Taxability of Development Agreement Capital Gains was Debatable due to Divergent Judicial Views: ITAT Deletes Penalty [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) deleted penalty under Section 271(1)(c) after holding that taxability of capital gains arising from a development agreement was a debatable issue at the relevant time.

Pramod Reddy Tekula filed the appeal against the order of the Commissioner of Income Tax (Appeals), Hyderabad-11, for Assessment Year 2016-17. The assessee had filed his return declaring income of Rs. 3,22,910. A search under Section 132 was conducted in the case of Giridhari Constructions Group on April 26, 2018.

During the search, loose sheets were found at the residence of Allam Raja Reddy. These included a General Power of Attorney executed on June 27, 2015 among the taxpayer, four others, and developers for total consideration of Rs. 6,48,08,000.

The assessment was completed under Section 143(3), read with Section 153C. The AO made an addition of Rs. 32,14,976 as short-term capital gains from transfer of property under a development agreement. The addition was confirmed by the CIT(A) and later by the Hyderabad ITAT in quantum proceedings.

The AO then levied penalty of Rs. 9,05,448 under Section 271(1)(c), treating the case as concealment of income. The Commissioner of Income Tax (Appeals) upheld the penalty.

The assessee’s counsel argued that mere confirmation of addition in quantum proceedings did not prove concealment. They argued that the issue of capital gains on development agreement was debatable due to divergent court views.

The assessee’s counsel argued that transfer under Section 2(47)(v) read with Section 53A of the Transfer of Property Act was not complete during the relevant year. They also pointed out that HMDA permission for construction was issued only on January 5, 2021.

The revenue counsel argued that the taxpayer did not disclose the transaction in the return and that the income came to light only due to search. It supported the penalty order.

The two-member bench comprising Vijay Pal Rao (Vice-President) and Manjunatha G. (Accountant Member) observed that penalty proceedings are separate from quantum proceedings. The tribunal referred to the Andhra Pradesh High Court cases of Potla Nageswara Rao and Shantha Vidyasagar Annam.

It observed that the issue of capital gains on development agreements required examination of facts, possession, consideration, and terms of the agreement. The tribunal held that at the time of filing the return, there was no clear position on the year in which capital gains had to be taxed in such cases.

The tribunal held that penalty under Section 271(1)(c) could not be levied merely because the quantum addition was confirmed. It directed the AO to delete the penalty and allowed the appeal.

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