High Court Of Kerala
Lachmandas & Sons vs. DCIT
Assessment Year : 2005-06
Section : 2(42B), 2(29A), 45
Dr. Manjula Chellur, Cj. And A.M. Shaffique, J.
IT Appeal No. 344 Of 2010
January  3, 2014
JUDGMENT
Dr. Manjula Chellur, CJ. – The following substantial questions of law arise for consideration :
“(i) In the facts and in the circumstances of the case whether the definition of capital assets as indicated in section 2(14) can be given a restrictive meaning to the extent of that property owned by the assessee himself in view of the judgment reported in CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bom) ?
(ii) In the facts and in the circumstances of the case, whether the Tribunal was right in holding that the date of transfer of funds, i.e., February, 2004, is the date of acquisition as against the fact that the right to obtain the conveyance of immovable property was acquired in 2001 by virtue of a MOU executed on June 22, 2001 ?
(iii) In the facts and in the circumstances of the case whether the Tribunal was right in holding that the transaction is only a short-term capital gain rather than a long-term capital gain as claimed by the assessee ?”
2. This appeal is directed against the order of the Appellate Tribunal. The relevant year of consideration is the assessment year 2005-06. The appellant-assessee admittedly is a partnership firm. While filing the return of income for the above assessment year, it declared his income as Rs. 36,75,130. When the return came up for scrutiny, assessment was proceeded under section 143(3) of the Income-tax Act. It is also not in dispute that the return of the assessee indicated the claim of long-term capital loss of Rs. 45,51,944. The material placed before the Assessing Officer was that the assessee entered into a memorandum of understanding (for short “MOU”) with M/s. Damodar Sons and Co and also their partners for acquisition of a property on June 22, 2001. It is also not in dispute certain amounts were due to Central Bank of India which had obtained recovery certificate issued by the Debt Recovery Tribunal. The property in question was attached by an order of attachment duly registered with the Sub Registrar, Ernakulam.
3. M/s. Damodar Sons and Co approached the present appellant-assessee to sell the property after clearing off the debt to the bank. As per the terms and conditions of the MOU, Rs. 3 crores was the sale consideration and, however, the sale deed which came to be executed on February 25, 2005, to which the appellant-assessee was also a consenting party, the sale consideration was shown as Rs. 4,25,00,000.
4. The claim of the assessee was that he acquired a right when he entered into agreement of sale in 2001 (MOU) and irrespective of the payment of Rs. 3 crores on February 11, 2004, looking at the date of sale deed February 25, 2005, it amounts to long-term capital gain. Therefore, after computing the cost of acquisition of right to purchase the property at Rs. 4,17,58,600 on the date of the MOU long-term capital loss of Rs. 45,51,944 has to be taken into consideration. However, rejecting the contention of the assessee, the Assessing Officer held that there was no right to purchase acquired by virtue of the MOU on June 22, 2001, unless and until the terms and conditions of the MOU were completely fulfilled. Treating the gain on transfer of whatever right acquired by the assessee by virtue of the MOU opined that such right is a limited one and computed short-term capital gain at Rs. 7,41,400. Aggrieved by the same, the assessee went in appeal before the Commissioner of Income-tax (Appeals). However, the Commissioner of Income-tax (Appeals) confirmed the findings of the Assessing Officer.
5. Thereafter, the appellant-assessee approached the Appellate Tribunal. The Appellate Tribunal also treated the amount as short-term capital gain from the transfer of property in question and came to the conclusion that it does not amount to long-term capital gain. In other words, the Tribunal proceeded on the presumption that there is no dispute from either side so far as treating the transfer in question within the meaning of section 2(47) of the Act. The Tribunal further opined that as there was no dispute with regard to the occurrence of transfer within the meaning of section 2(47) of the Act proceeded to consider whether it is a short-term capital gain or a long-term capital gain. According to the Tribunal, after referring to the definition of long-term capital gain and short-term capital gain, as there is no scope for treating the same as long-term capital gain entirely agreed with the view expressed by the Assessing Officer which was confirmed by the Commissioner of Income-tax (Appeals). They also referred to appreciation of materials by the assessing authority for the assessment year. Accordingly, the appeal came to be dismissed. Aggrieved by the same, the present appeal is filed.
6. Learned counsel for the appellant-assessee placing reliance on J. K. Kashyap v. Asstt. CIT [2008] 302 ITR 255/171 Taxman 390 (Delhi) contends that by virtue of the MOU in 2001, the appellant-assessee acquired right which has to be treated as an asset. Therefore, as he was a party to the document of sale in 2005, it has to necessarily be considered as a long-term capital gain. He also places reliance on CIT v. Vijay Flexible Containers [1990] 186 ITR 693/48 Taxman 86 (Bom.).
7. We have gone through the relevant facts and also the opinion of the High Court of Delhi and the High Court of Bombay in the above two decisions. On a perusal of the MOU, it is very clear that possession of the property was not handed over to the assessee as on the date of the MOU in 2001. As on the date of the MOU Rs. 62,50,000 came to be paid to the Central Bank of India and so far as Rs. 3 crores to be paid to the owner of the property, no amount as such came to be paid. The said amount came to be paid only in the month of February, 2004. It is not in dispute that in the month of February, 2004, the funds that ought to be paid under the MOU came to be transferred to the bank and obtained no dues certificate from the Central Bank of India. It is also not in dispute that on February 25, 2005, regular sale deed came to be executed by M/s. Damodar Sons and Co along with the assessee in favour of third parties for a sum of Rs. 4,25,00,000. The cost of acquisition of right acquired by the appellant-assessee that is right to get conveyance of property was computed at Rs. 4,17,58,600 as on June 22, 2001, which is also not disputed by the Department.
8. The only question is whether the date of the MOU, i.e., June 22, 2001, or February 11, 2004, i.e., the date of payment of the entire amount of Rs. 3 crores as per the MOU is to be considered as date of transfer as defined under section 2(47) of the Income-tax Act. The terms and conditions of the MOU clearly indicates that the property will not be transferred either in the name of the appellant-assessee or his nominee till the entire amount agreed upon as per the terms of the MOU is paid. Mere MOU would not confer any right to the appellant-assessee to transfer the property in favour of third parties. The right is acquired only after payment of the entire amount as per the MOU. It would happen only with the fulfilment of the terms and conditions under the MOU which apparently occurred in 2004. Therefore, whatever right accrued to the appellant-assessee under the MOU accrued only with the complete payment of amounts as per the terms and conditions of the MOU on February 11, 2004. Till this right accrued to the appellant-assessee, he could not have ventured to transfer any limited right accrued to him under the MOU, to third parties. In the absence of any regular document of conveyance in his favour or unless M/s. Damodar Sons and Co joined him in signing the documents of sale deed, he could not have transferred any right even if it was limited right. The said execution of sale deed occurred in 2005. Therefore, the right accrued to the appellant-assessee in 2004 came to be transferred along with M/s. Damodar Sons and Co. only in 2005. Hence, the Assessing Officer was justified in saying it is a short-term capital gain and not long-term capital gain.
9. Accordingly, the appeal is dismissed answering the substantial questions of law against appellant-assessee.
[Citation :Â 363 ITR 315]
