Land Purchased but Agreement Not Registered: Section 11(1) Exemption eligibility- Professed vs. Real Intention

Samaja Seva Mandali Vs ITO (ITAT Bangalore)

The case of Samaja Seva Mandali versus ITO (Income Tax Officer) heard before the Income Tax Appellate Tribunal (ITAT) Bangalore involved cross appeals by both the assessee and the revenue regarding different orders passed by the National Faceless Assessment Centre (NFAC) for the assessment year 2018-19 under the Income Tax Act, 1961.

In the appeal filed by the assessee (ITA No.33/Bang/2024), the main issue revolved around quantum additions made by the assessing officer. The assessee, a charitable trust engaged in providing education, had filed a return of income declaring NIL income, claiming exemption under section 11(1) of the Act. However, the assessing officer, after scrutiny, disallowed certain expenses incurred by the assessee, leading to a determination of taxable income. The NFAC upheld the assessing officer’s decision, prompting the assessee to file an appeal before the ITAT.

The grounds of appeal raised by the assessee covered various aspects, including challenging the denial of exemption for amounts applied towards the purchase of land, disputing the assessing officer’s findings, and contesting the imposition of interest under sections 234A, 234B, and 234C of the Act.

The crux of the assessee’s argument was that the amounts expended for purchasing land were applied out of exempt income and should therefore qualify for exemption under section 11(1) of the Act. The assessee provided details of the agreements to sell entered into for the purchase of land, along with payment receipts and other relevant documents, to substantiate its claim.

However, the revenue argued against granting exemption under section 11(1) of the Act, highlighting that the sale agreements were not registered until a later date (23.06.2021), casting doubts on the validity of the transactions. The revenue contended that without the execution of absolute sale deeds and absolute possession of the property by the assessee, the claim for exemption could not be justified.

The ITAT delved into the concept of professed intention versus real intention, emphasizing the need to ascertain the true nature of transactions. While acknowledging the documents provided by the assessee, the ITAT stressed the importance of determining whether the professed intention matched the real intention behind the transactions.

The tribunal noted that while parties were generally free to enter into transactions according to their will, the real intention behind these transactions should align with their professed intention. However, if there were doubts or disputes regarding the real intention, the authorities had the discretion to delve deeper and uncover the actual motives, especially if tax evasion was suspected.

The ITAT, after considering the arguments from both sides, emphasized the importance of ascertaining the true intention behind the transactions and the actual possession of the property. While acknowledging the documents provided by the assessee, including the agreements to sell and payment receipts, the ITAT stressed the need for conclusive evidence of the transfer of ownership, including the execution of sale deeds and possession of the property by the assessee.

Since the sale agreements had not culminated in the execution of sale deeds, and the property remained under the ownership of the original landowners, the ITAT ruled that the claim for exemption under section 11(1) of the Act could not be allowed at this stage. The matter was remitted back to the assessing officer for fresh consideration, directing a thorough examination of the transaction details and ownership status.

Regarding the revenue’s appeal (ITA No.45/Bang/2024) concerning the imposition of penalty under section 271(1)(c) of the Act, the ITAT decided to remit the issue back to the assessing officer’s file, along with the quantum addition issue, for reconsideration based on the outcome of the reassessment.

In conclusion, the appeals of both the assessee and the revenue were partly allowed for statistical purposes, with the ITAT emphasizing the importance of establishing the genuineness of transactions and ownership rights in determining tax liabilities and exemptions under the Income Tax Act, 1961.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These are the cross appeals by assessee as well as revenue which are directed against different orders of NFAC for the assessment year 2018-19 dated 7.11.2023 & 8.11.2023 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). In ITA No.33/Bang/2024 by assessee, the appeal is against the quantum addition and the other appeal filed by revenue in ITA No.45/Bang/2024 on the penalty levied u/s 271(1)(c) of the Act against the addition made in this assessment year.

2. First, we will deal with ITA No.33/Bang/2024 of the assessee’s appeal with regard to quantum additions. The grounds of appeal are as follows:

1. The learned Commissioner of Income Tax (Appeals) [“learned CIT(A)” in brevity] has erred In confirming the intimation passed under the provisions of section 143(1) of the Income Tax Act, 1961 (for short “the Act”) by the learned Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer of National Faceless Assessment Centre (for short “the learned Assessing Officed’) in so far as it is against the Appellant, is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the case.

2. The learned CIT(A) ought to have held that, the learned Assessing Officer has erred—in assessing the taxable income of the Appellant-at 3,10,29,555 as against the NIL income returned by the Appellant on the facts and circumstances of the case.

3. The learned CIT(A) has erred by confirming the denial of exemption of amount applied for purchase of land amounting to Rs.3,10,29,555 as application of income out of the income earned for the assessment year 2018-1 9 under the provisions of section 11(1) on the facts and circumstances of the case.

4. The learned CIT(A) has erred by confirming the action of learned Assessing Officer that amount expended for purchase of land amounting to 9,63,28,856 are not applied as per section 11(1) of the Act out of the amount accumulated under section 11 (5) of the Act during the previous years 2013-1 4 to 2016-17 on the facts and circumstances of the case.

5. The learned CIT(A) has erred by confirming the action of learned Assessing Officer of denial of exemption of amount expended for purchase of land amounting to Rs.16,00,78,000 as application of income under the provisions of section 11(1) on the facts and circumstances of the case.

6. The lower authorities have failed to establish how the appellant has contravened the provisions of section 11(1) of the Act while expending the amount in purchase of land with the bonafide intention of construction of school in furtherance of the charitable object of the Trust on the facts and circumstances of the case.

7. The learned CIT(A) and the learned Assessing Officer have failed to appreciate that the application of income under the provisions of section 11(1) cannot be denied as long as the Appellant is carrying out the charitable activities on the facts and circumstances of the case.

8. The learned CIJ(A) has held that the Appellant has misused the funds and claimed the wrong exemption without any basis/finding and rationale on the facts and circumstances of the case.

9. Without prejudice learned CIT(A) and the learned Assessing Officer erred in law in levying interest under the provisions of section 234A, section 234B and 234C of the Act on the facts and circumstances of the case.

10 .The Appellant craves to add, alter, delete or substitute any of the grounds urged above.

11. In view of the above and other grounds as may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.

3. Facts of the issue are that the assessee is a charitable trust imparting education to the society at large. The assessee filed the return of income declaring NIL income claiming exemption under section 11(1) of the Act. The return of income filed by the assessee was selected for scrutiny assessment and was in receipt of notice under section 143(2) of the Act. The notices were issued under section 142(1) of the Act on various dates calling for records which were duly submitted by the assessee.

3.1 The return of income of the assessee was selected for scrutiny assessment to examine the expenditure incurred by the assessee, accumulation of income and investments made in the immovable property. The learned Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer of National Faceless Assessment Centre (for short “the learned Assessing Officer”) was concerned with the amount of Rs. 16,00,78,000/- expended by the assessee in purchase of land. The assessee has expended towards purchase of land out of the income for the current year amounting to Rs.3,10,29,555, an amount of Rs.9,63,28,856 out of the amount accumulated under section 11(5) of the Act during the previous years 2013-14 to 2016-17 and income accumulated under section 11 (1) of the Act. The learned Assessing Officer considering the documents submitted by the assessee and has passed an order of assessment denying the application of income amounting to Rs.3, 10,29,555 under the provisions of section 11(1) of the Act.

3.2 The learned Assessing Officer has denied the application of Rs.3,10,29,555 claimed by the assessee for the Assessment Year 2018-19. The learned Assessing Officer determined demand amount of Rs. 1 ,52,12,009 for the Assessment Year 20 18-19. The assessee has preferred an appeal before the National Faceless Appeal Centre (NFAC) against the order passed by the learned AO. The ld. CIT(A), ld. CIT(A) at NFAC has passed an order confirming the denial of exemption claimed by the assessee in the instant case. Aggrieved by the order of the ld CIT(A), confirming the action of ld. AO, the assessee has preferred appeal before us.

4. The crux of the above grounds are that the NFAC arrived in sustaining addition of Rs.3,10,29,555/- claimed by assessee as an application of income u/s 11(1) of the Act. The ld. A.R. submitted that in the year under consideration, the Assessee has entered into an agreement to sell with Mr. B. K. Raghuveer and M/S. Heramba Enterprise to purchase the land for the proposed construction of the new school building forming part of the object of the Assessee. The agreement to sell dated 09/08/2017 and 21/08/2017 respectively has been entered with Mr. B. K. Raghuveer and M/S. Heramba Enterprises by the Assessee have been notified and certified at the Sub Registrar Office Jayanagar. The Assessee made the aggregate payment of Rs.16,00,78,000/- to purchase the land and such amounts are paid out of exempt income.

4.1 He submitted that the certificate number 7852/17-18 has been allotted for the agreement to sell entered with Mr. B. K. Raghuveer and the document clearly states the stamp duty has been received through DD bearing no. 746301 dated 09/08/2017. Further, the certificate number 9122/1718 has been allotted for the agreement to sell entered with M/S. Heramba Enterprises and the document clearly states the stamp duty has been received through DD bearing 711078 dated 01 / 09/2017. As stated above, the agreement to sell has been notified and certified with the Sub Registrar office at Bengaluru which now forms part of the land records and are available for verification on due payment of inspection charges.

4.2 Further, he submitted that the Assessee has paid the stamp duty of Rs. 20,000 in respect of each agreement to sell as per clause (e) of Article 5 – ‘Agreement or [its records or] memorandum of an agreement’ of the ‘The Karnataka Stamp Act, 1957’ (Karnataka Act No. 34 of 1957). The challan bearing receipt number 2724 was paid by the Assessee for notifying and certifying the ‘agreement to sell’ entered between Mr. B. K. Raghuveer and Assessee. The challan bearing receipt number 3551 was paid by the Assessee for notifying and certifying the ‘agreement to sell’ entered between M/S. Heramba Enterprise and the Assessee.

4.3 He submitted that the Assessee has taken the vacant possession of the property on 01/01/2018 from both the parties. Further, the Assessee has entered into a ‘Revalidation of the Agreement to sell dated 31/03/2018 with the sellers which has extended the time limit of the agreement to sell to 31/03/2023. The Assessee has entered into such revalidation agreement extending the validity of the agreement and in its vested interest to take the complete ownership of the property in future. The possession is of paramount importance in establishing ownership of immovable property.

4.4 Further, he submitted that the Assessee has registered the agreement to sell dated 23/06/202 1 entered with Mr. B. K. Raghuveer having reference BNG(U) JNR 987/2021-22/BK by paying the registration charges of Rs. 8,80,9 10 and stamp duty charges of Rs. 44,00,000. Further, the Assessee has registered the agreement to sell dated 23/06/202 1 entered with M/S. Heramba Enterprises having reference BNG(U) JNR 985/2021-22/BK by paying the registration charges of Rs. 8,80,910 and stamp duty charges of Rs 44,00,000. The Assessee has taken all steps to take complete ownership of the property from the sellers of the immovable property. 4.5 The chronology of events with Mr. B.K. Raghuveer are as under:

4.6 The chronology of events with M/s. Heramba Enterprises are as under:

5. According to the ld. A.R., the assessee is entitled for exemption u/s 11(1) of the Act and the same to be granted on the basis of above

6. On the contrary, ld. D.R. submitted that the above sale agreements are not registered and it was only registered after a lapse of long period which is on 23.6.2021. As such, it cannot be considered valid agreements, so as to consider as application of income u/s 11(1) of the Act.

7. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the assessee has paid advance of Rs. 16 crores towards purchase of the landed property vide agreements as follows:

7.1 The sale agreement with regard to the property at sl.no. 1 was finally registered on 23.06.2021 for a consideration of Rs.8.8 Crores and the description of property mentioned in Schedule A Property is reproduced as follows:

7.2 The sale agreement with regard to the other property at sl.no.2 was registered on 23.6.2021 for a consideration of Rs. 8.8 Crores, and the description of property mentioned in Schedule A Property is reproduced as follows:

7.3 Thus, according to the ld. A.R., the assessee originally entered into sale agreement and later it was revalidated as above as discussed in earlier part of the order and hence, exemption u/s 11(1) of the Act to be granted. In our opinion, in the present case, the sale agreement was not culminated with the sale deed. The transaction has been continued in the form of sale agreement only and there is no absolute transfer of the property to the hands of the present assessee. Thus, it is appropriate to ascertain whether the property was finally transferred to the present assessee vide proper sale deed and the absolute possession of the property should be in the hands of the assessee only along with custody of the title deeds. Without bringing all these facts on record, the assessee wants to seek exemption u/s 11(1) of the Act, which cannot be allowed. We have to see the following aspects to grant exemption u/s 11(1) of the Act:

a) Sources from which purchase money has been paid.

b) Nature and possession of the property after purchase.

c) Motive of the assessee to continue with the sale agreement instead of entering into absolute sale deed.

d)Position of parties and the relationship, if any between the assessee and the so called seller.

e) The custody of the sale deed after the sale agreement/sale

f) The conduct of the parties concerned dealing with the properties after sale.

g) Whether the payment made by assessee is in tune with the Sub-Registrar’s valuation of the property.

7.4 It should be noted that authorities always have the freedom to “go behind” documents to find out the real intention of the parties as always been recognized. Therefore, to consider the impugned transaction as a colourable devices aimed at tax evasions, one has to look at the truth of the transaction by going behind the façade of documentation or the series of steps taken by the assessee. That rule presupposed that in a given case the real intention of the parties to a document/transactions/arrangements could be different from what it appears from it ex-facie. The department/court must normally proceed on the basis of professed intention, but if that is under doubt, or is disputed or challenged, then it has a power to find out the real intention of the parties by ignoring the same and the department have the freedom to go behind by removing the façade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component parts of arrangement are legally correct and valid. However, any transaction in which the professed intention and the intention gathered from the documentation are the same, must be considered to be genuine transaction and not colourable device adopted to evade tax by assessee. In the present case, the parties involved herein have to enter into a transaction according to their free will and that choice has always been protected, the only rider being that both the professed intention and real intention should be the same. It is to be noted that if there was no execution of absolute sale deed even after lapse of limitation period of 3 years from the date of agreement i.e. 9.8.2017 & 21.8.2017 in respect of both impugned agreements and the Khata and tax paid receipt was not in the name of assessee and if it stands in the name of respective original land owners, the assessee cannot be granted any exemption u/s 11(1) of the Act as application of income and it would be considered that assessee has made an effort to claim exemption wrongly u/s 11(1) of the Act for which action to be taken by the ld. AO in accordance with law. In view of the above, the issue is remitted to the file of ld. AO for fresh consideration on the lines as explained above and the appeal of the assessee is partly allowed for statistical purposes.

ITA No.45/Bang/2024 (AY 2018-19) (Revenue’s appeal):

8. Since we have remitted the issue with regard to quantum addition on application of income u/s 11(1) of the Act to the file of ld. AO for fresh consideration, the issue relating to penalty u/s 271(1)(c) of the Act is also remitted to his file to decide firstly the quantum addition in ITA No.33/Bang/2024 and thereafter to decide the levy of penalty by AO, if circumstances warrants. Ordered accordingly.

9. In the result, appeals of the assessee as well as revenue are partly allowed for statistical purposes.

Order pronounced in the open court on 15^th Apr, 2024