Ishvakoo Grand Plaza Vs DCIT (ITAT Delhi)
ITAT Delhi held that to burden assessee with capital gain arising out of transfer of immovable property or an interest in it, the cost of acquisition is necessarily to be established. Here, cost of acquisition of so called right of preemption is considered as NIL. Hence, computation provisions fail, therefore capital gains could not have been calculated.
Facts- During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non – taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio.
AO vide notice u/s 142(1) of the Act dated 26.02.2016, enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” u/s 2(14) of the Act and the relinquishment of the said right falls under the definition of “Transfer” as per the Act. Therefore, why the amount of Rs. 20,40,00,000/-received from M/s. Kandhari Infrastructures Pvt. Ltd. should not be treated as Long Term Capital Gain arising from such transfer.
AO concluded the same as receipts taxable as capital asset. CIT(A) sustained the addition. Being aggrieved, assessee has preferred the present appeal.
Conclusion- To burden assessee with capital gain arising out of transfer of immovable property or an interest in it, the cost of acquisition is necessarily to be established. Mumbai Bench of Tribunal in the case of DCIT vs. Star Chemicals (Bom.) P. Ltd. 110 TTJ 753 (Mum) has held that for want of acquisition cost capital gain tax would not arise. In the present case, AO himself has considered the cost of acquisition of the so called right of preemption to be Nil. Thus, the computation provisions fail, therefore, capital gains could not have been calculated. This too establish that a mere right to sue in regard to immovable property cannot be subject to Income Tax under the head ‘Capital Gains’ as restricted by Section 6(e) of the Transfer of Property Act 1882, laying that a mere right to sue cannot be transferred.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal has been filed by the Assessee against order dated 12.06.2017 passed in appeal no. 18/10010/2016-17 for assessment year 2015-16, by the Commissioner of Income Tax (Appeals)-18, New Delhi (hereinafter referred to as the First Appellate Authority or in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 30.3.2016 u/s 143(3) of I.T. Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Central Circle-54(1), New Delhi (hereinafter referred as Ld. Assessing officer or in short ‘Ld. AO’).
2. The assessee is a firm having income from Business or Profession. The assessee filed return of income on 30.09.2013 declaring an income of Rs.46,89,452/-. The case was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) of the Act dated 03.09.2014 was issued and duly served upon the assessee. Subsequently, notice u/s 142(1) along with questionnaire was issued on 31.08.2015 and served upon the assessee.
2.1 During the year under consideration, the assessee has received Rs.20,40,00,000/- in a settlement in the court, which the assessee has claimed as non – taxable and has credited directly to the capital accounts of the partners of the firm in their respective profit sharing ratio.
2.2 The assessee vide letter dated 09.10.2015, filed the following sequence of events which led to the receipt of Rs. 20,40,00,000/-:
“SEQUENCE OF EVENTS
(i) 19.04.2004: The assessee firm (LESSEE), took on lease the entire property comprising of Easement Floor, Ground Floor, First Floor, Second Floor, Third Floor and Terrace, with parking area, on Plot bearing No. 73 Ring Road, Lajpat Nagar, New Delhi, (LEASED PROPERTY), (approx area 22,000 sqft), from one Sh Parvinder Singh Chopra (LESSOR), vide lease deed executed at New Delhi on the 19th day of April, 2004, on a monthly lease amount of Rs.9,00,000/- effective from 01.06.2004. Copy of the lease deed is filed at Pages …to…. of these submissions. The LEASE DEED was registered in the Office of the Sub Registrar V New Delhi, as document No. 4581, in Book No 1 Volume No 3963 on Pages 122 to 134. The LESSEE took on lease The LEASED Property to carry on its business.
The lease was renewable every 3 years, with 15% increase in the rent amount at the time of each renewal. The LESSEE paid The LESSOR, Rs. 45,00,000 by way of security deposit, refundable at the time of vacation of the Leased premises, AND Rs. 45,00,000/- as advance rent for 5 months The LESSEE, with the consent of The LESSOR, could make reasonable alterations / changes in the LEASED PROPERTY to meet its business requirement.
Clause 13 of the Lease deed, reads as under:
That in case the “LESSOR” intends to sell the premises, first priority of purchase of the premises shall be given to “LESSEE” and if “LESSEE” does not avail the offer and in the event of transfer of demised premises by “LESSOR” to a third party, the “LESSOR” shall be obliged to require any purchaser to recognize obligations, encumbrances and the liabilities created by these arrangements present and such purchaser shall be bound by all the terms and conditions concerning this arrangement including the return of security amount paid by The “LESSEE” after deducting arrears and dues or otherwise in same manner as the “LESSOR” was and as if no transfer had taken place. In case the purchaser further sells to any other purchaser or purchasers, the present arrangements will also be binding on them. Relations between The LESSOR and The LESSEE in due course began to detoriate. The LESSOR alleged that the LESSEE delayed in the payments of the rent amounts, and made structural changes in the premises against what was provided in the Lease Deed. The LESSEE on the other hand alleged that it was unable to effectively carry on business in the LEASED PREMISES because of interference by The MCD Authorities etc.
(ii) 19.10.2005 : The LESSOR committed breach of clause 13 of the LEASE DEED. Without making the first offer to the LESSEE, as was’ provided in clause 13 of the LEASE DEED, the LESSOR sold the entire property to one M/s KANDHARI INFRASTRUCTURES PVT LTD., 177-F, Industrial Area Phase I, Chandigarh, for a consideration of Rs Six crores. The sale deed was registered with The Sub Registrar V, New Delhi, as document No. 15980 in Book No 1 Volume No. 5492 at pages 1 to 192. The LESSOR did not.
(iii) 26.09.2006 : The assessee firm (LESSEE) then instituted suit No. CS(OS) No. 1863 of 2006, before The High Court of Delhi, at New Delhi, “For Preemption and/or for specific performance Of Agreement to sell and for permanent Injunction”. A copy of the suit filed is listed at Pages 40 to 47 of these submissions. Mr. Parvinder Singh Chopra (LESSOR) and M/s Kandhari Infrastructures Pvt Ltd were made the two Defendants. M/s Kandhari Infrastructures Pvt Ltd, as Owner of The LEASED PROPERTY, also filed a Civil Suit No CS (OS) No 101 of 2007 before The Delhi High Court, against the assessee firm, seeking decree of ejectment / possession of the property as also arrears of rent, damages and mesne profits.
(iv) 06.08.2007:The Hon’ble Delhi High Court, passed an interim order in CS (OS) No101 of 2007,And required the assessee firm to hand over possession of The LEASED PROPERTY to M/s Kandhari Infrastructures Pvt Ltd. The Hon’ble Court also appointed a Local Commissioner.
(v) 25.04.2012 : The Hon’ble Court referred both the above suits to Meditation. Sh K VENKATRAMAN, Advocate, was appointed as the Mediator. Several meetings were held between the parties to the suit and The Mediator on 30.04.2012, 10.05.2012, 23.05.2012 and 29.05.2012.
(vi) 29.05.2012 : A settlement was reached between the assessee firm and M/s Kandhari Infrastructures Pvt Ltd. Copy of the settlement agreement is filed at Pages H & to £ & of these written submissions. The parties, which had been litigating since 2006, wished to put an end to litigation and have peace of mind. They therefore resolved to compromise and amicably settle their disputes and compromise. M/s Kandhari Infrastructures Pvt Ltd., offered to pay Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm, which the assessee firm accepted. The parties agreed not to pursue their right to sue against each other. M/s Kandhari Infrastructures Pvt Ltd. paid Rs. 20,40,00,000 (Rs. Twenty crore Forty Lakhs) to the assessee firm. It is this amount that the assessee firm claims is a Non Taxable capital receipt.”
2.3 Thus the Ld. AO vide notice u/s 142(1) of the Act dated 26.02.2016, enquired from assess that the right of Preemption/right of first priority of purchase of the premises falls under the definition of “Capital Asset” u/s 2(14) of the Act and the relinquishment of the said right falls under the definition of “Transfer” as per the Act. Therefore, why the amount of Rs. 20,40,00,000/-received from M/s. Kandhari Infrastructures Pvt. Ltd. should not be treated as Long Term Capital Gain arising from such transfer.
2.4 To this vide letter dated 26.02.2016, received on 29.02.2016, the assessee filed the following submissions :
“(i) The Assessing Officer has erroneously observed that “The right of Preemptive/right of first priority of purchase of the premises “73, Ring Road, Lajpat Nagar, New Delhi” falls under the definition of “Capital Asset” u/s 2(14) of The Income Tax Act, 1961″. It does not fall so.
(ii) The Assessing Officer has further erroneously observed that the assessee had relinquished any right. The assessee having not relinquished any right, the other observations of the Assessing Officer that ” The relinquishment of the said right falls under the definition of “Transfer” as per the provisions of Section 2(47) of The Income Tax Act, 1961″ becomes meaningless and inappropriate.
(iii) It would be incorrect and against law to hold that the amount of Rs. 20,40,00,000/- received by the assessee from M/s Kandhari Infrastructures Pvt Ltd. should be treated as Long Term Capital Gain arising from such transfer, chargeable to tax in the hands of the assessee firm.”
The assessee further submitted that :
“Kind attn. is drawn to the following salient and important issues :
(i) The premises in question viz “73, Ring Road, Lajpat Nagar, New Delhi” stood transferred on 13.10.2015, when the LESSOR Sh. Parvinder Singh sold the property under a registered deed to M/s Khandhari Infrastructures (P)Ltd.
(ii) On 13.10.2015, Sh. Parvinder Singh (LESSOR) ceased to be the owner of the premises M/s. Khandhari infrastructures(P) Ltd. became the new owner of the premises, and continues to remain so as on date of the submissions. The assessee firm was neither the owner nor the Transferor or the Transferee of the premises. The assessee firm was not a party and was not associated in any manner with the transfer of the property. The assessee firm was not also a beneficiary to the consideration exchanged on the transfer of the property between the BUYER and the SELLER. Rs. 20,40,00,000 received by the assessee firm is not therefore against the transfer of the premises. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax on transfer of an asset, being an immovable .asset, are not applicable and are not attracted.
(iii) The Hon’ble Delhi High Court, vide its interim order passed On 06.08.2009, required the assessee firm to vacate the premises in question and hand over vacant possession of the premises to M/s Khandhari Infrastructures (P) Ltd the new and present owner of the premises in question. The tenancy right and possession of the premises in question with the assessee stood extinguished and ceased to exist from 06.08.2009. Rs. 20,40,00,000 received by the assessee firm is not for surrender of any tenancy rights. This sum is also not received against handing over of vacant possession of an immovable asset. The provisions of section 2(14), 2(47) and other related / applicable provisions of The Income Tax Act, 1961, governing the taxability of Capital Gains tax for surrender of any tenancy rights or for giving vacant possession of an immovable asset are not applicable and are not attracted.”
2.5 Thereafter taking into consideration of the claim of the assessee the Ld. AO observed that;
“To determine the taxability of the receipt of Rs.20,40,00,000/-, the following questions need to be Considered :
I. Whether there was any ‘capital asset’ as per the definition of ‘capital asset’ u/s 2(14) of the Income Tax Act, 1961?
II. Whether there was a ‘transfer’ as per the definition of ‘transfer’ u/s 2(47) of the Income Tax Act, 1961 ?
III. Whether the receipt of Rs. 20,40,00,000/- is taxable?
IV. Computation of Capital Gain.
2.6 So in order to determine the existence of a capital asset, Ld. AO having taken into consideration definition of capital asset in section 2(14) of the Act concluded that the term property has to be understood in the widest amplitude and it includes movable assets / immovable assets, tangible / intangible asset, incorporeal rights and chose in action. He concluded that ‘rights’ are included in the term property.
2.7 Referring to definition of transfer u/s 2(47) of the Act Ld. AO went on to observe that use of words ‘relinquishment’ of rights in section 2(47) of the Act include right of pre-emption or first right of purchase. He observed that this is an additional right upon the assessee and is distinct and separate from the assessee’s tenancy rights. Thereafter, considering the clauses of lease deal in favour of the assessee and the litigation initiated by the assessee in the form of suit for specific performance/ for pre-emption, the Ld. AO observed that assessee has given up all its right by virtue of settlement agreement. Ld. AO observed that, the withdrawal of the suit which was filed for the enforcement of the right of pre-emption by the assessee as part of settlement agreement shows that when the assessee gave up all its rights as part of the said agreement, it also relinquished its “right of preemption” which was the premises for the suit. Ld. AO also considered the issues framed by Hon’ble Delhi High Court in the suit instituted by the assessee to conclude that since it was an enforceable right it was a capital asset.
2.8 Thereafter based on the sequence of events, litigation and settlement, the Ld. AO considered it as relinquishment of asset for the purpose of clause (i) of section 2(47) of the Act. Ld. AO observed that if a person either gives up, abandons and surrenders interest of that person in a property but the property in which interest is relinquished continues to exist and continues to be owned by some person or persons after the transaction of relinquishment, then the case of assessee would be of relinquishment in terms of settlement agreement.
2.9 Thereafter, Ld. AO calculated the receipt of Rs. 20,40,00,000/- as taxable in the hands of assessee regardless of the fact that amount was paid by the subsequent purchaser. The ld. AO considered the date of lease deed 19.04.2004 to be the date of acquisition of capital asset, as there was no cost of acquisition of the right of preemption the cost of acquisition of the capital asset was taken as Nil. The date of transfer was considered to be 31.05.2012 as per the settlement agreement and thus the sale consideration was arrived at Rs. 20,40,00,000/- as received under the settlement agreement.
2.10 Ld. AO has distinguished the law cited by the assessee primarily on the basis that the judgments relied were in regard to damages being received in a civil suit while in the case in hand there was a suit for specific performance on the basis of right of preemption and not damages for breach of contract.
3. The ld. CIT(A) has sustained the addition with following relevant findings in para 5.5.31:-
“5.5.31 On the basis of above discussion made in the factual premises of our case and on the anvil of law enunciated, it is quite apparent that the assessee has received Rs. 20.4 crores for relinquishing at least two rights, one, the right of pre-emptive purchase and the right to perpetual lease. The contentions of the appellant that he has lost the tenancy right upon surrender of possession to M/s. Khandhari is not correct, as discussed in detail above. The mere vacation of the property when the appellant agreed to do so under Court direction is only to facilitate the adjuciation before the Hon’ble HC, the question of its valuable rights still remains to be adjudicated and subsists as on the date of settlement. This only got extinguished when the consideration of Rs. 20.4 cr. was received by the appellant. Even otherwise, when the sale consideration of the property was Rs. 6 crores, it would be novice to accept a contention that it has been paid Rs. 20 crore voluntarily and not in connection for extinguishment of pre-emptive right to purchase or surrender of tenancy right. The contention that such a huge and disproportionate amount was paid just like that voluntarily is not acceptable. This flies in the face of common sense. The question then remains is what was the compensation for. The AR has preferred to prevaricate the issue. (See his submission dt 9/6/2017 discussed at para 5.5.33 infra) Law of evidence mandate that when the best evidence is not produced, the issue has to be decided against the appellant.
(b) Be that as it may, the contention of the AO that such a high compensation was for pre-emptive right to purchase also is not plausible. It could be for a host of factors and the entirety of facts are close to the chest of the appellant which is kept under cover. The fact remains that the right of lease in perpetuity was relinquished and the consideration also attributable to it. Furhter, the transfer of tenancy right is exigible to capital gain tax, without doubt.
(c) In any case, the appellant has not submitted the basis of consideration of Rs. 20.4 cr. received by it. The onus to prove that it is capital receipt not liable to be taxed has also not been discharged. Even otherwise, such contentions are bound to fail in view of the discussion made above.
(d) The upshot of the entire discussion is that the appellant has transferred valuable rights (capital asset) of pre-emptive right to purchase and also right to lease in perpetuity. It is liable to be exigible to capital gain for the entire amount of Rs. 20.40 cr. The same is held. Penalty proceedings u/s. 271(1)(c) is to be initiated for furnishing of inaccurate particulars leading to concealment of taxable income.”
4. Therefore the assessee is in appeal raising following grounds :-
“1. That the learned CIT (A) has erred both on facts and in law in confirming the order of assessment and upholding the addition made of Rs. 20,40,00,000/-.
2. That the learned CIT (A) has failed to appreciate that the assessee held no asset, much less any transferrable asset and there being thus, no transfer of any such asset, the provision of section 45 of the Income Tax Act could not have been invoked to conclude that a sum of RS. 20, 40, 00, 000/-received by the assessee firm was an income from capital gain and was thus, liable to be included in the income of the assessee.
3. That the learned CIT (A) has overlooked that the assessee being a lessee took on lease on 19.04.2005 a property with a ‘condition’ that the lessor, if proposes to sell the property would make first offer to the assessee, the lessee and such a condition could not be regarded as preempting right acquired by the assessee to be assessed within the meaning of section 2(14) of the Act. There being no justification to hold that such a condition was either an acquisition of any preempting right and was a capital asset.
4. That on the facts and circumstances of the case the CIT (A) has further completely overlooked that there being no transfer made by the assessee in the instant year and even if there was for the sake of an argument any transfer on breach of the condition by the lessor then the same related to the FY 2005-06 and as such there being no income accrued to the assessee in the instant year, any addition made to the total income was wholly unwarranted.
5. That the learned CIT (A) has further erred in sustaining the levy of penalty u/s 234D of the Act.
6. That the learned C1T (A) has further erred in initiating proceedings u/s 271(l)(c) of the Act despite the fact such proceedings had been initiated by the AO and were pending for adjudication before him.
7. That the learned CIT (A) has failed to appreciate that
8. there could have been no double jeopardy and as such, the initiation of proceedings under section 271(l)(c) of the Act was wholly unwarranted and untenable in law.”
5. Heard and perused the record.
5.1 On behalf of the assessee, primarily the contention of Ld. Sr. Counsel was that Ld. Tax Authorities below have fallen in error in not understanding the nature of right of pre-emption. It was submitted that this right is a mere right to sue and cannot be considered to be transferable asset. Ld. Sr. Counsel took the Bench through sequence of events and documents reflecting various litigations and transactions of settlement to submit that Ld. Tax Authorities below have fallen in error in considering the amount received under settlement to be capital gains. He referred to the judgment of Hon’ble Delhi High Court in CIT vs. J. Dalhu 1985 20 taxman 86 Delhi to submit that mere right to sue may or may not be property but it certainly cannot be ‘transferred’ within the meaning of section 45 r.w.s. 2(47) of the Act. He also relied following judgments to submit that the pre-emption being ‘Right in Personam’ could not have been transferred:-
