By TIOL News Service

HYDERABAD, FEB 17, 2014: THE issue before the Bench is - Whether when the assessee has earned capital gains on transfer of land to developer, not filing income tax return merely because relevant documents were missing, and also the fact that no appeal was filed after the AO made additions, warrant penalty. And the answer goes against the assessee.

Facts of the case

A survey u/s 133A was conducted in the case of ‘B’ Pvt Ltd in which assessee wasthe managing director. It was noticed in survey that assessee had not filed his return of income. It was also found that ‘B’ Pvt Ltd entered into an agreement with ‘A’ Builders for construction of apartments. Assessee and his co-owner held the land in the ratio of 80:20 with 80% belonging to the assessee. The sharing ratio of built up area was 48:52 with 48% belonging to the land owners. Assessee sold an apartment falling into his share and admitted capital gains arising out of the said sale of one apartment but failed to offer capital gains on the transfer of undivided share of land. Thus, assessment was made u/s 143(3) r.w.s. 148 by making addition on account of long term capital gains arising on account of transfer of undivided share of land. Assessee had not preferred any appeal against the said assessment and the addition became final.

AO initiated penalty proceedings. In response to the said proceedings, assessee contended that the reason for not filing the income tax returns was that the information pertaining to the details of purchase of property given for development and will deed in which his mother gifted property to him was misplaced by his staff. Thus, due to lack of information return could not be filed within due date. In the absence of the same, it was not possible to compute capital gain and pay tax on it. In survey proceedings, revenue officials assured that if tax was paid, no penalty would be levied. The revenue officials advised to pay tax and file return despite the documents being lost. Subsequently after two years, the file could be located and returns were filed and taxes were paid. There was no intention not to file the Income tax returns or not to pay the taxes. As the relevant file containing all the important information pertaining to capital gains was missing, the return could not be filed in time. To buy peace with the department, the liability raised was accepted.

The AO rejected the claim of the assessee stating that the reason for not furnishing the return of income i.e, the information pertaining to the details of purchase of property given for development i.e, sale deed copies, will deed copies kept in a separate folder were misplaced by the staff, had no force in it and was not tenable. The complete details were available with the assessee to enable him to compute the income from capital gains arising from the land transferred in pursuance of the development. Assessee could obtain copies of the relevant documents from the Sub-Registrar office concerned. Payment of resultant taxes, consequent to survey and detection by the Department of the tax liability, did not absolve the assessee from the penal consequences u/s 271(1)(c) as per Explanation 3 to Section 271(1)(c). Assessee's claim that he restricted the claim u/s 54F for one dwelling unit though two were used by him did not stand on firm ground. The claim was allowable in respect of a residential house. In the instant case, the residential house can only be equated to an apartment which was an independent dwelling unit.

The CIT (A) confirmed the penalty levied by AO observing that even while filing the return in response to the said notice u/s 148, the assessee has not taken into account the capital gains arising on account of transfer of the undivided share of land in lieu of built up area and it was only when the AO during the assessment proceedings raised the issue of capital gains on the transfer the assessee has admitted the capital gains arising on account of transfer of the land to the developer in lieu of the built up area. There appears gross negligence on his part in not filing the return till survey took place and even thereafter till notice u/s 148 was issued and added to that, not offering full and true disclosure of income. Thus, AO was justified in levying penalty.

Assessee contended that was under a bona fide impression that the long term capital gains on transfer of undivided share of land transferred are not liable to assessment in the year under appeal. He submitted that there were divergent views on this issue pronounced by various courts. The issue was debatable and there was no conclusive finding on the matter, and consequently, no penalty could be imposed in relation to additions made with regard to such debatable issues. With regard to the issue of penalty leviable in relation to differential amount of assessee’s claim for relief under S.54F, it is submitted that the issue whether the assessee is eligible for relief under S.54F only in relation to one flat or otherwise, is a debatable.

After hearing both the parties, the ITAT held that,

++ it was only when AO during the assessment proceedings raised the issue of capital gains on the transfer the assessee has admitted the capital gains arising on account of transfer of the land to the developer in lieu of the built up area. Though the assessment was completed by AO, bringing to tax the capital gains in respect of transfer of undivided share of land belonging to the assessee, making addition to the capital gains admitted in respect of apartment in respect of which exemption under S.54F was claimed on recomputation thereof, the assessee did not prefer any appeal such assessment, and the additions made therein have attained finality;

++ viewed in this light, the contentions of the assessee before us as to the debatable nature of taxability of the capital gains in respect of undivided share of land in the year under appeal, as also debatable nature of the computation of exemption under S.54F of the Act, has to be considered as mere afterthoughts. If non-disclosure of the capital gains was on account of debatable nature of the assessability in the year under appeal, the assessee obviously would have filed appeal against the action of the assessing officer, contesting the view taken by the AO. There is no merit in the plea of the assessee that he was advised that the matter was not clear because there were contrasting decisions on the taxation of the same cannot be accepted, in the absence of any evidence in that behalf and contentions of the assessee appear to be evasive and general in nature. Assessee has deliberately tried to evade tax on capital gains.

(See 2014-TIOL-87-ITAT-HYD)