Rachit V Shah Vs ITO (ITAT Hyderabad)
Hyderabad ITAT dismisses Assessee’s appeal, holds that gift of house to father just prior to sale of land was a camouflage to claim Section 54F deduction as the Assessee owned two house properties; Remarks that “Though, gift deed, on a standalone basis seems to be a natural act on the part of son to gift home to his father, but when the gift deed is to be examined in the light of the prior and subsequent acts and prevailing circumstances, then it is clear that the real intention of the assessee, was to claim the deduction under section 54F” and upholds CIT(A) order disallowing deduction of Rs. 2.63 Cr; For Assessment year 2015-16, Assessee-Individual claimed deduction under Section 54F against capital gains arising on sale of land for a consideration of Rs. 4.41 Cr; Revenue observed that the Assessee gifted his self-occupied house to his father and within a gap of 7 days sold the land, thus, held that the gift was a colorable device to ensure that the Assessee had only one house property in his books to claim Section 54F benefit; CIT(A) opined that the gift was a colorable device since designed in a manner to avail the benefit of exemption under Section 54F while not parting with the property, thus upheld the denial of Section 54F deduction; ITAT peruses the sale agreement and notes that Rs.2.18 Lakh was received in cash prior to entering into the agreement, observes that there is no evidence as to when this cash amount was received by the Assessee i.e. whether it is prior to executing the gift deed or at the time of execution of the agreement of sale; Opines that the gift deed was “merely a paper gift deed as it was not covered with the transfer of possession and it was not executed on account of love and affection but was executed only for the purpose of taking undue benefit of the provision of law”, as even after executing the gift deed, the Assessee continued to live on the same property with his father; Notes that Assessee had two house properties. one self-occupied and one let-out property and the self-occupied property was gifted just prior to signing the sale agreement, after investing the proceeds from sale in buying new residential house property; Remarks that “From the conduct of the assessee and in view of the circumstances prevailing at the time of the agreement of sale, more particularly giving gift to his father just before the date of agreement, it is clear that the act of the assessee to gift the house is nothing but a concerted effort to avoid the due payment of taxes to the Government.”; Observes that the fact that the Assessee continued to stay in the same property along with his father clearly shows that the gift deed executed by the Assessee was merely a camouflage to claim the deduction under Section 54F; Refers to Sections 23 and 24 of the Indian Contract Act, 1872 whereby contracts entered into with the object to defeat provisions of law, the contract would be void and holds that per se gift deed was not executed on account of natural love and affection but was pre-arranged step for execution, served no commercial purpose and was motivated to avoid taxes; Accordingly, upholds CIT(A) order denying Section 54F deduction. [In favour of revenue] (Related Assessment year : 2015-16) – [Rachit V Shah v. ITO – Date of Judgement ; 15.03.2023 (ITAT Hyderabad)]
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal is filed by the assessee, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dated 06.07.2022 for the A.Y 2015-16, on the following grounds :
“1. In computing the total income, the CIT(A) has wrongly upheld the order of the learned Assessing Officer in disallowing exemption u/s. 54F of Income tax Act, 1961 claimed by the assessee amounting to Rs.2,63,67, 705/- by stating that the assessee has used a colourable device to claim exemption u/s. 54F of the Income tax Act, 1961.
2. For that, your petitioner craves the right to put additional grounds at the time of appeal.”
2. Brief facts of the case are that the assessee is an individual and has filed his return of income for the A.Y 2015-16 on 13.11.2015. A revised return in response to notice issued u/s 142(1) on 10.11.2017 declaring an income of Rs.7,80,890/- under the head House Property, Business, Capital Gains and Income from Other Sources. The return of income was processed u/s 143(1) of Income Tax Act, 1961 and the case was selected for limited scrutiny under CASS. The assessee produced relevant record and information before the Assessing Authority and the Assessing Authority ultimately passed the impugned assessment order for the said Assessment Year 2015-16 u/s 143(3) dated 29.12.2017 by disallowing exemption u/s 54F of Rs.2,63,67,705/- and assessed the total income at Rs.2,71,48,595/-.
3. It is the contention of the Ld. AR before us that the Ld. assessing officer and the Ld. CIT(A) had wrongly concluded that the gift deed executed by the assessee in favour of his father was a colourable device and it was executed only with a view to evade the due taxes and that assessee had wrongly claimed the exemption under section 54F of the Income Tax Act, 1961.
4. The ld. AR had drawn our attention to the order passed by the Assessing Officer and particularly paragraph 11.2 and 12 of the order wherein the following conclusion was recorded by the AO.
“11.2. In the course of hearing the AR was asked as to why it should not be construed that the assessee made a colourable device in the form of gift settlement to his father only to evade payment of tax on capital gains. To this, the AR said that the father Is free to gift that property to any other person and not necessarily to his own son. If his submission were to be true that the father will be so charitable to gift the property to any other person than his son, then why would the gift settlement happen only within a week before the transfer of old property? If the father were to be so charitable, he would have rather refused any gift from his son or would have instructed him to gift it to any needy/poor person or rather would have instructed his son to pay taxes on capital gains (which will be only 20% of the gains) than losing 100% of the property to any other person in the form of further gift. Thus it is proved that a family arrangement has been made by the assessee to evade payment of due taxes to the State
12. In the light of the above it is clearly established that the assessee was effectively the owner of the two house properties viz., i) one at D.No. 3-6-305/43, 431L, Avanthi Nagar, Basheerbagh, Hyderabad and, ii another flat bearing number 171, 7″ floor, Block-A, Srila Heights, St. Johns Road, East Maredpally, secunderabad as on the date of transfer of old asset, besides the third house property at Plot No.5, sy. No. 52 & 53, Saheb Nagar, Khurd Village, LB Nagar, Hyderabad, which the assessee himself claimed as house property in his return of income. In respect of the third property, the assessee claimed it is a commercial property but even failed to establish that It is a commercial property and the electricity bills (to prove non- domestic consumption) submitted by the assessee do not pertain to this third property at all. Notwithstanding the nature (i.e., whether commercial or residential) of the third property at Plot No.5, Sy. No. 52 & 53, Saheb Nagar, Khurd Village, LB Nagar, Hyderabad, it is already established that the assessee made colourable device in the form of gift settlement to his father in the absence of which the assessee would be technically in possession of two properties viz., one at D.No. 3-6-305/43, 431L, Avanthi Nagar, Basheerbagh, Hyderabad and another flat D.NO. 171, 7th floor, Block-A, Srila Heights, St. Johns Road, East Maredpally, Secunderabad) on the date of transfer of the old asset.
In view of the foregoing discussion, the exemption claimed by the assessee uls.54F is denied.”
5. Feeling aggrieved by the order of the AO, assessee preferred the appeal before ld.CIT(A), who had partly granted the relief to the assessee. The findings of the Ld. CIT(A) mentioned in the impugned order in paragraphs 5.7 and 5.8 of the order are to the following effect:
“5.7 The fact that he appellant owned another residential property at 171, 7th floor, Block-A, Srila Heights, St.Johns Road, East Maredpally, Secunderabad (till 26-10-2014) is not disputed by the appellant. The assessee gifted this house property to his father, Sri Vijay kumar shah by way of gift settlement deed in doc.No.107 of 2014 executed on 27-10-2014. Immediately after this gift settlement i.e, within a gap of 7 days, the assessee sold one land property jointly held with his mother in Survey Nos.114 and115 situated at Gaganpahad village, Rajendernagar· Mandal, Rangareddy District on 3-11-2014 for a total consideration of Rs.4,41 ,98,880/-, out of which the share of the assessee is Rs 2,28,38,880/-. Subsequently on 30-01-2015, the assessee purchased a new residential property for a consideration of Rs.3,39,66,000/-. The assessee used the sale proceeds of Rs.2,28,38,880/- of the previously sold property partly for the payment towards the acquisition of the new property. Thus, the assessee claimed exemption u/s.54F of the entire amount of capital gains arising from the sale proceeds of Rs.2,28,38,880/-.
5.8 From the nature of the transaction, it is quite clear that the intention of the assessee was to keep the property with him. That is why it was gifted to his father and not to any member outside the family. The idea was not to part with the property and at the same time avail benefit of exemption available u/s 54 of the Act. Therefore, the gift has been designed in a manner to avail the benefit of exemption under section 54F of the I T Act. Thus, I find that the whole “substance” of the gift transaction is to avail the exemption under section 54F of the I T Act. During the relevant period the assessee was not the owner of the residential property although he had full control over the property. Before the AO, the appellant has stated that his father is free to gift this property to any other person. Thus, I find that that the assessee has hypothetically attempted to justify the transfer of residential property to father in the garb of gift to avail exemption u/s 54 of the Act. At the appellate stage also, the assessee has not produced any evidence to fully substantiate his action to show that the main substance of the gift transaction is not to avail the exemption u/s 54 of the Act. The assessee has merely stated that his father Sri Vijay Kumar Shah is separately assessed under Income Tax Act with PAN: AMFPS4199D and therefore the gift transaction cannot be covered under the ambit of colourable device. The real intent of the gift transaction is to ensure that the appellant has only one self-occupied property in his books and can claim exemption u/s 54 of the Act without alienating himself from the property gifted. This action of the assessee is clearly a colourable device as envisaged in the case of the Mc Dowell and company Limited Vs commercial Tax officer (1985), 3 SCC 230, decided by Hon’ble supreme Court of India. This is elaborately discussed by the AO at para 11.1 of the Assessment order. Accordingly, I fully agree with the AO that the assessee has used a colourable device to claim exemption u/s 54F of the Act.
Therefore, the ground of the appellant is dismissed.
6. Feeling aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us on the grounds mentioned hereinabove.
7. The Ld.AR had made the following submissions before us. Firstly, it was submitted that it is not impermissible under the law to gift the property on account of love and affection by the assessee to his father, therefore, the allegation of the Revenue that the gift deed is a ‘colourable device’ was incorrect. Secondly, assessee had gifted the property in the year 2014–15, before agreement of the sale of the property and thirdly, the father of the assessee had sold the same property in the year 2019-20 and therefore, the hunch of the Assessing Officer that the property will revert back to the assessee was unfounded, incorrect and imaginary. Lastly, assessee along with his father were paying income taxes and are high-net-worth individuals, therefore, there was no occasion to the Assessing Officer to conclude that the assessee was involved in tax avoidance by the ‘colourable device”.
8. It was submitted that the tax planning under the law is permissible and there is no bar for the assessee to arrange his affair to pay minimum taxes. Merely, because the assessee had judiciously placed his financial affairs to reduce the tax liability, then assessee cannot be labelled as indulging in tax evasion by using a “colourable device”. Ld.AR relied upon various decisions and filled the written submissions, which are to the following effect :
“The petitioner assessee Sri Rachit V Shah is an individual and has filed his return of income for the A Y 2015-16 on 13.11.2015 and a revised return in response to notice issued u/s 142(1) on 20.12.2017 declaring an income of Rs.7,80,890/-. The return of income was processed u/s 143(1) of Income Tax Act, 1961 and the case was selected for Limited scrutiny under Computer Assisted Scrutiny Selection (CASS). The assessee produced relevant record and information before the Assessing Authority and the Assessing Authority ultimately passed the impugned assessment order for the said Assessment Year 2015-16 u/s 143(3) dated 29.12.2017 by disallowing exemption u/s 54F of Rs.2,63,67,705/- and wrongly considering the property at Shaheb Nagar Kurd, as a residential property. The total income assessed by the Assessing Authority was Rs.2,71,48,595/-thereby making an addition of Rs. 2,63,67,705/- to the returned income. The nature of the addition to the returned income is as follows:
