Capital gain on compulsory acquisition of property already sold to builder?

IN THE ITAT AGRA BENCH

Deputy Commissioner of Income-tax

versus

Tej Singh

IT APPEAL NO. 127 (AGRA) OF 2010

C.O. NO. 47 (AGRA) OF 2010

[ASSESSMENT YEAR 2005-06]

MARCH 30, 2012

ORDER

Bhavnesh Saini, Judicial Member

The departmental appeal as well as the cross objection by the assessee are directed against the order of ld. CIT(A)-I, Agra dated 10.02.2010 for the assessment year 2005-06. The Revenue has raised two effective grounds of appeal, which read as under :

“1.  That the CIT(A)-1, Agra has erred in law and on the facts of the case in deleting the addition of Rs. 26,31,467/- made on account of long term capital gain without appreciating the facts that the land was acquired by the ADA on 25.08.2000 while the assessee has entered into agreement to sale in A.Y. 2005-06 and has obtained the advance against the transfer of the said land which is the subject matter of long term capital gain assessed by the A.O.

 2.  That the CIT(A)-1, Agra has erred in law and on the facts of the case in deleting the addition of Rs. 2,50,000/- made on account of income from other sources without appreciating the facts that the assessee was unable to explain the source of deposit of Rs. 7,84,000/- in his bank account.”

1.1 The assessee in the cross objection raised the following ground :

“1. That the Ld. CIT(A)-1, Agra has erred in law and in facts in confirming addition of Rs. 5,34,000/- being unexplained deposit ignoring the cash flow statement submitted by the appellant.”

2. The facts of the case are that the AO received information from AIR that the assessee has deposited Rs. 10,00,000/- in his saving bank account with Indian Overseas Bank. Proceedings u/s. 147 of the IT Act were initiated in respect of such unexplained deposits in the bank account. The AO recorded the statement of the assessee, in which it is stated that the assessee is not assessed to tax and he is a farmer/farm labourer. The assessee along with his two brothers owned 12 bighas of land. This land was sold for Rs. 70,00,000/- through the agreement, in which the assessee has 1/3rd share amounting to Rs. 24,00,000/-. The land was agricultural land and wheat, Bajra and vegetables were grown in the said land. The assessee maintained two bank accounts with Indian Overseas Bank and Oriental Bank of Commerce. The land has neither been registered in the name of the builder nor possession has been handed over to the builder. The impugned land has been acquired by the Agra Development Authority and is in its possession. The assessee has contested the acquisition of the property before the Hon’ble Allahabad High Court, seeking its release from the Agra Development Authority. The money received from the builder has been utilized in purchase of the agricultural land in the name of assessee’s son. The investment in such agricultural land is of about Rs. 15,00,000/- and some amount has been invested in residential house and the balance amount has been given as a gift to the children and spent on marriages etc. Approximately Rs. 10,00,000/- to 20,00,000/- have been invested in residential house.

2.1 In response to the requisition u/s. 133(6), the builder, M/s. Dream Shelters Pvt. Ltd. filed a letter before the AO dated 26.12.2008 and explained that the assessee and his brothers entered into an agreement to sale of the same property on 20.11.2004 and entire consideration of Rs. 70,00,000/- has been paid. The details have been noted in the impugned order and the same amount has been shown by the builder as stock-in-trade in their balance sheet. However, physical possession has still not been received by the builder. With regard to deposit of Rs. 10,00,000/- in the bank account of the assessee, the assessee explained that Rs. 2,16,000/- has been received from the builder in cash and similarly, Rs. 2,17,000/- and Rs. 2,67,000/- in cash have been received by brothers of the assessee, namely Radhey Shyam and Shri Sukh Singh.

2.2 The AO, however, did not accept the contention of the assessee and made addition of Rs. 26,31,467/- on account of capital gains on sale of land in question and also made addition of Rs. 7,84,000/- on account of unexplained deposit in the bank account, treating the same as income from other sources. The AO observed in the assessment order that the assessee and his two brothers entered into an agreement to sale in respect of the land in question and received a sale consideration and the assessee has not shown any long-term capital gains in the return of income. The AO further observed that Chief Development Officer confirmed that the land in question falls within 8 kilometers of the municipal limit. Therefore, the assessee is liable to tax on capital gains arising on account of transfer of impugned urban agricultural land. The AO on examination of the agreement to sale entered into between the assessee and the builder, M/s. Dream Shelter Pvt. Ltd., observed that the assessee has relinquished his right in the impugned land, which amounts to transfer in terms of section 2(47) of the IT Act and hence, there was no merit in the assessee’s claim that the impugned agricultural land has not been conveyed by a registered document and, as such, no sale can be deemed to have taken place. The AO also observed from the reply of the builder that the entire amount has been paid by them to the assessee and copy of their balance sheet reflects the payment made to the assessee in the form of stock-in-trade and not as advance against the purchase of land. The capital gains was accordingly worked out to Rs. 26,31,467/- and the same was taxed accordingly.

2.3 With regard to deposit of Rs. 10,00,000/- in the bank account of the assessee in cash, the assessee explained that the amount received through agreement to sale in cash by the assessee was Rs. 2,16,000/- and the amounts received by his brothers was Rs. 2,17,000/- and Rs. 2,67,000/-. However, the AO noted that no evidence was produced with regard to the fact that the amounts belonging to his brothers were deposited in the bank account of the assessee. The AO, however, gave benefit of Rs. 2,16,000/-, which was received by the assessee of his share in cash through agreement to sale and confirmed the addition of Rs. 7,84,000/-.

2.4 The AO also observed that no claim is made in the return of income if any amount was spent on the agricultural land and further, no evidence was produced for claiming relief u/s. 54B and 54F of the IT Act. It was further observed that since the matter regarding investment in the property was raised and referred to the Departmental Valuation Officer and no report of the DVO has been received, therefore, no benefit could be given to the assessee.

3. Both the additions were challenged before the ld. CIT(A) and the assessee, more or less, reiterated the same submissions made before the Authority below and it was further explained that addition on account of capital gain was wrongly made which was not in accordance with law. Agra Development Authority has already notified the land in question for acquisition for its Shashtri Puram Yojana and an application for release had been filed with the State Government, which is pending. According to the agreement to sale, it was clear at the time of entering into the agreement that the land in question was already acquired by the ADA. Therefore, section 45(5) would not be applicable in this case because the assessee has not received any compensation from ADA. Therefore, the capital gain will arise only when compensation will be received by the assessee. The agreement to sale also contained first clause that the second party, i.e., the builder, shall make all efforts to get released the land from ADA. It was, therefore, submitted that since there was no transfer of land as per agreement, which is yet to be released by the ADA, therefore, the agreement to sale was contingent and was based on future events. It was, therefore, explained that the provisions of section 2(47) would not apply in the case of the assessee. The assessee also emphasized that according to section 51 of the IT Act, in case of advance forfeited which was received through agreement to sale, it would only be a capital receipt. The assessee also explained that the AO has wrongly denied the benefit of deduction to the assessee u/s. 54B and 54F of the IT Act because the assessee made investment in agricultural land on different dates on 12.12.2005 and 29.10.2005 in a sum of Rs. 16,39,500/-. Therefore, deduction should have been allowed u/s. 54B of the Act. Further, the AO has considered the advance money as sale consideration, but no benefit has been given u/s. 54B. The ld. CIT(A) also directed the AO to ascertain the present status of the acquisition of the land of assessee by the ADA. The letter dated 11.12.2009 (page 15 of first paper book) has been received from Land Acquisition Officer, Agra Development Authority stating that the impugned land was acquired on 25.08.2000. Further letter dated 01.01.2010 (page 14 of first paper book) was received from Special Land Acquisition Officer confirming that the land in question was acquired on 25.08.2000. As the matter was pending before the Hon’ble High Court, therefore, no compensation has been awarded in respect thereof. The ld. CIT(A) considering the above facts and explanations held that no capital gain arises for taxation. The ld. CIT(A) further held that without prejudice to the above finding, the long-term capital gains is also exempt as the assessee has made investment in terms of section 54B in agricultural land and 54F in residential house, as is assessed by the DVO vide report dated 30.04.2009 received by the AO after finalization of the assessment. The ld. CIT(A), accordingly, deleted the addition of Rs. 26,31,467/- as long-term capital gains.

3.1 It was further submitted before the ld. CIT(A) that Rs. 10,00,000/- was deposited in the bank account of the assessee out of the amount received from the builder by the assessee and two of his brothers. Cash flow statement was also filed as reproduced in para 4.2 of the appellate order to explain that opening cash in hand and cash withdrawn from IOB apart from amounts received from brothers was also available to the assessee. Therefore, addition should not be made against the assessee. The ld. CIT(A), considering the explanation of the assessee, noted that the amounts of Rs. 2,17,000/- each received by the assessee from his two brothers has not been proved with any cogent evidence. Therefore, Rs. 4,34,000/- remained unexplained. The opening balance of Rs. 2,75,000/- was considered, but the assessee has not furnished any evidence in support thereof. Therefore, in absence of any corroborative documentary evidence, the ld. CIT(A) considered reasonably that the assessee could have saved Rs. 1,75,000/-. Therefore, Rs. 1,00,000/- was treated as unexplained. The ld. CIT(A) out of total addition of Rs. 7,84,000/- considered the following amounts as explained :

The ld. CIT(A) gave benefit to the assessee in a sum of Rs. 2,50,000/- and balance of Rs. 5,34,000/- was confirmed for the purpose of addition, on which the Revenue as well as the assessee are in appeal.

4. The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that land in question was compulsorily acquired vide gazette notification dated 30.01.1989 (Page 1 of second Paper book). He has submitted that the assessee challenged the acquisition of the land before the Hon’ble High Court and the proceedings have been started. Copy of the interim order of the High court is filed at page 11 of the second paper book. He has submitted that the letters issued by the ADA and Land Acquisition Officers clearly mention that the possession of the land has been taken by the ADA on 25.08.2000 and no amount of compensation has been paid to the assessee. He has, therefore, submitted that the provisions of section 2(47) of the IT Act read section 45(5) would not be attracted for the purpose of charging of capital gains. He has submitted that since agreement to sale was executed thereafter on 20.11.2004 (page 1 of first paper book) and possession was not handed over to the builder, as it was with the ADA, therefore, capital gains cannot be charged in the matter. He has submitted that the agreement to sale depends upon the de-notification of the land, for which the builder will be responsible. Therefore, agreement to sale was contingent agreement and no capital gain could be charged accordingly. He has submitted that the DVO has supported the case of the assessee for investment made in agricultural land and residential house. Therefore, the ld. CIT(A) rightly deleted the addition. As regards the addition on the unexplained deposit in the bank account, he has submitted that the cash flow statement was filed before the ld. CIT(A) to explain the deposit. Therefore, the ld. CIT(A) should have deleted the entire addition. Cash flow statement is filed at page 16 of the first paper book.

5. On the other hand, the ld. DR relied upon the order of the AO and submitted that full consideration has been received through agreement to sale and the amount was not refundable. Therefore, the AO rightly charged capital gains on transfer of capital asset. The ld. DR submitted that though the assessee filed cash flow statement to explain the deposit in the bank account, but no corroborative evidence was filed in support of the cash flow statement. Therefore, even the part addition deleted by the ld. CIT(A) is clearly unjustified.

6. We have considered the rival submissions and the material on record. It is not in dispute that the land in question was compulsorily acquired by the government vide notification dated 30.01.1989 and possession of the impugned land was taken by the ADA on 25.08.2000. It is also not in dispute that no compensation has been given to the assessee because the matter was pending before the Hon’ble Allahabad High Court. The letter of Special Land Acquisition Officer dated 01.01.2010 and Land Acquisition Officer dated 11.12.2009 are filed in the paper book in respect of the same. It is, therefore, clear that the matter is subjudice before the Hon’ble High Court for de-notifying the land in question and possession with the ADA and no compensation has been received by the assessee.

The Relevant provisions of section 2(47)(iii) & (v) read as under :

“(47) transfer, in relation to a capital asset, includes –

(iii)  the compulsory acquisition thereof under any law; 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).”

Section 45(5) of the IT Act reads as under

“(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :

 (a)  the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof was first received; and

 (b)  the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such amount is received by the assessee;

 (c)  where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration

Explanation. – For the purposes of this sub-section, –

  (i)  in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;

 (ii)  the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii)  where any reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head “Capital gains”, of such other person.”

6.1 The combined reading of above provisions provides that transfer in relation to capital assets includes the compulsory acquisition under any law and that the capital gain could be charged in the previous year, in which such compensation or part thereof or such consideration or part thereof was first received. Hon’ble Madras High Court in the case of Anil Kumar Forma (HUF) v. CIT [2007] 289 ITR 245/163 Taxman 182 held –

“Held, that the right to the amounts received by the assessees as part of the compensation, was only an inchoate right during the pendency of the appeals before the High Court and the amounts could be assessed only when the appeals were finally determined by the High Court on April 20, 2000. The amounts received under interim conditional orders of the court were not liable to tax in the assessment years 1997-98 and 1998-99.”

6.2 Hon’ble Punjab & Haryana High Court in the case of CIT v. Karanbir Singh [2008] 303 ITR 231/169 Taxman 85 held –

“Held, that the Revenue was not entitled to tax the amount of interest received by the assessee on account of acquisition of land till such time the proceedings in reference thereto attained finality.”

6.3 Since in this case, the land is acquired compulsorily and no amount of compensation has been received by the assessee and further, the matter is still pending before the Hon’ble Allahabad High Court and has not attained finality, therefore, the provisions of section 2(47) (iii) and (v) section 45(5) would not apply in the case of the assessee. Further, the AO charged capital gains because the assessee received the amount from the builder through the agreement to sale dated 20.11.2004. The agreement to sale was executed on 20.11.2004 after the land was acquired and possession was taken by the ADA. It was mentioned in the agreement to sale that it was duty of the builder to pursue the matter for de-notification of the land in question and in case the builder fails to get it de-notified then the amount paid to the assessee would not be refunded. Thus, the possession could have been given to the builder when the land in question would be de-notified by the ADA. It was, therefore, a contingent agreement based on the happening of the events in future. Thus, there was no transfer of capital asset within the meaning of section 2(47) (v) of the IT Act. There is no transfer of possession of any immovable property in favour of the builder because the possession was already with the ADA prior to entering into the agreement to sale in question. Under section 53A of the Transfer of property Act, it is necessary that for part consideration, the possession should have been handed over to the transferee. Therefore, these provisions would not apply in the case of the assessee. It is, therefore, a case where on account of compulsory acquisition of land and possession taken by the ADA, no compensation is given to the assessee and in case of entering into agreement to sale, though consideration is received, possession could not be given to the builder because it was already with the ADA. Thus, none of these provisions would apply in the case of the assessee. Merely because full consideration has been received by the assessee on account of agreement to sale by itself is no ground to charge capital gains on the subject matter in issue. Since the conditions of above provisions are not fulfilled in the case of the assessee, therefore, the ld. CIT(A) rightly held that no capital gain is chargeable to tax. The ld. CIT(A) apart from the above findings has further noted that as per DVO’s report, which was filed before the AO after completion of the assessment, would shows that the assessee made investment in agricultural land and residential house in terms of section 54B and 54F. Therefore, on alternate contention, the assessee would be entitled for deduction on account of capital gains. Admittedly, the AO referred the matter to the DVO for clarification of investments as per law and the DVO has given report in favour of the assessee. Therefore, the AO would be bound by the same. Considering the totality of the facts and circumstances, noted above, we do not find any infirmity or illegality in the order of the ld. CIT(A) in deleting the addition on account of capital gains on sale of land. Ground No. 1 of appeal of the Revenue has no merit and is, accordingly, dismissed.

7. With regard to ground No. 2 of the departmental appeal and ground No. 1 of the cross-objection of the assessee regarding deposit made in the bank account of the assessee in a sum of Rs. 10,00,000/- in cash, the ld. CIT(A) gave part benefit to the assessee out of addition of Rs. 7,84,000/-. The assessee in the cash flow statement claimed benefit of Rs. 2,17,000/- each received by both of his brothers, Radhey Shyam and Sukh Singh, but admittedly, no evidence was produced before the authorities below to support such contention. May be they have received the amount in question from the builder, but no evidence was produced before the authorities below that the brothers of the assessee have given these amounts to the assessee for depositing in the bank account of the assessee. No such evidence is also produced before us in support of the claim. Therefore, the ld. CIT(A) rightly decided not to give any benefit of Rs. 2,17,000/- each (total Rs. 4,34,000/-) in favour of the assessee. We, therefore, do not find any justification to interfere with the order of the ld. CIT(A) in this regard. The assessee further claimed in the cash flow statement that the opening cash in hand was Rs. 2,75,000/-, but no evidence could be furnished by the assessee in support thereof. In absence of any corroborative documentary evidence, the ld. CIT(A) merely gave benefit to the assessee for Rs. 1,75,000/-. We do not approve the finding of the ld. CIT(A) even for granting part relief to the assessee on this issue. The ld. CIT(A) specifically noted in the impugned order that no evidence has been given by the assessee in respect of availability of opening cash in hand of Rs. 2,75,000/- and further no corroborative evidence has been furnished. On the face of these findings of the ld. CIT(A), he should not have considered the savings of the assessee in a sum of Rs. 1,75,000/-. No evidence is also produced before us in respect of this contention. We, therefore, set aside the order of the ld. CIT(A) and reverse his finding for granting benefit to the assessee in a sum of Rs. 1,75,000/-. The ld. CIT(A) further gave benefit of Rs. 45,000/- and Rs. 4500/- out of cash withdrawn from IOB on 08.04.2004 and 20.05.2004. The AO noted that as per the report received from AIR and bank statement of the assessee, the assessee made cash deposit of Rs. 10,00,000/- in IOB on 22.11.2004. No evidence to show any co-relation between the withdrawals made from IOB in April/May, 2004 with cash deposit in November, 2004 has been filed. Considering the meager income declared in the return of income, it is possible that the amount withdrawn by the assessee from IOB in earlier dates would have been spent by the assessee for household purposes. Therefore, in absence of any plausible explanation and evidence on record, the ld. CIT(A) should not have given benefit of Rs. 45,000/- and Rs. 4500/- to the assessee. We, therefore, reverse the finding of the ld. CIT(A) on this issue by setting aside his order. The ld. CIT(A) further gave benefit of current income of Rs. 25,500/- in which we do not find any infirmity. It is, therefore, clear that at the most, the assessee would be entitled for deduction of Rs. 25,500/- out of addition of Rs. 7,84,000/. We accordingly, modify the order of the ld. CIT(A) to that extent and direct that the assessee would be entitled for reduction of Rs. 25,500/- out of the total addition made by the AO in a sum of Rs. 7,84,000/-. Accordingly, the addition on this issue would be maintained in a sum of Rs. 7,58,500/-. In the result, ground No. 2 of the appeal of the Revenue is partly allowed and ground No. 1 of the assessee’s cross-objection is dismissed. No other point is argued or pressed.

8. In the result, the appeal of the Revenue is partly allowed and cross-objection of the assessee is dismissed.