Income from agreement for sale simply to camouflage real transaction to avoid tax payment, attracts Sec 56(2)(vii)(b)

The Mumbai ITAT Third Member Bench recently observed that when assessee has purchased property for fixed sale consideration but got agreement for sale registered in her favour only by making part payment, such sale cannot be treated as genuine transaction.

The ITAT therefore held that where time was made ‘essence of agreement to sale’ and balance sale consideration is paid through unexplainable channel and such property was rented by virtue of leave licence agreement before taking over possession, such transaction is mere round tripping of money.

Accordingly, the Bench concluded that income earned out of agreement for sale (colourable device) simply to camouflage real transaction in order to hoodwink tax authorities to avoid tax payment, attracts section 56(2)(vii)(b) of Income Tax Act, 1961.

Advocate Venugopal C Nair appeared for the Revenue/Appellant, whereas Advocate Ujjwalkumar Chavhan represented the Assessee/Respondent.

Briefly, the assessee is an individual. During the assessment proceedings, the AO observed that assessee had purchased office premises for total purchase consideration of Rs.2,17,00,000/-. When asked to submit the source of purchase of property, the assessee explained that it has purchased office premises by making payment of Rs.1,00,000/- and thereafter got the same registered with sub-registrar concerned by making payment of stamp duty on the total sale consideration of Rs.2,17,00,000/-. The assessee however, rented out the property in question vide leave licence agreement even prior to agreement to sale.

The AO treated the difference between registered value and the amount paid by the assessee as deemed income of the assessee and he observed that the assessee claimed that the joint venture is still in existence and her husband yet to receive the share of profit and the balance payable will be adjusted against the share of profit receivable. The AO observed that assessee failed to appreciate the fact that the assessee and her husband are separate legal entity. There is no connection between the property was given to the assessee at throw away prices and share of profit yet to be received by the assessee’s husband.

The AO after declining the contentions raised by the assessee proceeded to invoke the provisions contained under section 56(2)(vii)(b) and thereby concluded that it was not a commercial transaction rather a colourable devise to evade the payment of taxes by not making payment of the remaining sale consideration of Rs.2,16,00,000/- through unaccounted cash and thereby assessed the income of the assessee from other sources u/s 56(2)(vii)(b) by making addition of Rs.2,16,00,000/-.

Since there was difference of opinion, the ITAT Third Member Bench after considering the submission, found that the CIT(A) has passed a cryptic order without addressing the legal and factual issue that the entire sale transaction was a colourable devise in order to hoodwink the tax authority to evade the taxes on the remaining amount of Rs.2.16 crore which has never been proved to have been paid till passing of the assessment order nor any such balance payment made by the assessee has been proved or discussed by the CIT(A) during the first appellate proceedings.

When undisputedly the assessee has purchased property in question for a sale consideration of Rs.2,17,00,000/- and got the agreement for sale registered in her favour only by making part payment of Rs.1,00,000/- and payment of remaining sale consideration of Rs.2,16,00,000/- has never been made, the Bench stated that it is highly improbable to treat the sale in question as a genuine transaction.

The Bench also admitted that even prior to this agreement to sale the assessee took the possession of the property in question and rented out the same to one Mr. Ravindra Bhat by virtue of the leave licence agreement meaning thereby amount of Rs.2,16,00,000/- was paid by the assessee in cash at the time of taking possession of the property in question.

Since it is proved from the recital made in the agreement to sale that the assessee has taken possession of the property in question after making payment of entire consideration, the Bench observed that she is estopped by her own act and conduct from claiming that she has made the balance payment of Rs.2,16,00,000/-, which is further a round tripping of the money from one account to another or an afterthought when hauled up by revenue authorities.

So, when the assessee has already paid entire sale consideration qua the property in question at the time of taking possession, the Bench observed that there is no question of again making payment by virtue of the receipts placed on record and which have never been examined by the revenue authorities.

“The substance of the agreement itself proves that the remaining sale consideration of Rs.2,16,00,000/- was paid in cash by the assessee at the time of taking possession of the property in question as per recital made in the agreement to sale but prepared a colourable devise i.e. agreement for sale to camouflage real transaction in order to hoodwink the tax authorities to avoid payment of taxes”, added the Bench.

In the given circumstances, the ITAT Third Member Bench concluded that the AO has rightly invoked the provisions contained under section 56(2)(vii)(b) by making addition of Rs.2,16,00,000/- to the income of the assessee.

Cause Title: ITO vs. Gitika Ganesh Sane [ITA.NO.1088/Mum/2022 / 2023-Enterslice-24-ITAT-Del]

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