Gujarat H.C : An agreement to sell cannot be equated with transfer of property without there being anything more

High Court Of Gujarat

Ratna Trayi Reality Services (P.) Ltd. VS. ITO

Assessment Year : 2005-06

Section : 2(47), 147

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 2198 Of 2013

April  9, 2013

ORDER

Akil Kureshi, J. – Petitioner has challenged a notice dated 28.03.2012 as at Annexure A to the petition issued by the respondent-Assessing Officer under Section 148 of the Income-tax Act, 1961. Under such-notice, the respondent desired to reopen assessment for the assessment year 2005-06.

2. Petitioner had filed return of income for the said assessment year 2005-06 which was accepted without scrutiny. Subsequently, the Assessing Officer issued the impugned notice and desired to reopen the assessment. At the request of the petitioner, the Assessing Officer also supplied the reasons recorded for reopening the assessment. Such reasons read as under:

“It has come to know that during the F.Y. 2004-05 relevant to A.Y. 2005-06 the assessee has purchased land admeasuring 33817 sq.mt For a toal consideration of Rs. 24,68,97,917/- from the society M/s. Purshottam Farmers Co.op cotton ginning & pressing at Varachha Road, Surat The satakhat without possession-cum-agreement to sale dated 8/4/2004 entered between M/s. Purshottam Farmers Co.op and the assessee.

It is pertinent to note that original agreement to sale was signed between the Purshottam Farmers Co.op society and the company M/s. Ratna Trayi Reality Services Pvt. Ltd. In April 2004, while the transaction as per final sales deeds are in October and December 2005 i.e. after a gap of more than one and half year. Considering the fact that land is an appreciating asset, M/s. Ratna Trayi Reality Services Pvt. Ltd. has tried to evade tax on the short terms capital gain arising in its hand. I have reason to believe that the income has escaped assessment by the assessee.”

3. Petitioner raised objections under communication dated 16.07.2012 against reopening of the assessment. Such objections, however, were rejected by the respondent by an order dated 15.01.2013. The petitioner has, thereupon, filed this petition.

4. Counsel for the petitioner pointed out that the petitioner had entered into an MOU with four other entities on 22.01.2004, under which, the agreeing party had decided to commonly bid for a large piece of land belonging to one Purushottam Farmers Co-operative Cotton Ginning and Pressing Society Ltd. (hereinafter to be referred to as ‘the said society’). Such MOU was necessary since considerable investment was required to purchase large piece of land and neither the petitioner nor other agreeing parties to the said MOU individually had sufficient funds to do so.

5. Ultimately, the petitioner, on behalf of other agreeing parties, entered into an agreement to sale with the said society on 18.04.2004 for purchase of 33870 sq.meters of land situated in the city of Surat. Such agreement was, as a result of the petitioner’s successful bidding at a public auction. In the said agreement it was recorded that, the petitioner had paid a sum of Rs. 6,17,24,479/- to the said society as a part payment against the total sale consideration of Rs. 24,68,97,917/-. The agreement granted time and instalments to the petitioner to pay up the remaining price. Final instalment had to be paid by 31.01.2005. Para 12 of the agreement provided that when the petitioner paid the entire sale consideration, the land, either in whole or in part, shall be transferred in the name of such person or persons as the petitioner may indicate. Para 13 significantly noted that the possession of the land continued with the society and would be handed over to the purchaser only after the full consideration was paid.

6. Under such agreement, several sale deeds took place between, on one hand the petitioner, the other signatories to the MOU dated 22.01.2004 and, the society on the other hand. Such sale deeds took place during October and December,2005. The petitioner purchased only a part of the land. Other portions of the entire land were purchased by different signatories to the said MOU.

7. On the basis of such facts, the stand of the Assessing Officer, as emerging from the reasons recorded, appears to be that the petitioner had created the entire device to avoid the burden of short terms capital gain. As elaborated by the counsel for the revenue; the Assessing Officer seems to be contending that the petitioner had purchased the land in question at the very point of time when the agreement to sale took place between the petitioner and the said society on 08.04.2004. Actual sale deeds executed by the society in favour of other signatories to the MOU was only a device to avoid the petitioner’s liability to pay tax on short term capital gain.

8. In view of such facts, counsel for the petitioner vehemently contended that impugned notice lacked validity. He submitted that from the reasons recorded, it cannot be stated that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. Counsel further submitted that the notice was issued beyond the period of four years from the end of the relevant assessment year. It was, therefore, necessary that income escaping tax should be in the excess of Rs. 1 lakh. In the present case, reasons recorded nowhere mentioned the amount of tax, which might have escaped assessment arising out of the said transaction. In support of his contentions, counsel placed heavy reliance on the decision of Division Bench of this Court in case of Bakulbhai Ramanlal Patel v. ITO dated 04.03.2011 rendered in Special Civil Application No. 12852 of 2010.

9. Counsel further submitted that liability to pay capital gains did not arise, particularly, during the year under consideration. He submitted that the petitioner had not transferred any capital asset so as to invite any capital gain. The Assessing Officer, therefore, gravely erred in basing his reasons for issuance of notice for reopening.

10. On the other hand, learned counsel, Mr. Manav Mehta for the department submitted that, return filed by the petitioner was not taken in scrutiny. The same having been accepted under Section 143(1) of the Act, it was open for the Assessing Officer to reopen the assessment by issuing notice and recording reasons thereof. He submitted that when the petitioner entered into the agreement dated 08.04.2004 with the society, transfer of the land in question stood completed. He relied on provisions contained in Sections 19 and 5 of the Transfer of Property Act to contend that under the said agreement dated 08.04.2004, a vested right to have the sale deed executed, had accrued in favour of the petitioner.

11. Having thus heard learned counsel for the parties and having perused the documents on record, we need to examine the validity of the notice for reopening, in the context of reasons recorded, of course bearing in mind that, in the present case, previously, no scrutiny assessment was framed. It is of course true that in such cases, revenue would enjoy far greater latitude to reopen and assess or reassess income chargeable to tax which the Assessing Officer had reason to believe had escaped assessment. So much is clearly emerging from the decisions of Apex Court in case of Asstt. CITv. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC). However, it is equally well settled that merely because an assessment was not previously framed after scrutiny, would not give unlimited right to the Assessing Officer to reopen by merely issuing a notice without valid reasons. In other words, validity of reason permitting the Assessing Officer to form a belief that income chargeable to tax had escaped assessment would be a relevant consideration even in cases, where the Court is examining challenge to a notice for reopening where no scrutiny assessment was previously framed. Division Bench of this Court in case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Dy. Commissioner of Income Tax or his successor in a judgment dated 06.08.2012 in Special Civil Application No. 858 of 2006 examined the assessee’s following contentions:

“10. This brings us to the second limb of the petitioner’s challenge namely, that the power under section 147 of the Act cannot be exercised to circumvent the proceedings under section 143(3) of the Act because the notice under section 143(2) of the Act has become time barred and further that in any case, reasons recorded would not permit the Assessing Officer to reopen the assessment.”

12. In this context, referring to the decision of Apex Court in case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) and other judgments, following observations were made:

“11. It is undoubtedly true that proviso to section 143(2) of the Act prescribes a time limit within which such notice could be issued. It is equally well settled that such notice is mandatory and in absence of notice under section 143(2) of the Act within the time permitted, scrutiny assessment under section 143(3) cannot be framed. However, merely because no such notice was issued, to contend that the assessment cannot be reopened, is not backed by any statutory provisions.

Counsel for the petitioner did not even stretch his contention to that extent. The case of the petitioner as we understand is that in guise of reopening of an assessment, the Assessing Officer cannot try to scrutinize the return. This aspect substantially overlaps with the later contention of the petitioner that the reasons recorded by the Assessing Officer were not germane and were not sufficient to permit reopening.

16. It would, thus, emerge that even in case of reopening of an assessment which was previously accepted under section 143(1) of the Act without scrutiny, the Assessing Officer would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. However, as held by the Apex Court in the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., (supra) and several other decisions, such reason to believe need not necessarily be a firm final decision of the Assessing Officer.

17. If we accept such proposition, the petitioner’s apprehension that the Assessing Officer would arbitrarily exercise powers under section 147 of the Act to circumvent the scrutiny proceedings which could not be framed in view of notice under section 143(2) having become time barred, would be taken care of. To reiterate, even for reopening of an assessment which was accepted previously under section 143(1) of the Act without scrutiny, the Assessing Officer should have reason to believe that income chargeable to tax has escaped assessment.”

13. In view of such legal position, we may revisit the facts and ascertain for ourselves whether, on the basis of the reasons recorded by the Assessing Officer, it can be stated that he could form a belief that income chargeable to tax had escaped assessment. In our opinion, the Assessing Officer has committed a grave error in issuing impugned notice on the basis of reasons recorded. As noted earlier, the petitioner had first entered into MOU to form a consortium of different entities to bid for a large piece of land which would require sizable investment. The petitioner participated in such auction proceedings. The bid was accepted being the highest. Petitioner, thereupon, entered into an agreement to sale with the society. Ultimately, as per the terms of the agreement and the understanding between the petitioner and other signatories to the MOU at the instance of the petitioner, the society entered into a separate sale deeds in favour of various parties. We fail to see how the revenue can contend that under such circumstances, there was escapement of income under the head of short term capital gain.

14. Section 45 of the Act pertains to ‘capital gains’. Sub section (1) thereof provides inter alia that any profits or gains arising out of transfer of capital asset affected in the previous year shall be chargeable to income tax under the head ‘Capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. Essentially, requirement of attracting said provision to sub-section (1) of Section 45 therefore, is the transfer of capital asset. We fail to see how the revenue can contend that the petitioner had transferred any capital asset that too during the previous year relevant to assessment year under consideration. Merely because the petitioner entered into an agreement with the said society which agreement contained a clause that the final sale deed would be executed in favour of such other persons as the petitioner may indicate, by itself cannot give rise to a presumption that the land in question stood transferred in favour of the petitioner on the date of such agreement as contended by the revenue. The said agreement dated 08.04.2004 is a simple agreement to sale immovable property. The petitioner had paid part sale price at the time of execution of such agreement. Substantial portion of the sale price was yet to be paid. The petitioner was given instalments for doing so. The possession of the property was retained by the seller and was to be handed over only upon full payment of sale consideration. Merely because in addition to such terms the agreement also envisaged that the ultimate sale deeds may be executed in favour of the persons that the petitioner may indicate, by no way would convert such agreement to sale into one of sale deed.

15. Section 19 of the Transfer of Property Act only provides that where, on a transfer of property, an interest is created in favour of a person without specifying the time when it is to take effect, or specifying that it is to take effect forthwith or on the happening of any event which is certain, such interest is considered as a vested interest, unless a contrary intention appears from the terms of the transfer. Even if such provision is seen as creating a vested interest in the petitioner to ultimately purchase the land in question, the transfer would be completed only when actual sale deed takes place. By merely creating a vested right in the petitioner to compel the society to execute the sale deed at a later stage, would not by itself amount to actual transfer of the property on the date of the agreement. There may be variety of situations under which the ultimate sale deed may not take place. For example, if the petitioner itself fails to muster enough resources to pay the remaining sale price, the agreement to sale would fail. As per the terms of agreement; the seller may either forfeit the earnest money or a portion of the sale consideration deposited by the petitioner upfront but surely the sale would not be completed. In a given case after the agreement to sale, both parties may not ultimately execute the sale deed and cancel the agreement on mutually agreed terms. We can think of many other situations developing other situations between the agreement to sale and actual sale due to which, the final event of sale may never take place. The revenue’s attempt therefore to equate an agreement to sale to one of the transfer of property, in our opinion, lacked any valid basis in law.

16. Section 5 of the Transfer of the Property Act, which is more relevant for our consideration pertains to definition of transfer of property and reads as under:

“5. “Transfer of Property” defined-In the following sections “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, [or to himself] and one or more other living persons; and “to transfer property” is to perform such act.

[In this section “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for th time being in force relating to transfer of property to or by companies, associations or bodies of individuals.]

17. Section 5 thus provides that transfer of property means an act by which living person conveys property, in present or in future, to one or more other living persons or to himself and one or more other living persons. In the present case, the society had not, by virtue of agreement dated 08.04.2004, transferred the property in favour of the petitioner. The society had only agreed to do so on certain terms and conditions. Most important condition being that of the purchaser paying remaining purchase price without which the sale could never be completed. In the meantime the possession of the land was retained by the society. An agreement to sale without there being anything more, obviously cannot be equated with transfer of property. Section 5 of the Transfer of Property Act also enforces this view.

18. In the result, we are of the opinion that the reasons which founded the basis for issuing impugned notice for reassessment lack validity. The notice dated 28.03.2012 is, therefore, quashed. Petition is disposed of.

[Citation : 356 ITR 493]