Sec 54F LTCG Deduction cannot be denied only because of doubt on authenticity of stamp paper

Brief facts of the case are that the assessee has filed his return of income for the assessment year 2016-17 on 06.08.2017. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has computed long-term capital gain towards compensation received for relinquishment of his right in a property in favour of M/s.Landmark Construction (M/s. Land Housing Projects Chennai Pvt.Ltd.) and claimed deduction u/s 54F of the Income Tax Act, 1961. The Assessing Officer has called upon the assessee to explain with necessary evidences transactions give rise to long term capital gain and consequent deduction claimed u/s 54F of the Income Tax Act, 1961. In response, the assessee submitted that he had entered into Memorandum of Understanding with M/s. Landmark Construction, a proprietary concern, on 28.11.2006 for purchase of 20,000 sqft of saleable area together with proportionate undivided share at pre-launch price of Rs.3000/- per sq.ft and has also paid Rs.1,00,000/- advance in cash. It was further submitted that due to delay in implementation of project, the assessee has relinquished his right in the property to be constructed by M/s. Landmark Construction and received compensation of Rs.5 crores in cheque after deducting necessary TDS applicable as per law.

The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to A.O., except MOU, no other reliable document was submitted in support of his claim. Further, the MOU between the parties dated 28.11.2006 is unregistered and there is no witness signature on the document. Although, the assessee claims to have paid Rs.10,25,000/- on various dates, but could not substantiate his claim with necessary evidences. Therefore, the Assessing Officer has rejected claim of the assessee and assessed compensation received by the assessee in lieu of surrender of his rights in property under the head ‘income from other sources’.

Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A).

The learned CIT(A), after considering relevant submissions of the assessee and also taken note of certain judicial precedents, including decision of the Hon’ble High Court of Madras in the case of K.R.Srinath Vs ACIT (2004) 268 ITR 436 (Mad) held that the Assessing Officer has rejected claim of the assessee on the basis of certain assumptions and doubts about MOU between the parties, however, failed to give any valid reason for not considering transaction of the assessee within the meaning of section 2(47) of the Income Tax Act, 1961. The learned CIT(A) further observed that except making certain allegations on the MOU regarding non-registration of document and absence of witnesses, the Assessing Officer has failed to make out a case that transaction between the assessee and builder is sham transaction and has arranged to claim benefit of deduction u/s 54F of the Income Tax Act, 1961. Therefore, the learned CIT(A) allowed claim of the assessee towards deduction u/s.54F of the Income Tax Act, 1961, and directed the Assessing Officer to delete additions made towards compensation received from builder in terms of MOU under the head ‘income from other sources’.

Aggrieved by the decision of CIT(A), the Assessing Officer has filed an appeal with ITAT. The learned D.R. submitted that the learned CIT(A) erred in not appreciating the fact that the stamp paper on which MOU between the parties was entered is not having any serial number, therefore, the genuineness of the MOU is in doubt. The learned CIT(A) has failed to appreciate the fact that except for MOU, the assessee could not produce any other evidence to prove that he had a right in the property and such right has been relinquished in favor of other parties. The learned DR further submitted that the assessee has entered into a transaction to claim the benefit of section 54F of the Act, however, failed to prove the transaction with necessary evidence in light of various reasons given by the Assessing Officer to term arrangement between the parties is not a genuine transaction.

The learned A.R for the assessee, on the other hand, supporting order of the learned CIT(A) submitted that the Assessing Officer has never doubted transaction between the parties, however, rejected claim of the assessee only on the basis of certain defects in MOU, including authenticity of stamp paper issued by the Stamps & Registration Department and absence of witness in the document. The learned A.R for the assessee further submitted that if at all, any defect in the document, said error is rectifiable defect under the provisions of Stamp duty Act, however, same does not invalidate transaction between the parties. The learned AR further submitted that as per provisions of section 2(47) of the Income Tax Act, 1961, term ‘transfer’ includes relinquishment of any right in asset or extinguishment of any right therein. Therefore, extinguishment of any right in relation to capital asset would be treated as transfer and thus, when the assessee has extinguished his right by MOU, same cannot be questioned merely for the reason that stamp paper authenticity is not proved.

Agreeing to the contention of the assessee, Income Tax Appellate Tribunal (ITAT) held that reasons given by the Assessing Officer to reject claim of the assessee on the basis of authenticity of stamp paper is not correct, because if at all, the Assessing Officer is having any doubt on authenticity of stamp paper, the A.O. should have conducted necessary inquiries to ascertain facts whether stamp paper purchased by the assessee is genuine or fake one. In absence of any inquiry, the Assessing Officer cannot come to a conclusion that stamp paper purchased is not genuine one and consequently, on that basis the transaction between the parties cannot be questioned, more particularly, when other evidences filed by the assessee, including confirmation from buyer reveals that transaction took place between the parties.