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Case Law Details

Case Name : Fashion Group International Vs ACIT (ITAT Delhi)
Appeal Number : ITA No. 122/Del/2019
Date of Judgement/Order : 24/05/2023
Related Assessment Year : 2014-15

M/S. Fashion Group International Vs ACIT (ITAT Delhi)

ITAT Delhi held that provisions of section 50C of the Income Tax Act applies only in case of transfer of land or immovable property. Invocation of deeming provision of section 50C in case of mere transfer of right in property accrued under agreement without transfer of title is unjustifiable.

Facts- The main issue in this appeal filed by the assessee is an addition of Rs. 1,58,56,968/- made by AO invoking the provisions of Section 50C of the Act, confirmed by CIT (Appeals).

The assessee, a partnership firm, has claimed long term capital loss in its return of income for the relevant assessment year on transfer of two properties. AO invoking the provisions of section 50C of the Act and applying stamp valuation of the properties made an addition.

The assessee had purchased two properties for construction of factory building via two separate Agreement to Sell. The assessee intended to construct a factory building on the impugned land. However, due to certain restrictions from HUDA, the assessee could not register the land in its name. As the properties were not in its name, the assessee was unable to construct the factory building. The sale consideration / was fully paid at the time of entering into the Agreement to Sell. In this manner the total funds of the assessee in the form of sale consideration was tied up as legally the assessee not being a registered owner, it could not construct the factory building and also could not sell the same to any third party.

The assessee and the seller settled the dispute between the two parties holding when the amount was received from the ultimate buyer the same would be forwarded to the assessee. AO invoking the provisions of Section 50C of the Income Tax Act and applying the stamp valuation of the properties, made an addition.

Conclusion- Held that the assessee merely transferred right in the property accrued under agreement without transfer of title, and the language of section 50C is unambiguous and plain which reveals that the said section applies only in a case of transfer of land or immovable property and in the instant case the assessee is not a transferor or property or co-owner of the property but he transferred certain rights under the earlier agreement therefore the Assessing Officer was not correct and justified in invoking deeming provision of section 50C of the Act and ld. CIT(A) has also erred in upholding the same against the scheme of the Act.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal has been filed against the order of CIT(A) Karnal dated 02.11.2018 for AY 2014-15.

2. The grounds of assessee are as follows:-

1. On the facts and circumstances of the case, the order passed by the Learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad, both in the eye of law and on the facts.

2. On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 1,58,56,968/- invoking the provisions of section 50C of the Act.

3. On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the above said addition rejecting the contention of the assessee that the transaction being not in the nature of sale of either land or building, the provisions of section 50C are not applicable to the same.

4. Without prejudice to the above and in the alternative, the CIT(A) has erred both on facts and in law in confirming the addition despite the failure of the A.O. to refer the property for valuation to the D.V.O.

5. Without prejudice to the above and in the alternative, the CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the loss having been incurred in the normal course of business is otherwise an allowable

6. (i). On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the disallowance of Rs. 2,00,000/- made by the A.O. on account of expenses on consumables.

(ii). That the disallowance was made arbitrarily, without there being any basis for the same.

7. (i).On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the disallowance of Rs. 19,543/- made by the O. on account of business promotion expenses, office expenses and miscellaneous expenditure.

(ii). That the disallowance was made @1/5 of the expenditure most arbitrarily, without there being any basis for the same.

3. The learned counsel has submitted return synopsis, for the sake of completeness the same is being reproduced below:-

1. The main issue in this appeal filed by the assessee is an addition of Rs. 1,58,56,968/- made by the Ld. Assessing Officer (AO) invoking the provisions of Section 50C of the Act, confirmed by the Ld. Commissioner of Income Tax (Appeals).

2. The assessee, a partnership firm, has claimed long term capital loss of Rs.31,30,562/- in its return of income for the relevant assessment year on transfer of two properties. The Ld. AO, invoking the provisions of Section 50C of the Act and applying the stamp valuation of the properties, made an addition of Rs.1,58,56,968/-.

3. The assessee had purchased two properties for construction of factory building vide two separate Agreement to Sell at a total of Rs.55,55,555/-. The transactions were entered into only with the help of Agreements to Sell, the copies of which are placed at PB Pg. 48-49 and 53-54. The properties were not registered in the name of the assessee for a very long period. The assessee intended to construct a factory building on the impugned land. However, due to certain restrictions from HUDA, the assessee could not register the land in its name. As the properties were not in its name, the assessee was unable to construct the factory building. The sale consideration / was fully paid at the time of entering into the Agreement to Sell. In this manner the total funds of the assessee in the form of sale consideration was tied up as legally the assessee not being a registered owner, it could not construct the factory building and also could not sell the same to any third party. In this way, the assessee was entangled in a financial criis and asked the seller to give its money back. However, the seller did not intend to take the land back. The assessee and the seller both went before Shri Ramesh Verma, President of Handloom Manufacturers Association, Paniat for settlement of their dispute. Mr. Verma is a highly respectable man in the community. He settled the dispute between the two parties holding that the assessee would find a buyer for the impugned properties, the seller would help the assessee in this and when the amount is received from the ultimate buyer the same would be forwarded to the assessee. These Settlement Awards were duly registered with the Stamp Vendor of Paniat District Court. For both the properties separate Settlement Awards were made. Copies of Settlement Awards are placed at PB Pg. 81 and 85.

4. After that the assessee together with the efforts of the seller found a buyer for the properties and both the properties were ultimately sold to a third party during the year under consideration. The copies of Agreement to Sell are placed at PB Pg. 50 and 55.

5. From the above chronology it can be seen that the assessee was never the owner of the properties and what was transferred during the year under consideration may at best be said to be the right in the properties held by the assessee. Since the total value of sale consideration was already transferred it was imperative to include the name of the assessee in the Agreement to Sell for sale of properties to the ultimate buyer.

6. Provisions of Section 50C are applicable in case of transfer of a capital asset being land or building or both. In the present case the transfer is not any land or building or both on the part of the assessee. At best it can be said to be transfer of rights in

7. The first question arising in this case is what is the nature of property transferred by the assessee during the year under consideration. Firstly, there was no transfer of any property even at the initiation in the present case as it would be appreciated that the Agreement to Sell through which the impugned properties were intended to be acquired by the assessee were not registered with the Stamp Valuation Authority. In the definition of part performance in Section 53A of the Transfer of Property Act, property can be said to transferred through Agreement to Sell only if the Agreement to Sell is a registered agreement. Reliance is placed on the following judgments;-

(I) Charanjit Singh Atwal Vs. CIT (2015) 378 ITR 244 (P&H HC)

“Once it was embodied in Section 2(47)(v) of the Act by incorporation, all the legal requirements of Section 53A of 1882 Act had to be complied with. In the absence of registration of such an agreement, the same was not enforceable under general law keeping in view the provisions of Sections 17(1 A) and 49 of the 1908 Act and at the same time, the transaction would not fall under Section 2(47)(v) of the Act.”

This case has been confirmed by the Hon’ble Supreme Court in the case (ii) CIT Vs. Balbir Singh Maini, CIA 15619/2017, dt. 04.10.2017 (SC)

“there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no “transfer” can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken/whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their part of the bargain.”

8. Further In the present case the applicability of Section 50C is not tenable. The Section Itself starts with the term ‘transfer by an assessed of a capital asset, being land or building or both/. The language itself is very clear and unambiguous. The provisions of this Section will strictly apply to cases only when there is a transfer of land or building or both. In the present case, only certain rights were transferred by the assessee in the year under consideration. Reliance is placed on the following judgments:-

(i) JCIT Vs. Sesha Giri Rao ITA 760 & 50/ HydI 2016, dt. 30.11.2017

(ii) CIT Vs. Greenfield Hotels and Estates Pvt. Ltd., (2016) 389 ITR 68 (Bom)

(iii) Atul G. Puranik Vs. ITO, (2011) 11 ITR 120

(iv) Baniara Engineers Pvt. Ltd. Vs. ITO, ITA 635/Kol/ 2018, dt. 07.07.2018

9. Without prejudice, there being no transfer of any property during the year under consideration the losses incurred by the assessee are to be treated as business loss of the assessee as there was a loss incurred by the assessee in the course of its business only.

4. Precisely reiterated that written submissions the learned counsel submitted that the assessee was never owner of the property and what was transfer during the year under consideration may be at best be said to be in the right in the property held by the assessee under agreement to sell dated 18.03.2005 & 30.03.2007. Therefore he submitted that the provision of section 50C of the Income Tax Act, 1961 (for short ‘Act’) are not applicable to the case of assessee. The learned counsel placing reliance on various judgements including judgement of Hon’ble Punjab & Haryana High Court in the case of Charnjit Singh Atwal vs. CIT (supra) and judgement of Hon’ble Supreme Court in the case of CIT vs. Balbir Singh Maini (supra) submitted that for completion of transaction of sale of property u/s. 2(47) (v) of the Act, all legal requirements u/s. 53A of the transfer of property Act has to be complied. For non applicability of section 50C of the Act, the learned counsel submitted that in the present case certain rights accrued to the assessee due to earlier agreement to purchase with the owner to the property but the transaction could not completed due to some restrictions of competent authority HUDA and thereafter owner searched another purchaser and at the time of transfer of property to the third party the assessee was including as consenting party to terminate all the disputes and safe guard the financial rights of assessee therefore no addition can be made in the hands of assessee either u/s. 50C or any other provision of the Act. The learned counsel finally submitted that the addition made by the Assessing Officer and upheld by the ld. CIT(A) has no lapse to stand therefore the same may kindly be dismissed, deleting the addition.

5. Replying to the above the ld. Senior DR strongly supported the orders of the authorities below and submitted that while the assessee is claiming long term capital loss then the Assessing Officer was right in making addition u/s. 50C of the Act.

6. Placing rejoinder to the above, the ld. counsel placed reliance on the judgment of Hon’ble Karnataka High Court in the case of V.S Chandrashekar vs. ACIT 432 ITR 330 (Kar) and submitted that when the assessee had certain rights in the property under the agreement then also the language of section 50C of the Act, does not apply in such a case. Further placing reliance on the judgement of ITAT Delhi Bench in the case of Bhagwat Singh vs. ITO dated 30.11.2022 in ITA No. 1239/Del/2018 and Noida Cyber Park Pvt. Ltd. vs ITO dated 12.10.2020 in ITA No. 165/Del/2020. The learned counsel submitted that the section 247 of the Act, specifically deals with the same and agreement to sale of property under clause (V) the assessee cannot be taken as covered under clause (ii) of section 247 which deals with the extinguishment of any right therefore addition made by the Assessing Officer only on transfer of rights in the property under earlier agreement does not put the assessee under the rigor of section 50C of the Act.

7. On careful consideration of above submission, first of all, we note that undisputedly the assessee had purchased two properties for construction of factory building vide two separate agreement to sale against total consideration of Rs. 55,55,555/- copies of which are placed at paper book at pages 48-49 & 53-54 and no registered sale deed in the name of assessee was executed by the owner due to certain restriction of housing urban development authority. It is also not dispute that the assessee at the time of agreement paid entire consideration to the owner. As we have noted above that the registered sale deed was never executed in favour of the assessee therefore rights & title therein were never transferred from owner to assessee. It is also not in dispute that the owner and the assessee found a buyer of property and ultimately sold to third party during FY 2013-14 pertaining to AY 2014-15 and the assessee was merely consenting party to that agreement.

8. In the case of Charanjit Singh Atwal vs. CIT (supra) their lordship held that “Once it was embodies in Section 2(47)(V) of the Act by incorporation, all the legal requirements of Section 53A of 1882 Act had to be complied with. In the absence of registration of such an agreement, the same was not enforceable under general law keeping in view the provisions of sections 17(1A) and 49 of the 1908 Act and at the same time, the transaction would not fall under section 2(47)(v) of the Act.” In the present case also since there was only agreement to sale in favour of the assessee but transaction could not be completed due to legal restrictions and finally property was sold to third party under the consent of assessee therefore transaction of extinguishment of right does not fall under the ambit of section 2(47)(v) of the Act.

9. Further, we respectfully note that Hon’ble Karnataka High Court in the case of S Chandrashekar vs. ITO (supra) in para 11, adjudicating the identical legal issue held as under:-

11. Thus, from perusal of the aforesaid provisions, it is axiomatic that explanation 1 to Section 2(47) uses the term ‘immovable property ‘whereas, Section 50C uses the expression ‘land’ instead of immovable property. 11 is also pertinent to mention that wherever the legislature intended to expand the meaning of the land to include rights or interests in land, it has said so specifically viz., Section 35(1)(a), Section 54G(1), Section 54GA(1) and Section 269UA(d) and Explanation to Section 155(5A). Thus, Section 50C applies only in case of a transferor of land which in the instant case is M/s Namaste Exports and not the assessee who was only a consenting party and not a transferor / co-owner of the property. Undoubtedly, the assessee had certain rights under the agreement, however, from the clear plain and unambiguous language employed in Section 50C, it is evident that the same does not apply to a case of rights in land. It is equally well settled rule of statutory interpretation with regard to taxing statute that an assessee cannot be taxed without clear words for that purpose and every Act of the Parliament has to be read as per its natural construction of words. For the aforementioned reasons, in our considered opinion, the provisions of Section50(c) are not applicable to the case of the assessee. In the result, the first substantial question of law is answered in the negative and in favour of the assessee.

10. Thus in the present case also it is evident that the assessee merely transferred right in the property accrued under agreement without transfer of title, and the language of section 50C is unambiguous and plain which reveals that the said section applies only in a case of transfer of land or immovable property and in the instant case the assessee is not a transferor or property or co-owner of the property but he transferred certain rights under the earlier agreement therefore the Assessing Officer was not correct and justified in invoking deeming provision of section 50C of the Act and ld. CIT(A) has also erred in upholding the same against the scheme of the Act. Therefore grounds no. 1 to 4 of assessee are allowed.

11. Apropos ground no. 5 ld. counsel submitted that the authorities below have erred on facts and in law in not allowing loss incurred to the assessee on said transaction of transfer of right in the property as business loss which was allowable as has been cause to the assessee in the normal course of business. Therefore the ld. counsel submitted that the loss may kindly be allowed as business loss.

12. Replying to the above the ld. DR submitted that the assessee is not in the business of purchase and sale of the property therefore this cannot be allowed as business loss. He also submitted that on the one hand the assessee want to get rid off from the rigor of section 50C of the Act and on the other hands he is contended that the loss should be allowed as business loss. The assessee cannot be allowed to take two contrary stands at the same time therefore ground no. 5 may kindly be dismissed.

13. On careful consideration of above, we note that before the Assessing Officer the assessee submitted a computation which has been reproduced in para 3.1 of assessment order. From this table it is clear that the assessee paid consideration of Rs. 55,55,555/- and under tri party agreement he received amount of Rs. 59,12,500/-. If the indexed cost of investment, which accrued right in the property to the assessee, is considered then it comes to Rs. 90,43,062/- causing loss of Rs. 31,30,562/- to the assessee and these factual position/matrix has not been disputed by the Assessing Officer or ld. CIT(A) or Senior DR appearing before us. Therefore we note that undisputedly the assessee sustained loss of Rs. 31,30,562/-. But since assessee is not in the business of purchase and sale of property and as per para 2 of assessment order it earns income from manufacturing, trading and exporting of home textile goods and other handmade items. Therefore this loss cannot be allowed to the assessee as business loss and in the totality of facts and circumstances of agreement to purchase and extinguishment of right in the property under tri party agreement the said loss is nothing but capital loss and Assessing Officer is directed to treat the same as capital loss. Accordingly, ground 5 of assessee is dismissed.

14. Apropos ground no. 6 & 7 of the assessee we have heard argument both the On perusal of para 4.1 and 5 of assessment order it is clear that the authorize representative of assessee agreed that the assessee has not maintained record expenditure incurred on consumables and also conceded and agreed to that part expenditure for non business purpose cannot be rule out under miscellaneous, office and business promotion. Keeping in view above factual position emerged from the assessment orders the ld. CIT(A) has dismiss the grounds of assessee. In view of above when the AR himself agreed to the addition due to the non-maintenance of record on consumables and under possibility of part expenditure on miscellaneous, office and business promotion expenses for non business purposes then the assessee cannot be allowed to agitate the issue before this Tribunal. Accordingly, ground no. 6 & 7 of assessee are dismissed.

15. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 24.05.2023.

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