to avoid Capital Gain Tax: ITAT deletes Addition

Babusinh P. Thakor Vs ITO (ITAT Ahmedabad)

Income Tax Appellate Tribunal (ITAT) Ahmedabad has recently delivered a verdict in Babusinh P. Thakor Vs ITO, addressing the matter of an unjust addition to the assessed tax liability. In this ruling, the Tribunal has directed the deletion of an addition made by the Assessing Officer (AO) on the grounds of wrongful assessment of the tax liability. This article provides an in-depth analysis of the case and the conclusion drawn by ITAT.

In this case, the appellant (Babusinh P. Thakor) was charged for short-term capital gain tax of Rs. 92,00,000 against the returned capital gain of Rs. 2,28,700. The AO had assessed gross sale consideration at Rs. 1,04,00,000, to which Thakor objected. The argument revolved around whether a payment of Rs. 89,00,000 made by Thakor to Frontline Financial Services Ltd. represented a sham transaction designed to avoid tax liability.

Upon examination of the case, the ITAT noted that the payment made by Thakor to Frontline Financial Services Ltd was conducted through a legitimate banking channel and was accepted by the company. Furthermore, the company had given an undertaking to be responsible for the tax liability on the received payment, which implies that Thakor was not responsible for any tax payments related to this amount.

Despite the peculiarities in the transaction, the Tribunal found that Thakor should not be charged with tax for the capital gain mentioned in the Memorandum of Understanding (MOU). This decision was influenced by a precedent set by a previous case, Sapnaben Dipakbhai Patel v Income Tax Officer.

The ITAT’s verdict in the Babusinh P. Thakor Vs ITO case sheds light on the importance of thorough examination of financial transactions before arriving at a tax liability assessment. The Tribunal highlighted the need for equitable taxation and established that tax liabilities should not be unjustly inflated based on misconstrued transactions.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

1. The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Gandhinagar, (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143 r.w.s. 147 of the Income Tax Act 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2009-10.

2. The assessee has raised the following grounds of appeal:

1. In law, in the facts and in the circumstances of the appellant’s case, the Id CIT(A) has to appreciate suo moto that the impugned order passed u/s 147 r.w.s. 143(3) of the I.T. Act is void and bad in law. He ought to have quashed the proceeding accordingly.

2. In law, in facts and in the circumstances of the appellant’s case, the Ld. CIT(A) has grossly erred in confirming the action of the AO of assessing the short term gain at Rs. 9200000 as against the short term capital gain of Rs.228700 shown in the return. In the peculiar facts of the case, the Id CIT(A) ought to have inter alia assessed the short term capital gain as returned by the appellant.

2.1 In law, in the facts and in the circumstances of the appellant’s case, the Ld. CIT(A) has grossly erred in upholding the action of the Assessing Officer in assessing the gross sale consideration at Rs.10400000 in the following terms mentioned in the impugned assessment order u/s 143(3) of the act, as the appellant having disclosed the sale consideration at Rs. 10400000, he ought to have dislodged the action of the AO of carrying out further addition to gross sale consideration of Rs. 89,71,300/-

“14. the entire sale consideration of Rs.1,03,00,000 Rs.1,00,000 i.e. Rs. 1,04,00,000/- (which the assessee has shown as sale consideration in the computation of income) should be taxed in the hands of the assessee.

3. In law, in the facts and in the circumstances of the appellant’s case, the Ld. CIT(A) has grossly erred in upholding the finding of the Assessing Officer that the transaction is sham. The Id CIT(A) should have dislodged the finding of the AO and directed the AO to assess the income as returned by the appellant.

4. In law, in the facts and in the circumstances of the appellant’s case, the Ld. CIT(A) has grossly erred in omitting and decide upon the Ground No.3 of the appellant’s appeal before him, reading as under-

“3. That on the facts and in law, the Assessing Officer has grievously erred in charging interest u/s.234A, 234B and 234C of the Act. “

5. The appellant craves leave to add, amend and/or alter the ground or grounds of appea l either before or at the time of hearing of the appeal.

6. The only interconnected issue raised by the assessee is that the Ld.CIT(A), erred in confirming the order of the AO by sustaining the addition of Rs. 89,71,300/- under the head capital gain.

7. The facts in brief are that the assessee in the present case is an individual and declared income under the head capital gain, other sources and agriculture income in response to the notice issued u/s 148 of the Act. The assessee has purchased a property for a value of Rs. 12,00,000/- dated 02/02/2005. The assessee has entered a memorandum of understanding transferring the impugned property at Rs. 15,00,000/- to M/s Frontline Financial Services Ltd. dated 15-04­2008. However, the Frontline Financial Services Ltd. subsequently claimed to have transferred the property to Smt. Anitaben Bhojrabhai and Smt. Pravinaben Prajapati for consideration of Rs. 1.04 crores. Accordingly, the assessee has shown consideration at Rs. 1.04 crores but claimed the deduction of the difference amount of Rs. 89 lacs i.e. (Rs.1.04 crores – 15 lacs). It was submitted by the assessee that as per the MOU, the consideration received by the assessee over and above to Rs.15 lacs, the same was to be paid to Front Line Financial Services Ltd. Accordingly, the assessee has paid the sum of Rs. 89 lacs to Frontline Financial Services Ltd. and claimed the deduction against the sale of property.

5. However, the AO found that the assessee to avoid the payment of tax liability has adopted colorable device by showing the payment of Rs. 89 lacs to M/s Fronline Financial Services Limited. Thus, the AO disallowed the same and added to the total income of the assessee.

6. Aggrieved assessee preferred an appeal before the Ld.CIT(A), who also confirmed the order of the AO.

7. Being aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.

8. The Ld. AR before us filed a paper book running from pages 1 to 63 and submitted that there is no dispute to the fact that the assessee has made the payment of Rs. 89 lacs to M/s Frontline Financial Services Ltd. To this effect, the Ld. AR drew our attention on MOU (cancelled MOU) and the undertaking given by M/s Frontline Financial Services Ltd. to pay the due taxes on the amount received by it against the MOU as discussed above. Thus, it was contended by the Ld. AR that the assessee cannot be charged for the tax on the amount paid to the M/s Frontline Financial Services Ltd.

9. On the other hand, the Ld. DR vehemently supported the order of the authorities below.

10. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the payment made by the assessee to the company namely Frontline Financial Services Ltd for ₹89,00,000/- which was claimed as deduction against the short-term capital gain represents the sham transaction. Admittedly, both the lower authorities concurrently have reached the conclusion that the assessee has shown the transaction to avoid the tax liability. The view of the lower authorities was based on various reasoning which have been elaborated in the preceding paragraph.

10.1 Be that as it may be, the undisputed fact is that the assessee has made the payment to Frontline Financial Services Ltd of ₹89,00,000/- through the banking channel which has also been accepted by the company namely Frontline Financial Services Ltd. This fact can be verified from the declaration, undertaking furnished by the company namely Frontline Financial Services Ltd which is placed on pages 37 to 39 of the paper book. The relevant extract is reproduced as under:

5. That the company has received Rs.89,00,000/- (Rupees Eighty nine Lacs) from Shri Babusinh Thakor as detailed hereunto:-

10.2 There is no allegation of the revenue based on the documentary evidence that the payment made by the assessee has come back to the assessee in any form directly or indirectly. Besides the company namely Frontline Financial Services Ltd has also given undertaking to the assessee that it will be solely responsible for the tax liability on the payment received by it. The relevant extract is reproduced as under:

6. That Shri Babusinh Thakor, is and will not be able or responsible for payment o f any tax, of whatsoever nature, on the aforesaid amount of Rs.89,00,000/- and if any demand or notice raised on Shri Babusinh Thakor by Income Tax department or any other Govt. department or authorities, the same shall be the sole responsibility of the Company and the Company shall pay and reimburse to Shri Babusinh Thakor the amount of such tax, demand or loss on damage.

10.3 All these facts discussed above were very much available before the authorities below. Despite that no proceeding against the company has been initiated by the revenue by issuing a notice under section 148 of the Act. It is not out of the place to mention that there are certain loopholes in the transaction carried out by the assessee with the company namely Frontline Financial Services Ltd but the same cannot be used against the assessee in the light of the discussions made in the preceding paragraph.

10.4 It is also important to note that the company namely Frontline Financial Services Ltd by virtue of the MOU dated 15 April 2008 got the right which could have been enforced by way of suit for specific performance. Thus, it appears the assessee has made the payment to the company avoid such litigation. Therefore, the assessee cannot be subjected to tax for the capital gain on the amount mentioned in such memorandum of understanding. The Ahmedabad Tribunal in the case of “Sapnaben Dipakbhai Patel v Income Tax officer” reported in 73 Taxmann.com 288 has held as under:

14. Thus, on an analysis of the record, we are of the view that the rights acquired by SDS under the agreement dated 4.4.2008 are of capital nature. In other words, the rights assigned by the assessee by virtue of this agreement are of capital nature and this agreement was enforceable in law under the Specific Relief Act. The time limit for filing of the suit for specific performance of the contract has been provided in Schedule-II of the Indian Limitation Act, 1905. This time is three years from the date of execution of the agreement. The assessee was bound by this agreement, and if she violates this agreement, she could be exposed to civil as well as criminal proceedings. Her right in the property after the execution of this agreement has been curtailed or encumbrance has been created.

10.5 In view of the above and after considering the facts in totality, we set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is hereby allowed.

11. In result the appeal of assessee is allowed.

Order pronounced in the Court on 16/06/2023 at Ahmedabad.