In a recent decision of Bombay High Court in PR. CIT Vs M/s. Talwalkars Fitness Club, Income Tax Appeal No. 589 of 2016, Order dated 29/10/2018 the Bombay High Court has held that the mere fact that an agreement for sale of property is registered does not make it a conveyance, if such agreements is conditional and possession is not transferred to purchaser.
Facts of the case:
The Assessee was the owner of the gymnasium (the “property”) wherein it entered into two agreements for sale of the said property with the purchaser on 14.02.2011 (AY 2011-12). As per the said agreements, the two property had been agreed to be sold for a consideration of Rs.2,20,00,000/- each. Only a token amount of Rs.20,00,000/- was received as advance by the assessee and the balance consideration was agreed to be paid by purchasers by 26.05.11 (AY 2012-13). The possession of the property was not handed over to the purchaser in AY 2011-12. In respect to clause 3(ii) of the agreement, it was provided that the purchaser would pay the balance consideration of Rs.2 crores to the assessee on or before 26.05.11 which was subject to the conditions that the assessee would make out their title and all other rights and interest in the said property as clear, marketable and free from all encumbrances, within 30 days from the date of execution of the agreement. Vide clause No.13 of the agreement, it was agreed that the purchaser would be able to take the possession of the property only on payment of the balance consideration. The AO held that the premises stood transferred on 14.02.2011 (AY 2011-12) itself due to registered sale agreements both executed on that date. The AO held that the agreement for sale in question was not revocable. On the issue of possession it was held that handing over of the possession of the property on a future date was a mere formality and hence short term capital gains earned by the assessee from the sale of the property were to be taxed in the A.Y. 2011-12 and not when actual possession was given in AY 2012-13. Aggrieved by the said order, the assessee filed an appeal before CIT (A).
Issue before CIT (A):
Whether capital gains arising from the sale of the said property would be liable to be assessed in the A.Y. 2011-12?
Submission by Assessee before CIT (A):
The assessee submitted that though the agreements to sale were executed during the financial year relevant to assessment year in AY 2011-12, however, the actual sale took place in the subsequent AY i.e 2012-13 and the capital gains were accordingly offered in AY 2012-13. In AY 2012-13 also the department has accepted the capital gain. The assessee further explained that the assessee had not parted with the possession of the property in question during the year under consideration.
CIT (A) Verdict:
The CIT (A) did not find favour with the assess’s contention and upheld the findings of the AO that the transfer of the property took place on the date of execution of agreement in AY 2011-12. Tthus the capital gains were liable to be assessed during the year under consideration i.e AY 2011-12. Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before ITAT.
Issue before ITAT:
Whether the capital gains earned by the assessee from the sale of the immovable property were to be taxed in the assessment year under consideration i.e. A.Y. 2011-12 as against offered by the assessee in the subsequent A.Y. 2012-13?
The hon’ble ITAT while going through the entire document along with the accompanied agreement, on which the stamp duty was paid, made the following observation:
Bombay High Court Verdict:
Upon Revenue’s appeal the Hon’ble High Court upheld the decision of the Tribunal. It held that the appeal of Revenue is devoid of merits and dismissed the same on the following grounds: