Allahabad H.C : there was no ‘transfer’ of land from the assessee to the society and no capital gain would arise on the alleged transfer of land to the society on December 7, 1984

High Court Of Allahabad

CIT vs. Rakesh Gupta

Assessment Year : 1985-86

Section : 2(47)

V.K. Shukla And Rajiv Sharma, JJ.

IT Appeal Nos. 61 To 63 Of 2008

October  9, 2009

JUDGMENT

1. Heard Sri D. D. Chopra, learned counsel for the appellant and Sri Pradeep Agarwal, learned counsel for the respondent.

2. The aforesaid appeals have been filed under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for the sake of brevity) against the judgment and order dated July 27, 2007, passed by the Income-tax Appellate Tribunal, Lucknow Bench, Lucknow in Appeal No. I.T. A. Nos. 285/Luc/2002, 143/Luc/2002 and 300/Luc/2002, respectively, for the assessment year 1985-86, raising the following common question of law :

“Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that there was no ‘transfer’ of land from the assessee to the society and no capital gain would arise on the alleged transfer of land to the society on December 7, 1984 ?”

and as such, all these appeals are being decided by a common order.

3. The brief facts of the case are that the respondents, namely, S/Shri Rakesh Gupta, Ajay Gupta and Gunjan Gupta who are co-owners, entered into an agreement with one M/s. Pratap Sahkari Grih Nirman Samiti Ltd. on December 7, 1984, for the sale of land to the samiti and consequently the sale deed was also prepared. They had also received a meagre amount on the said date but subsequently, on December 8, 1984, proceedings were initiated under the Land Acquisition Act and a notification under section 4(1) of the Land Acquisition Act for compulsorily acquiring the land was issued by the State Government. The said proceedings of acquisition were challenged by the assessee, housing society and other persons but subsequently, this hon’ble court dismissed the writ petition vide judgment and order dated March 20, 1998, upholding the acquisition proceedings. In between, certain infirmities, which were reported during the acquisition proceedings, were removed by promulgation of the Ordinance dated December 27, 1990. It is also relevant to point out at this stage that in the agreement for sale, which was entered into between the respondent and the housing society on December 7, 1984, and in pursuance thereof the sale deed was prepared, it was specifically provided that the entire sale consideration would be paid by the society on December 31, 1987, failing which, the sale deed would be null and void.

4. The Assessing Officer had passed an order under section 143(3) on September 10, 1987, assessing the income of the assessee but the issue of capital gain of land was not considered. Subsequently, under section 154 of the Act, the Assessing Officer revised the income of the assessee but again capital gains were not taxed. Thereafter, a notice under section 148(1) of the Act was issued to the assessee to assess capital gains on transfer of land and reassessment order passed under section 148/143(3) on March 16, 1992, assessing the capital gains on sale of the land. The respondent being aggrieved by the aforesaid notice preferred an appeal before the Commissioner Income-tax (Appeals) (hereinafter referred to as the “CIT(A)”) and the Commissioner of Income-tax (Appeals), vide order and judgment dated July 15, 1992, while allowing the appeal, set aside the order, holding that the assessment framed by the Assessing Officer was null and void. Subsequently, the Assessing Officer passed another order under section 143(3) on March 28, 1995, assessing the assessee on the same income, against which the respondent filed another appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) confirmed the order of the assessing authority vide order dated September 18, 1995.

5. Not being satisfied with the order dated September 18, 1995, the respondents filed appeals before the Tribunal and the Tribunal, vide order dated October 26, 1998, remitted the matter to the Assessing Officer for adjudicating it afresh in the light of the observations contained therein. It was also provided by the Tribunal that while framing the assessment order, the Assessing Officer shall record his findings specifically on the points, i.e., (1) whether the sale deed has been registered or not and whether the sale consideration has been paid to the transferors ; (2) whether the name of the housing society has been mutated in the Revenue records as owner of the land on the basis of the sale deed ; (3) when the relevant notification for acquiring the land was made ; (4) whether the assessee or the housing society had claimed the compensation under the land acquisition award and to whom the amount of compensation has been paid or is likely to be paid.

6. Pursuant to the order dated October 26, 1998, the Assessing Officer, after making enquiries and after giving opportunity to the assessees again assessed the income of the assessees as was computed in the order dated March 16, 1992, by the order dated March 22, 2001. Against the order dated March 22, 2001, the assessees filed appeals before Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), vide order dated January 25, 2002, deleted the capital gains. While deleting the entire capital gains which has been added in the income of the assessee vide order dated March 22, 2001, a finding had been recorded that in the sale deed, it had been specifically provided that in case the entire sale consideration was not paid on or before December 31, 1987, the sale deed shall be null and void automatically. Admittedly, the sale consideration as per the terms and conditions of the sale deed was not paid on or before December 31, 1987. Thus, the sale deed has become automatically null and void and as such, no capital gain can arise on part of the sale consideration. Further, no compensation has been given by the Lucknow Development Authority to the appellant as the appellant has been demanding 25 per cent. of land acquired instead of currency notes as compensation. But even then, the land has not been given so far. Section 45(5) of the Income-tax Act provides that where a capital asset by way of compulsory acquisition under any law, the capital gain shall be computed with reference to the compensation awarded in the first instance in the year in which such compensation is first received and if the compensation is enhanced subsequently, the enhanced compensation shall be charged to tax as income of the previous year in which such amount is received by the appellant and not otherwise. Thus, in the case of compulsory acquisition of land, the capital gain arises only when the compensation is received by the appellant and not otherwise. Therefore, it can be said that no capital gain has arisen on transfer of land by the appellant to the co-operative society or on the compulsory acquisition of the land by the Lucknow Development Authority.

7. Feeling aggrieved, the order dated January 25, 2002, was assailed by the Revenue before the Income-tax Appellate Tribunal, inter alia, on the grounds that the learned Commissioner of Income-tax (Appeals)-III, Lucknow, has erred in deleting the addition of capital gain in the hands of the assessee without appreciating the facts that the assessee had transferred his land to a housing society resulting into the above gain. Further, the fact that land is proposed to be acquired by the Lucknow Development Authority subsequently does not vitiate the transaction between the assessee and the housing society and that the order of the learned Commissioner of Income-tax (Appeals)-III, Lucknow being erroneous in law as well as on the facts deserves to be vacated and that of the Assessing Officer restored. The Tribunal, vide order dated July 27, 2007, dismissed the appeal of the Revenue. Hence, the instant appeal.

8. In order to decide the question, as to whether there was a valid transfer of land from the assessee to the society on December 7, 1984, or not, it would be apt to refer the provisions of section 45 of the Act as existing for the relevant assessment year, which are reproduced as under :

“45. Capital gains.-(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E and 54F, 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.

(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received, or accruing as a result of the transfer of the capital asset.”

9. In order to bring the capital assets within the four corners of the provisions of section 45, one has to determine whether in the relevant year, there was a transfer of a capital asset. In the instant case, the submission of the counsel for the Revenue/appellant is that the land was transferred to the society as there was a sale deed between the assessee and the society and the same was executed on December 7, 1984, and further registered finally on January 22, 1986 and as such, the said registration of transfer deed would be effective from and relate back to the date of execution of the deed, i.e., December 7, 1984. It has also been submitted that part performance as per the agreement was also paid at the time of agreement and the remaining part was also paid in the year 1986. Thus, the provisions of section 2(47)(v) and section 53A of the Transfer of Property Act, 1882, would be applicable to this transfer and capital gains would be chargeable even though the land was not registered in this year in the name of the transferee.

10. On the other hand, Sri Pradeep Agarwal, learned counsel appearing on behalf of the respondent has contended that the amendment by the Finance Act, 1987 in section 2(47) was made effective from April 1, 1988, i.e., prospective and hence will not be applicable to the assessment year 1985-86. As regards the provisions of section 53A of the Transfer of Property Act, the same cannot be invoked for this assessment year to deem the transaction as a transfer. He has also urged that the society did not fulfil its part of agreement by not paying the entire money of consideration by December 31, 1987, and hence as per the agreement, the sale deed has become null and void.

11. Sri Pradeep Agarwal also states that the provisions of section 45(5) of the Income-tax Act, 1961 would be applicable and capital gains would be chargeable on the transfer of land only when the assessee receives compensation from the Government on the acquisition of land. Thus, to resolve the issue one has to look into both the definitions of transfer under section 2(47) of the Income-tax Act, 1961, prior to the amendment and further after the amendment by the Finance Act, 1987. The definition prior to the amendment is as under :

“2. (47) ‘transfer’ in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset ; or

(ii) the extinguishment of any rights therein ; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment.”

12. The aforesaid provisions were amended by the Finance Act, 1987, with effect from April 1, 1988. The amended provision of section 2(47) is reproduced as under :

“2. (47) ‘transfer’ in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset ; or

(ii) the extinguishment of any rights therein ; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association or persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property :

Explanation.-For the purposes of sub-clauses (v) and (vi) ‘immovable property’ shall have the same meaning as in clause (d) of section 269UA.”

13. Thus, the amendment inserted two new clauses, i.e., (v) and (vi) and a new Explanation. The scope and effect of these amendments have been elaborated in the following portion of the Departmental Circular No. 495, dated September 22, 1987 as under ([1987] 168 ITR (St.) 87, 92) :

“Definition of ‘transfer’ widened to include certain transactions :

11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908,. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in section 53A of the Transfer of Property Act, 1882. New sub-clauses (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.

11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of ‘transfer’, the practice of enjoyment of property rights through what is commonly known as power of attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorized the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor.

11.3 These amendments shall come into force with effect from April 1, 1988, and will accordingly apply to the assessment year 1988-1989 and subsequent years. (Section 3(g) of the Finance Act, 1987)”

14. On a perusal of the provisions of section 2(47) of the Act existing in the assessment year 1985-86, the same requires registration of the sale deed under the Registration Act, 1908, for transfer of an immovable property for levying capital gains tax. If the instrument is not registered then, it is not treated as “transfer” and hence no capital gains could be charged on the alleged transfer of land. It is only after amendment by the Finance Act, 1987, that registration for completing the transfer was done away with. Capital gains could be charged merely on handing over of possession and on part performance as per agreement.

15. Section 53A of the Transfer of Property Act, 1882, which was added in the statute book by the Transfer of Property (Amendment) Act, 20 of 1929, was analysed by the apex court in the case of Nathulal v. Phoolchand , AIR 1970 SC 546, wherein the apex court has held that (page 548) :

“The conditions necessary for making out the defence of part performance to an action in ejectment by owner are :

(1) that the transferor has contracted to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty ;

2. that the transferee has, in part performance of the contract, taken possession of the property or any part thereof or the transferee being already in possession continues in possession in part performance of the contract ;

3. that the transferee has done some act in furtherance of the contract ; and

4. that the transferee has performed or is willing to perform his part of the contract.

If these, conditions are fulfilled, then notwithstanding that the contract, though required to be registered, has not been registered or where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him is debarred from enforcing against the transferee any right in respect of the property of which the transferee has been taken or continued in possession other than a right expressly provided by the terms of the contract.”

16. Thus, the amending Act of 1929 has not altered the law in this respect but recognized in a limited manner the English doctrine of part performance and has enabled the transferee to raise the defence, which was not available to him before the said amending Act was passed. Section 53A does not provide that under the circumstances stated therein, a good title passes to the transferee. It only provides that the transferor shall be debarred from enforcing against the transferee and the person claiming under him any right in respect of the immovable property of which the transferee has taken possession. In addition to a valid title section 53A recognizes an equitable interest which might accrue to the transferee in the property on the fulfilment of the conditions mentioned therein. Under the Income-tax Act, the recognition of conveyance of de facto ownership by way of handing over of possession of the property as per contract and part performance by the transferee without actual conveyance of title was first time made by the Finance Act of 1987, by amending the definition of section 2(47)(v) as discussed hereinabove. Thus, prior to April 1, 1988, the fact that the transferee had taken possession of the property or he had part performed as per agreement by paying a part of contracted money or that he will make full payment as agreed upon and as scheduled, will not enough to hold that a “transfer” of immovable property took place for levying capital gains tax. Thus, under the Income-tax Act, section 53A of the Transfer of Property Act had no role to play in holding the creation of equitable interest in favour of the transferee a “transfer” in respect of conveyance of such interest through an agreement entered into prior to April 1, 1988, without conveyance of legal title.

17. Sri Pradeep Agarwal, with regard to the prospective application of the amendment by the Finance Act, 1987, has placed reliance upon the judgment of the hon’ble Delhi High Court in CIT v. Reliance International Corporation (P.) Ltd. [1995] 211 ITR 666 (Delhi) whereby the apex court has held that (page 670) : “the amendment made in section 2(47) of the Act subsequently with effect from April l, 1985, and April 1, 1988, was merely clarificatory in nature and the agreement to sell in the present case, though executed in the previous year relevant to the assessment year 1978-79, amounted to transfer within the meaning of section 2(47) as it originally existed. We do not agree. As regards the amendments in section 2(47) of the Act, these are substantive in nature and further if what Mr. Gupta said was correct there was no need for the Legislature to mention that these amendments would be effective from particular dates. We may also note that the Central Board of Direct Taxes, in its Circular No. 495, dated September 22, 1987, since reported in [1987] 168 ITR (St.) 87, 92, had also clarified that the said amendment shall come into force with effect from April 1, 1988 and will accordingly apply to the assessment year 1988-89 and subsequent years”.

18. The Departmental Circular No. 495 of September 22, 1987, referred to above and the above decision of the hon’ble Delhi High Court clearly show that the amendment in section 2(47) to include the equitable transfer, as defined in section 53A of the Transfer of Property Act within the definition of “transfer” for the purposes of levying capital gains tax was not effective for assessment year 1987-88 or earlier years.

19. In the case of CIT v. Mormasji Mancharji Vaid [2001] 250 ITR 542 (Guj) [FB], a Full Bench of the hon’ble Gujarat High Court, after placing reliance upon the judgment of the hon’ble apex court in CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625, has held that for the purposes of tax on capital gains under section 45 of the Income-tax Act, 1961, transfer of immovable property of value exceeding Rs. 100 is effected on the date of execution of the document of transfer and not either on the date of presentation of the document for registration or on the date on which registration of the deed is completed. The capital gains on the transfer has to be assessed to tax in the assessment year relevant to the previous year within which the date of execution of the deed of transfer falls and not the subsequent year relevant to the previous year in which deed is registered. “Transfer” as defined in section 2(47) has to be given a simple meaning taking into consideration the object of the Act.

20. Having heard learned counsel for the parties and perused the records, we are of the view that the submission advanced by learned counsel for the Revenue that registration would relate back to the date of execution of the agreement, which was the date when the agreement was signed and attested and continued to be valid in the eyes of law till the date of registration on December 7, 1984, is not sustainable especially in the background of the decision of the Allahabad High Court in writ petitions, which have been affirmed by the hon’ble apex court that there is no evidence of transfer of land to societies existed, the question of capital gains would not arise, and the same would be leviable within the meaning of section 45, as and when compensation is actually received by assessee.

21. In view of the above, we do not find any illegality and infirmity in the order dated July 27, 2007. These appeals are dismissed accordingly.

[Citation : 336 ITR 277]

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