Case Law Details
Rekah Devi Vs DCIT (ITAT Delhi)
In a significant verdict, the Income Tax Appellate Tribunal (ITAT) Delhi has provided substantial relief to Rekah Devi, an individual taxpayer, by overturning a major addition of INR 2,52,99,100/- made by the Assessing Officer (AO) on account of alleged long-term capital gain. The Tribunal also partly allowed her appeal concerning an addition of INR 1,68,000/- for deemed rental income. The decision, pronounced on September 9, 2021, underscores the principle that capital gains can only arise when actual consideration is received from the transfer of a capital asset.
The Assessment and Initial Additions
For Assessment Year (AY) 2012-13, Rekah Devi had filed her income tax return declaring a modest income of INR 5,747/-. However, the AO completed the assessment under Section 143(3) of the Income Tax Act, 1961, at a total income of INR 2,54,72,850/-. This substantial increase was primarily due to two additions:
1. Long-Term Capital Gain: INR 2,52,99,100/-.
2. Deemed Rent Received: INR 1,68,000/-.
Rekah Devi challenged these additions before the Commissioner of Income Tax (Appeals) [CIT(A)], but her appeal was dismissed, leading her to approach the ITAT.
The Capital Gain Dispute: Property Forfeiture vs. Sale
The core of the capital gain dispute revolved around a property located at 2501, Gali No. 8, Karol Bagh, New Delhi, belonging to Rekah Devi. Her legal representative informed the ITAT that this property was never sold or transferred by the assessee in the conventional sense. Instead, it had been mortgaged with the Indian Overseas Bank (IOB) as a guarantor against a loan taken by M/s Vikas Chain Company Pvt. Ltd.
When M/s Vikas Chain Company Pvt. Ltd. defaulted on its loan and became a Non-Performing Asset (NPA), the Indian Overseas Bank initiated recovery proceedings. The bank, exercising its rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), forfeited and subsequently sold the mortgaged property.
Rekah Devi’s counsel vehemently argued that since the property was forfeited and sold by the bank, and the entire sale consideration of INR 2,60,00,000/- was adjusted by the bank against the loan of M/s Vikas Chain Company Pvt. Ltd., no amount was ever received by Rekah Devi. The bank, having an overriding title over the property due to the mortgage, absorbed the entire proceeds. Consequently, it was contended that the provisions of Section 2(47)(v) of the Income Tax Act (defining ‘transfer’ to include transactions where possession is given in part performance of a contract) and Section 53A of the Transfer of Property Act, 1982, were inapplicable, as there was no ‘sale’ or ‘transfer’ by the assessee for consideration. The assessee had, in fact, treated the cost of the property as a bad debt due to the loss incurred without any recovery.
ITAT’s Ruling on Capital Gain: A Hypothetical Income
The ITAT, after carefully examining the evidence presented by the assessee and considering the arguments, found merit in Rekah Devi’s submissions. The Tribunal explicitly noted that “the assessee never received any amount.” It confirmed that the property was indeed forfeited and sold by the Indian Overseas Bank under the SARFAESI Act, and the “entire sale proceeds were adjusted against the loan taken by M/s Vikas Chain Company Pvt. Ltd.” The ITAT emphasized that since “the assessee lost her property without any consideration,” the amount could not be considered a long-term capital gain in her hands.
To support its conclusion, the ITAT relied on the landmark decision of the Hon’ble Supreme Court in CIT Vs. Balbir Singh Maini (2017) 86 taxmann.com 94 (SC). In Balbir Singh Maini, the Supreme Court had dealt with a situation where income from capital gain on a transaction never materialized. The apex court held that if no profit or gains arose from the transfer of a capital asset, then Section 45 (charging capital gains) and Section 46 (modes of computation) would not be attracted. The ITAT found this precedent “apt” for Rekah Devi’s case, as the alleged capital gain was “hypothetical income” since no actual consideration flowed to the assessee.
Based on this reasoning, the ITAT allowed Ground Nos. 1 and 2 of the assessee’s appeal, effectively deleting the addition of INR 2,52,99,100/-.
The Deemed Rent Dispute: A Protracted Legal Battle
Regarding the addition of INR 1,68,000/- on account of deemed rent, Rekah Devi’s counsel explained that a portion of her property in Delhi had been rented to M/s Shri Chain Company Pvt. Ltd. since 2004. However, a dispute arose between the assessee (owner) and the tenant company in 2010, which escalated to the Senior Civil Court, Teeshazari, Delhi. Due to this ongoing legal battle, M/s Shri Chain Company Pvt. Ltd. had not paid any rent to the assessee since 2010, and consequently, Rekah Devi had not shown any rental income in her return for the current assessment year.
The counsel further submitted that the dispute was eventually settled, and a final rent of INR 7,810/- per month was fixed. Rekah Devi’s representative assured the Tribunal that the assessee would offer this rental income to tax in her income tax return as and when it is actually received.
ITAT’s Ruling on Deemed Rent: Conditional Allowance
The ITAT acknowledged the existence of the dispute and the fact that the rental income had not been received by the assessee in the relevant assessment year. Taking note of the assessee’s commitment to declare the income upon receipt, the Tribunal directed Rekah Devi to offer the settled rent amount to the revenue authorities when it is actually received. It further directed the Assessing Officer to verify the same as per the Income Tax Statute at that time.
Therefore, Ground Nos. 3 and 4 of the assessee’s appeal were partly allowed for statistical purposes, indicating that while the addition was not sustained for the current year, the liability to tax would arise upon actual receipt of the income.
Interest Charges and Final Outcome
Ground No. 5, pertaining to the charging of interest under various sections (234A, 234B, 234C, and 234D) of the Income Tax Act, was deemed consequential. Since the primary additions were either deleted or conditionally allowed, the interest charges would automatically be recomputed based on the revised taxable income. Thus, this ground was not adjudicated at that juncture.
In conclusion, the ITAT’s order significantly favored Rekah Devi, primarily by deleting the substantial capital gain addition. The ruling reinforces the legal principle that for capital gains to be taxable, there must be an actual ‘transfer’ resulting in ‘consideration’ flowing to the assessee, and mere forfeiture by a bank, where proceeds are adjusted against a loan, does not trigger capital gains liability for the original owner. The decision also provided conditional relief on the deemed rent, acknowledging the practical realities of legal disputes affecting income receipt.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is filed by the assessee against the order dated 21/05/2016 passed by CIT(A)-30, New Delhi for assessment year 2012-13.
2. The grounds of appeal are as under:-
1. “1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.2,52,99,100/- on account of alleged capital gain and that too without observing the principles of natural justice.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making addition of Rs.2,52,99,100/- on account of alleged capital gain is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.l,68,000/- on account of deemed rent received and that too without observing the principles of natural justice.
4. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making addition of Rs.l,68,000/-on account of deemed rent received is bad in law and against the facts and circumstances of the case.
5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in charging interest u/s 234A 234B, 234C and 234D of Income Tax Act, 1961.
3. The assessee is an individual filed her return of income for Assessment Year 2012-13 declaring income of Rs. 5,747/- assessment order u/ 143(3) was completed vide order dated 25/3/2013 at total income of Rs. 2,54,72,850/- thereby making additions on account of long term capital gain amounting to Rs.2,52,99,100/- and deemed rent received amounting to Rs. 1,68,000/-.
4. Being aggrieved by the penalty order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
5. The Ld. AR submitted that the assessee had mortgaged the property with Indian Over Seas Bank as a guarantor against the loan taken by Vikas Chain Company Pvt. Ltd. from the said Bank. The Vikas Chain Company Pvt. Ltd. became NPA. The Indian Over Seas Bank forfeited the same property and disposed of the property. Thus, the assessee never sold or transferred the property and, therefore, the provisions of Section 2(47) (v) of the Income Tax Act and Section 53A of the Transfer of Property Act, 1982 are not applicable to the assessee. The Ld. AR further submitted that the possession of the said property was with M/s Vikas Chain Company since Financial Year 2010-11 and the sale consideration was received in the Financial Year 2011-12 where as the sale deed was executed in Financial Year 2012-13. Thus, the Ld. AR submitted that the Assessing Officer as well as CIT(A) ignored all these relevant facts. As regards Ground No. 3 & 4, the Ld. AR submitted that there was a dispute going on with M/s Vikas Chain Company Pvt. Ltd. in 2010 and the matter went to Senior Civil Court Teeshazari, Delhi. Hence, there is no rental income during the year under consideration. Although, finally the dispute was settled and the final rent was fixed at Rs.7,810/- per month. The Ld. AR submitted that as and when the rent is received, the assessee will offer the same to tax with the authorities.
6. The Ld. DR relied upon the assessment order and the order of the CIT(A).
7. We have heard both the parties and perused the material available on record. As regards Ground No. 1 & 2, from the evidences produced before the Assessing Officer and the CIT(A) as well as before us, it emerges that the assessee never received any amount. The property No. 2501, Gali No. 8, Carol Bagh, New Delhi belonging to the assessee was mortgaged in the bank (Indian Overseas Bank, Janpath, New Delhi) as guarantor against the loan taken by M/s Vikas Chain Company Pvt. Ltd. from the said Bank. The bank enforced, the recovery of loan against M/s Vikas Chain Company Pvt. Ltd. by sale of the property mortgaged with it. The Indian Overseas Bank forfeited the said property and sold the said property under SARFAESI Act, 2002 by the Bank and out of total sale consideration of Rs. 2,60,00,000/- nothing was given to the assessee as the Bank has an overriding title over the property. Thus, the entire sale proceeds were adjusted against the loan taken by M/s Vikas Chain Company Pvt. Ltd. Since the assessee lost her property without any consideration, the assessee has shown the same as bad debts to the extent of the cost of the said property. Thus, the said amount cannot be considered as long term capital gain in the hands of the assessee. The Ld. AR relied upon the decision of the Hon’ble Supreme court in case of CIT Vs. Balbir Singh Maini (2017) 86 taxmann.com 94 (SC) which is apt in assessee’s case, as in the said case also the income from capital gain on a transaction which never materialized was treated as hypothetical income and the Hon’ble Supreme Court held that there was no profit or gains arose from the transfer of capital asset so as to attract Section 45 & Section 46. Thus, Ground No. 1 & 2 of the assessee’s appeal are allowed. As regards Ground No. 3 & 4, the rental income has not been received by the assessee in the present assessment year. The part of property situated at Delhi was on rent to M/s Shri Chain Company Pvt. Ltd. since 2004 onwards. The dispute started between the assessee (owner) and M/s Shri Chain company Pvt. Ltd. (tenant) in 2010 and the matter went in the Court of Senior Civil Court Teeshazari, Delhi. Since then, the said company did not pay any rent to the assessee. Therefore, the assessee has not shown rental income in the present assessment year in the computation of income. The dispute was settled and final rent was fixed at Rs. 7,810/- per month and the Ld. AR submitted that the same will be shown in her income tax return as and when the said amount will be received. Therefore, we direct the assessee to offer the same to Revenue authorities when it will be received. We further direct the Assessing Officer to verify the same as per the Income Tax Statute. Thus, Ground No. 3 & 4 are partly allowed for statistical purpose. As regards Ground No. 5, the same is consequential, hence not adjudicated at this juncture.
4. In result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on this 09th Day of September, 2021.
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