The Apex Court has finally provided closure to one of the most litigatious aspect of the Income Tax statute. While deciding the appeal in the case of Seshasayee Steels (P.) Ltd v. ACIT [2020] 115 taxmann.com 5 (SC), the Apex Court has interpreted section 2(47) of the Income Tax Act, 1961 which defines the term ‘transfer’.

Facts of the case :

The assesse being the land owner had entered into an agreement with the buyer in FY 1998-99. Along with the agreement, the assessee had also issued a power of attorney in favour of the buyer to enable him to carry out the development on the said land. The assessee also permitted the buyer to start construction and sale on the said land. However, the deal did not culminate until year 2003 and the consideration was paid only in the year 2003.

In the year 2003-04, the assessee entered into a compromise agreement with the buyer wherein the assessee received substantial consideration and also received post dated cheque’s (PDCs) for balance amount. The said PDCs were subsequently encashed.

Assessment Proceedings :

The Assessing Officer reopened the assessment under section 148 for the AY 2004-05 and passed an order u/s 147 read with section 143(3), treating the said compromise agreement as a “transfer” and calculated capital gain tax in the said year. The assessee challenged the said assessment order, but lost in all lower forums. The ITAT held that the AO was right in calculating capital gain in AY 2004-05 since the PDCs were also encashed and hence, the rights in property stood transferred through compromise agreement. The said order was upheld by the HC.

Assessee’s Plea before Apex Court :

The assessee raised the following pleas before the apex court :

a) Capital gain arose in FY 1998-99 when the agreement was executed and the Power of Attorney was issued in favour of the Buyer. The assessee relied upon the definition of the term “transfer” and quoted section 2(47)(v) to claim that the agreement read with POA in FY 1998-99 was “part performance” of contract u/s. 53A of the Transfer of Property Act, 1882. Hence, u/s. 2 (47)(v), transfer took place in FY 1998-99.

b) Even otherwise as per section 2(47)(vi), the agreement read with POA enabled the enjoyment of the property by the buyer. Hence, it was a transfer in FY 1998-99 itself.

c) Finally, it was argued that the compromise deed dated 19-07-2003 was not a document of transfer and hence, no capital gain would arise in AY 2004-05 in either situation.

The Apex court decision:

The Apex Court did not agree with the contentions of the assessee. It held that there are two essential conditions for section 53A of Transfer of Property Act:

a) Transfer of Possession of property to buyer and;

b) The transferee is willing to perform its obligations

The Apex Court held that since the “possession” was not transferred but merely a “permissive license” was granted in FY 1998-99, the conditions of section 53A of Transfer of Property Act, 1882 were not fulfilled. Consequently the provisions of sub clause (v) of section 2(47) cannot be invoked.

The Apex Court also held that it has already been decided in case of CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC) that sub clause (vi) of section 2(47) is applicable only where the enjoyment of the property is as the “purported owner” of the property and not divorced from such ownership. Therefore, where such enjoyment is merely as a permissive licensee, it cannot be said that the conditions of sub clause (vi) is fulfilled.

The Apex Court further held that Compromise Deed of 2003 had all the trappings of a transfer. The said deed had confirmed the earlier agreement and POA and had also made all payments including the PDCs which stood encashed. Hence, the transfer in year 2003 was confirmed by the Apex Court.

Analysis :

The above decision brings into fore certain important aspects of section 2(47). The Apex Court has recognised the concept of “permissive license” divorced from the transfer of possession while interpreting section 2(47). Prior to this decision, the Bombay High Court the case of Dr. Joao Souza Proenca v. ITO [2018] 90 taxmann.com 83 (Bombay) held that “transfer” cannot be contemplated where what was given to a developer was merely a license to enter and de jure possession continued with the owner.

Secondly, the observation of Apex Court in the case of Balbir Singh Maini (supra) is recognised as a ratio and hence, it puts to rest the argument that it’s merely an obiter dicta. Although, such obiter dicta is also binding since, it’s from Apex Court.

Thirdly, the factum of discharge of consideration has been provided deeper sanctity and it acquires gigantic proportions while deciding the date of “transfer”. Hence, where a “permissive license” is granted and the owner has not received the consideration, or such consideration has not accrued it cannot he said that “transfer” as per section 2(47) has arisen to fasten a liability of Capital Gain tax. This is an important decision which would change the future of real estate industry especially how the development agreements are viewed by the Income Tax Department.

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