Case Law Details
Gajanan Parshuram Khismatrao Vs ITO (ITAT Mumbai)
ITAT Mumbai held that land was transferred to the builder/ developer at the time of execution of Development Agreement i.e. 18/01/2008 and accordingly, the same cannot be taxed in the year of agreement of sale i.e. A.Y. 2010-2011.
Facts- During the proceedings u/s. 147 of the Act, it was noticed that the immovable property has been sold for Rs.34,56,000, as against the market price of Rs.5,11,93,000, and the assessee has not offered any income under the head capital gains for taxation, since it did not file any return of income for the year under consideration.
Accordingly, the assessee was asked to show cause as to why Rs.5,11,93,000, should not be treated as capital gain shown by the assessee during the year under consideration. Assessee submitted that the land was sold on 18/01/2008, and therefore no addition can be made in the year under consideration.
AO vide order dated 30/11/2017, passed u/s. 143(3) read with section 147 of the Act did not agree with the submissions of the assessee and held that although the assessee entered into a Development Agreement on 18/01/2008, however, the actual sale deed was executed on 30/03/2010, that is during the relevant previous year. AO, by applying the provisions of section 50C of the Act, adopted the amount of Rs.5,11,93,000, as the full value of the consideration received by 18 co-owners for the sale of immovable property vide registration agreement dated 30/03/2010. As a result, the AO made an addition of Rs.28,44,056/-.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Held that even though the Agreement for Sale was executed on 30/03/2010, the property was already transferred on 18/01/2008 at the time of execution of the Development Agreement, and thus, for all intent and purpose the land was transferred in the assessment year 2008-09.
We are of the considered view that the aforesaid land was transferred by the assessee along with the other 17 co-owners to the builder/developer in the previous year relevant to the assessment year 2008-09 and therefore, capital gains, if any, thereon cannot be taxed in the year under consideration.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned order dated 12/11/2019, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–1, Thane, [“learned CIT(A)”], for the assessment year 2010–11.
2. In this appeal, the assessee has raised the following grounds:–
1. The Ld. CIT (A) did not take into consideration that the validity of notice u/s 148 is challenged by the appellant but no finding thereon is given by him in the impugned order.
2. The Ld. CIT (A) failed to appreciate that there is no escapement of any income and as such the impugned notice u/s 148 is bad in law.
3. The Ld. CIT (A) also failed to appreciate the transfer of the land in question has taken place during the previous year relevant to assessment year 2008-09 and as such any capital gain thereon cannot be taxed in assessment year 2010-11.
4. The Ld. CIT (A) is not justified in approving the impugned assessment order merely because the appellant has not filed his return of income for assessment year 2008-09.05. The Ld. CIT (A) has not properly appreciate facts of the case and has dismissed the present appeal in a partition manner.”
3. The brief facts of the case, as emanating from the record, are: The assessee is an individual and derives income from salary. For the year under consideration, the assessee did not file the return of income. On the basis of the information available with the Assessing Officer (“AO”) in AIR, it was observed that the assessee along with 17 other co-owners had sold immovable property, however, the profit arising in this transaction was not offered for tax. Accordingly, the AO issued notices under section 148 of the Act on 31/03/2017, and proceedings under section 147 of the Act were initiated. Subsequently, statutory notice under section 142(1) of the Act was issued and served on the assessee requesting to submit the details in connection with the aforesaid transaction. However, the assessee failed to comply with any of the notices mentioned above. During the proceedings under section 147 of the Act, it was noticed that the immovable property has been sold for Rs.34,56,000, as against the market price of Rs.5,11,93,000, and the assessee has not offered any income under the head capital gains for taxation, since it did not file any return of income for the year under consideration. Accordingly, the assessee was asked to show cause as to why Rs.5,11,93,000, should not be treated as capital gain shown by the assessee during the year under consideration. At last, the assessee submitted his return of income on 29/11/2017, in response to the notice issued under section 148 of the Act. The assessee further submitted that the land was sold on 18/01/2008, and therefore no addition can be made in the year under consideration. The AO vide order dated 30/11/2017, passed under section 143(3) read with section 147 of the Act did not agree with the submissions of the assessee and held that although the assessee entered into a Development Agreement on 18/01/2008, however, the actual sale deed was executed on 30/03/2010, that is during the relevant previous year. The AO, by applying the provisions of section 50C of the Act, adopted the amount of Rs.5,11,93,000, as the full value of the consideration received by 18 co-owners for the sale of immovable property vide registration agreement dated 30/03/2010. As a result, the AO made an addition of Rs.28,44,056 (i.e. 1/18th of Rs.5,11,93,000) as income under the head „capital gains‟ earned by the assessee during the relevant assessment year.
4. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee and held that transfer of land took place in the assessment year 2010-11 and therefore capital gain arising in this transaction is assessable to tax in the year under consideration. The learned CIT(A) also upheld the initiation of proceedings under section 147 of the Act in the present case. Being aggrieved, the assessee is in appeal before us.
5. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee conferred ownership right to the developer under the Development Agreement dated 18/01/2008. It was further submitted that possession of the land was given to the developer on the date of the Development Agreement and even the developer was given the right to sell the constructive area vide the Development Agreement. The learned AR further submitted that entitling the developer to sell the constructive area further is only possible once the possession is given.
6. On the contrary, the learned Departmental Representative (“learned DR”) submitted that under the Development Agreement, the owner had the right to get back the property if the payment terms are not fulfilled, and therefore, the Development Agreement was a contingent contract. The learned DR further submitted that the possession was handed over to the developer on the date of the sale deed i.e. 30/03/2010, and therefore the transfer of property took place in the year under consideration.
7. We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that the assessee did not file his return of income. On the basis of the information available in AIR that the assessee along with 17 other co-owners has sold immovable property and since the assessee has not filed any return of income, therefore, no income under the head „capital gains‟ has been offered for taxation, the AO initiated proceedings under section 147 of the Act. In ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd, [2007] 291 ITR 500 (SC), the Hon‟ble Supreme Court observed as under:
“16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC).”
8. Thus, if there is reasonable information on the basis of which a reasonable person can form a requisite belief that income chargeable to tax has escaped assessment, then proceedings under section 147 of the Act can be validly initiated. Further, it is also well settled that sufficiency or correctness of the material is not a thing to be considered at the stage of recording Therefore, in view of the above, we find no infirmity in the initiation of proceedings under section 147 of the Act in the facts of the present case. Accordingly, grounds no.1 and 2 raised in assessee‟s appeal are dismissed.
9. On merits, the main issue for consideration is the year in which the transfer of immovable property has taken place. As is evident from the material available on record, the assessee along with 17 other coowners/family members entered into Development Agreement dated 18/01/2008, with Shri Shivraj Komal Singh, Builder/Developer, in respect of property, i.e. agriculture land situated at village Titwala, Tehsil office Kalyan, District Thane, in Dombivali Municipal Corporation for a consideration of Rs.34,56,000. As per the Revenue, an Agreement for Sale was enteredamongst the aforesaid parties on 30/03/2010, therefore, the capital gains arose in the assessment year under consideration, and since the market value of the land was Rs.5,11,93,000, therefore the same should be adopted as per section 50C of the Act for computing capital gains in the hands of the assessee.
10. Before proceeding further, it is relevant to note the meaning of the term „transfer’, which is defined in section 2(47) of the Act, in relation to a capital asset. Section 2(47) of the Act reads as under:
“(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
(iva) the maturity or redemption of a zero coupon bond; 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 of 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
Explanation 1.—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.
Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;”
11. We find that section 2(47) of the Act uses the word „or’ instead of „and‟. Therefore, all the conditions laid down in the provisions of section 2(47) of the Act are not required to be cumulatively satisfied and even if any condition is satisfied, the capital asset can be considered to be transferred within the meaning of section 2(47) of the Act. We find that as per provisions of clause (ii) to section 2(47) of the Act extinguishment of any right in the capital asset also results in transfer in relation to the capital asset. We are of the considered view that the term „any right‟ used in the aforesaid clause is wide enough to even include the development rights in the plot of land. In the present case, it has not been disputed that the assessee has transferred the development rights in the plot of land to the builder/developer. It is the plea of the assessee that the possession of the land was also handed over to the builder/developer alongwith the development rights. Therefore, even though the Agreement for Sale was executed on 30/03/2010, the property was already transferred on 18/01/2008 at the time of execution of the Development Agreement, and thus, for all intent and purpose the land was transferred in the assessment year 2008-09.
12. We find that in Sanjeev Lal v/s CIT, in [2014] 365 ITR 389 (SC), the Hon’ble Supreme Court, while dealing with the facts, wherein the assessee claimed the benefit under section 54 of the Act in respect of the capital gains arising from transfer of property vide sale deed registered on 24/09/2004, while the agreement to sell was executed on 27/09/2002, considered the question as to whether the date on which agreement to sell was executed could be considered the date on which the property was transferred. The relevant observations of the Hon’ble Supreme Court, in the aforesaid decision, are as under:
“20. The question to be considered by this Court is whether the agreement to sell which had been executed on 27th December, 2002 can be considered as a date on which the property i.e. the residential house had been transferred. In normal circumstances by executing an agreement to sell in respect of an immovable property, a right in personam is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the agreement to sell some right is given by the vendor to the vendee. The question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of Section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred. Relevant portion of Section 2(47), defining the word “transfer” is as under:
‘2(47) “transfer”, in relation to a capital asset, includes,-
(i)** ** **
(ii) the extinguishment of any rights therein; or. . . . . . . . . . . . .
21. Now in the light of definition of “transfer” as defined under Section 2(47) of the Act, it is clear that when any right in respect of any capital asset is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset. In the light of the aforesta ted definition, let us look at the facts of the present case where an agreement to sell in respect of a capital asset had been executed on 27th December, 2002 for transferring the residential house/original asset in question and a sum of Rs. 15 lakhs had been received by way of earnest money. It is also not in dispute that the sale deed could not be executed because of pendency of the litigation between Shri Ranjeet Lal on one hand and the appellants on the other as Shri Ranjeet Lal had challenged the validity of the Will under which the property had devolved upon the appellants. By virtue of an order passed in the suit filed by Shri Ranjeet Lal, the appellants were restrained from dealing with the said residential house and a law-abiding citizen cannot be expected to violate the direction of a court by executing a sale deed in favour of a third party while being restrained from doing so. In the circumstances, for a justifiable reason, which was not within the control of the appellants, they could not execute the sale deed and the sale deed had been registered only on 24th September, 2004, after the suit filed by Shri Ranjeet Lal, challenging the validity of the Will, had been dismissed. In the light of the aforestated facts and in view of the definition of the term “transfer”, one can come to a conclusion that some right in respect of the capital asset in question had been transferred in favour of the vendee and therefore, some right which the appellants had, in respect of the capital asset in question, had been extinguished because after execution of the agreement to sell it was not open to the appellants to sell the property to someone else in accordance with law. A right in personam had been created in favour of the vendee, in whose favour the agreement to sell had been executed and who had also paid Rs. 15 lakhs by way of earnest money. No doubt, such contractual right can be surrendered or neutralized by the parties through subsequent contract or conduct leading to no transfer of the property to the proposed vendee but that is not the case at hand.
22. …..
23. Consequences of execution of the agreement to sell are also very clear and they are to the effect that the appellants could not have sold the property to someone else. In practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another. In our opinion, such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the appellants had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed.
24. Thus, a right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendee/transferee on 27th December, 2002. The sale deed could not be executed for the reason that the appellants had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated.
25. In view of the aforestated peculiar facts of the case and looking at the definition of the term ‘transfer” as defined under Section 2(47) of the Act, we are of the view that the appellants were entitled to relief under Section 54 of the Act in respect of the long term capital gain which they had earned in pursuance of transfer of their residential property being House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of a new asset/residential ”
13. In the present case, as per the terms of the Development Agreement dated 18/01/2008, forming part of the paper book from pages 1-82, we find that the assessee along with 17 other co-owners handed over open and physical possession of the aforesaid land to the builder/developer. In the said Development Agreement, it was also agreed that the entire responsibility for the protection, use, and occupation of the said land is of the builder/developer. It was further agreed that the builder/developer has the right to sell the constructive area of the planned building on the land which includes shop/flats for a reasonable price and the builder/developer has every right to receive the prize consideration. In this regard, it is relevant to note clauses No. 12 and 13 of the Development Agreement, which reads as under:-
“12) The Second Party has handed over open and physical possession of this landed property to the First Party as Developers for the purpose of carrying measurements and other works today. Hereinafter, it is! will be the entire responsibility of the First Party for protection, use and occupation and of the said land.
13) The First Party has right to sell constructive area of the planned building on the land which include shops! flats and shops etc. for a reasonable price and to search customers for the same, enter into agreement with them and execute deeds to be registered in the office of the Hon ‘ble Sub-Registrar. The First Party has every right to receive the price consideration but compliance of the said agreement will not be shifted on the Second Party by the First Party in any manner.”
14. In the aforesaid Development Agreement, it was also agreed that the builder/developer will develop the land according to their whims and fences. Therefore, from the careful perusal of the Development Agreement dated 18/01/2008, it is sufficiently evident that the assessee along with the other 17 co-owners transferred the possession of the land to the builder/developer for all intent and purposes at the time of execution of the Development Thus, when the builder/developer was granted the right to sell the constructive area and also had the right to exclude deeds to be registered in the office of the Sub-Registrar, it cannot be said that the transfer of the immovable property did not take place in the assessment year 2008-09.
15. During the hearing, the learned DR submitted that all the payments as agreed vide Development Agreement were not made in the assessment year 2008-09 and the majority of the payment was made after the assessment year 2008-09. From the perusal of the Agreement for Sale, forming part of the paper book from pages 83-152, we find that the builder/developer indeed did not make the entire payment as per the payment terms agreed in the Development Agreement, however, made the entire payment subsequently in the next year. The learned DR also placed reliance upon clause 9 of the Development Agreement, which states that if the builder/developer fails to pay any one instalment, the assessee and the other 17 co-owners will have full right to cancel the said agreement, in order to substantiate the claim that the Development Agreement is in the nature of the contingent agreement and the actual sale took place only upon execution of Agreement for Sale on 30/03/2010. In this regard, firstly, we find that clause 9 of the Development Agreement also grants the liberty to the assessee and the other 17 co-owners to grant an extension or refuse an extension of time for making the payment. Secondly, in the present case, it is evident that the builder/developer had made the payment of the amount of Rs. 34,56,000 as agreed between the parties vide aforesaid Development Agreement. Thus, all the essentials of a contract i.e. offer, acceptance, and consideration are fulfilled in the present case. In any case, by non-fulfillment of any condition of the contract, the same becomes only voidable at the option of the parties and it does not render the contract to be void. Therefore, clause 9 of the Development Agreement only says so and therefore, cannot be read to mean that the Development Agreement is a contingent contract. There is no material available on record to show that despite the delay in payment of the money, the vendor, i.e. the assessee along with the other 17 co-owners, exercised the right to cancel the Development Agreement, and thus, the land was returned to the possession of the assessee and the other 17 co-owners before the date of execution of the Agreement for Sale on 30/03/2010. Therefore, we find no merits in the submission of the learned DR.
16. Thus, in view of the above, we are of the considered view that the aforesaid land was transferred by the assessee along with the other 17 co-owners to the builder/developer in the previous year relevant to the assessment year 2008-09 and therefore, capital gains, if any, thereon cannot be taxed in the year under consideration. As a result, ground no.3 raised in assessee‟s appeal is allowed.
17. In view of the above, grounds no.4 and 5 need no separate adjudication. Further, the issues raised by the assessee vide additional grounds are also rendered academic and therefore are left open.
18. In the result, the appeal by the assessee is partly allowed.
Order pronounced in the open Court on 31/05/2023
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