Pay Income Tax on Capital Gain of Land if Possession handed over even if agreement to sell cancelled later on : HC

JUDGMENT

Ashok Menon, J. – The Revenue is in appeal under section 260A of the Income-tax Act, 1961 (“Act” for short) challenging the findings of the Income-tax Appellate Tribunal, Cochin Bench in ITA No. 509/Coch/2006 dated April 20, 2009 (Asstt. CIT v. Hotel Harbour View [2009] 84 Taxman 42 (Mag.)), for the assessment year 1999-2000. The following questions of law arise for consideration :

2. The facts in brief are thus :

Following a search and seizure under section 132 of the Act at the premises of the assessee on August 6, 2003, a notice was issued under section 153A read with section 153C of the Act on August 5, 2004. The assessee filed a return on December 27, 2004 declaring “nil” income, consequent to which notice was issued under section 143(2) and assessment completed making an addition of Rs. 1,87,00,000 as being concealed income under “short-term capital gain”. The assessee, which was a partnership firm and later registered as a company, owns 30.7 cents of land in a prime location at Ernakulam. While the assessee was a firm, it started construction of a building and from out of that, a constructed area of 4,300 sq.ft. on the ground floor was agreed to be sold to M/s. Sai Sales and Services, vide annexure-A agreement dated April 12, 1996, for a sale consideration of Rs. 2.58 crores and received a sum of Rs. 1.25 crores. The building was intended for the purpose of Indica car showroom. However, the showroom was not commenced due to technical reasons and thereafter, M/s. Sai Sales and Services formed another company by name M/s. Malabar Automobiles (P.) Ltd. (MAPL) and entered into annexure-B, renewed agreement with the assessee on December 4, 1998, for the same sale consideration and with the same advance ; which was adjusted by way of refund and receipt. One-twelfth undivided share in the land over which the building was constructed, was also agreed to be sold to the purchaser. Permissions were obtained under section 269UL of the Act on January 6, 1999, for registration of the sale deed. According to the Revenue, possession was handed over to the purchaser in part performance of the contract. The Assessing Officer (AO) had received the sworn statement (annexure-C) of the managing partner and also the letter dated August 28, 2003 (annexure-D) of the assessee admitting that the possession of the property was handed over, and that MAPL had possession of the property since December 4, 1998. Based on these admissions of part performance, the assessee was proceeded against. No return for the year under consideration was filed till the search was effected and even then the assessee failed to disclose any capital gain on account of transfer. The Assessing Officer estimated the capital gains at Rs. 1.87 crores and subjected the same to tax. The assessment order is annexure-E.

3. Following a dispute between the proposed vendor and vendee, the agreement was terminated by mutual consent during the financial year 2003-04 and Rs. 1.25 crores was refunded to M/s. MAPL. The balance non-refundable amount of Rs. 1.05 crores was credited towards the profit and loss account for the year ending March 31, 2004 by the assessee and offered for tax as income from other sources. The Assessing Officer did not accept the objections raised and explanations offered, and went ahead to complete the assessment by fixing the total income at Rs. 1,87,00,000.

4. Aggrieved by the assessment, the assessee went on appeal before the Commissioner of Income-tax (Appeals-I), Kochi, and that was allowed vide annexure-F order. The Revenue challenged that order before the Income-tax Appellate Tribunal and vide annexure-G order, the appeal was dismissed. Hence, the Revenue is aggrieved and before us.

5. The learned senior standing counsel, Government of India (Taxes) states that the Tribunal failed to note that except a nominal balance of Rs. 12,92,649, the entire sale consideration was paid by M/s. MAPL to the assessee. The possession was also taken over. The Tribunal failed to note the conduct of the parties to the agreement that the act of the parties to the agreement would amount to part performance under section 53A of the Transfer of Property Act, 1882 (“TP Act” for short), which would squarely bring it under the purview of transfer contemplated under section 2(47)(v) of the Act. The Tribunal gave much importance to the events and circumstances, which transpired in the previous assessment year 1999-2000 and concluded that the parties have voluntarily rescinded from the agreement and a major portion of the consideration was also returned to the assessee and therefore, the Tribunal held that, in the circumstances, the Assessing Officer was wrong in finding that there was a transfer of possession and part performance of contract making out the transfer to result in accrual of “short-term capital gains” at the hands of the assessee, and confirmed the order of the CIT (Appeals) deleting the assessment and dismissing the appeal, which is not sustainable, is the submission.

6. Per contra, the assessee would contend that unless there is transfer of asset as envisaged under section 2(47), no capital gains can be computed under section 45. Electricity and phone connections were taken by M/s. MAPL with the intention to start business, which was a non-starter, and ultimately ended up in rescission of contract. The learned counsel for the assessee points out that there is no recital in the agreement for sale produced at annexures-A and B regarding possession being handed over to the vendee. Certain acts such as taking of electric and phone connections, alone will not amount to transfer of possession in part performance of contract, unless it is so explicitly stated in the agreement for sale. Neither annexure-A nor annexure-B indicates such transfer of possession as is required under section 53A of the TP Act. That apart, the learned counsel also points out section 17(1A) of the Registration Act, 1908, which makes it compulsory for a sale agreement to be registered to have effect of part performance under section 53A of the TP Act. Unless such an agreement was registered, it would not have any effect in law. That is, in the eyes of law, there would be no contract that could be taken cognizance of for the purpose of section 53A of the TP Act.

7. It is argued, in the instant case, that the agreement at annexures-A and B have not been registered and therefore, there is no propriety in stating that transfer as contemplated under section 2(47) of the Act has taken place. The learned counsel also relies on the decision of the honourable Supreme Court in CIT v. Balbir Singh Maini [2017] 398 ITR 531 (SC) in support of his arguments.

8. There is no dispute that except for a balance sum of Rs. 12,92,649, the entire sale consideration was paid by M/s. MAPL to the assessee. Subsequent to the rescission of the contract, the assessee has returned only a sum of Rs. 1.25 crores and retained the balance. The contention of the assessee, which is upheld by the Tribunal, is that there was no part performance of the contract coming within the purview of section 53A of the TP Act and therefore, the provisions of section 2(47) of the Act will not be attracted. The relevant portion of section 2(47)(v) of the Act reads thus :

“2(47) ‘transfer’, in relation to a capital asset, includes,— . . .

(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.”

9. A reading of the above cited provision would indicate that the possession of the immovable property following a transaction ; enabling retention by the expected vendee, would be part performance of the contract as contemplated under section 53A of the TP Act. Section 53A of the TP Act reads thus :

“53A : Part performance : Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,

and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,

and the transferee has performed or is willing to perform his part of the contract,

then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract :

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.”

10. Section 53A was inserted to the TP Act by the Transfer of Property Amendment Act, 1929 to import into India the equitable doctrine of part performance. The hon’ble Supreme Court has in Shrimant Shamrao Suryavanshi v. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676 stated as follows :

“16. But there are certain conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under section 53A of the Act. The necessary conditions are :

11. To claim benefit of part performance under section 53A, the abovementioned requirements must be satisfied. The thrust of the argument advanced by the learned senior counsel appearing for the assessee is that the Revenue has not succeeded in establishing that section 53A of the TP Act is attracted in this case. It is pointed out that the documents do not indicate handing over of possession, which is an essential ingredient under section 53A of the TP Act and in the absence of that, possession cannot be one under part performance of the contract and therefore, does not attract section 2(47)(v) of the Act.

12. It is true that the documents at annexures-A and B do not necessarily spell out handing over of possession, but the parties to the agreement admit handing over of possession. In the deposition given on behalf of the assessee before the Assessing Officer, it is submitted that the possession of the property was handed over to the expected vendee and that the vendee continues to remain in possession. The vendee, M/s. MAPL, has written a letter to the Department, which is produced at annexure-D admitting that the possession of the building was taken by them on December 4, 1998. Hence, inter se parties, there is no dispute that the possession was handed over in pursuance of the agreement for sale. It is also admitted in the deposition as well as in the letter that the building continues to be in the possession of M/s. MAPL during the assessment period.

13. There is no doubt that only when the agreement to sell is coupled with delivery of possession, does it confer right on the vendee to defend his possession under section 53A of the TP Act. In this proceedings, however, we are not concerned about whether the vendee is entitled to protect their possession or not. What we are concerned is whether there was a sale and handing over of possession as contemplated under section 53A of the TP Act attracting section 2(47)(v) of the Act. The decision in Balbir Singh Maini (supra) can be distinguished on facts. In that case, there was a tripartite Joint Development Authority (JDA) between the owner of the land, i.e., Punjabi Co-operative Housing building Society Ltd., and the developers, Hash Builders Pvt. Ltd., and Tata Housing Development Company Ltd. The JDA was to develop the land belonging to the society. Different amounts were payable and flats allotable to members having different plot sizes from which some instalments were paid. Due to different reasons, the JDA did not take off the ground. The Assessing Officer held that since physical and vacant possession of the land had been handed over under the JDA, the same would tantamount to “transfer” within the meaning of section 2(47)(ii), (v) and (vi) of the Act. Long-term capital gain was also assessed. According to the assessee therein, the possession of the land was handed over as only a licence to develop the land and not a possession as contemplated under section 53A. The project was also terminated. The High Court accepted that argument. The hon’ble Supreme Court did not find it necessary to go into the question of whether the possession was only a licence to develop the land, because, the JDA was found to be not having any efficacy in law due to non-registration of the agreement as required under section 17(1A) of the Registration Act.

14. The above cited decision relied upon by the learned senior counsel for the assessee pertains to handing over of possession of land for the purpose of development and construction by means of a tripartite agreement (JDA) with the developers and not an agreement for outright agreement for sale as it is in the instant case, and therefore, the decision has no application to the case in hand. In the instant case, in view of the categorical admission by both the parties to the agreement that possession was handed over, the Assessing Officer rightly took the view that the sale is one as contemplated under section 53A of the TP Act. His view is supported by the fact that in part performance of contract, the vendee has done something in the property, such as electrification and drawing of telephone lines. The vendee could not have done such acts without taking possession of the building in pursuance of the agreement.

15. Another argument advanced by the learned senior counsel for the asses see is that part performance is not valid because the agreement has not been registered as is required under the provisions of section 17(1A) of the Registration Act, 1908. The relevant provision reads thus :—

“17. Documents of which registration is compulsory.-(1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 (48 of 2001), and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A.”

16. Additional condition of registration of an agreement for sale in which there is a claim of part performance, was introduced only by way of amendment of the Registration Act in 2001. The proposition propounded in Balbir Singh Mainicase (supra), on the basis of section 17(1A) has no application because, the transaction in that case was in 2007, subsequent to the amendment of the Registration Act. Annexures-A and B transactions took place much prior to the amendment, and sub-section (1A) of section 17 of the Registration Act has no retrospective effect. Hence, the argument of the learned counsel that section 53A of the TP Act will not be attracted as the agreements are not registered, will not hold good.

17. Hence, we find that the Tribunal went wrong in holding that the pos session was not handed over in pursuance of the agreement for sale as contemplated under section 53A of the TP Act. Once the sale agreement comes under the provisions of section 53A of the TP Act, handing over of possession takes place and the provisions under section 2(47) would squarely apply. That apart, the argument of the learned senior counsel for the assessee that contract was subsequently rescinded will not be of any help because the contract was rescinded only subsequent to the assessment year and what we are concerned for the purpose of the Act is the transactions which took place during the assessment year. The fact that the contract was subsequently terminated on mutual consent will not improve the case of the assessee to wriggle out of the purview of section 2(47) of the Act and the liability to pay tax on short-term capital gains under section 45 of the Act.

18. Here, to dispel any reasonable doubt which may arise, we extract below one of the conditions stated in Shrimant Shamrao Suryavanshi case (supra) :

“(6) the transferee must have performed or be willing to perform his part of the contract.”

Here the agreement was rescinded between the parties but long after the assessment year in which the agreement was entered into and possession handed over. At least when the returns were filed there was a right conferred on the transferee as per section 53A of the Transfer of Property Act. The transferor though subsequently was absolved from the rigour of section 53A ; in the close of assessment year was obliged to return the capital gains as per section 2(47)(v) of the Income-tax Act. The Income-tax Act by the definition clause includes a transaction in accordance with section 53A as a transfer in relation to a capital asset. The consequence flowing from the inclusive definition has to be given effect to as on the subject assessment year and the transferor being absolved subsequently from the rigour of section 53A as against the transferee is of no consequence in applying the rigour under the taxation enactment. The transaction failed and the parties settled between themselves, but the voluntary act of the parties cannot efface the tax liability. We hence answer the questions of law on the facts arising in the above case against the assessee and in favour of the Revenue.

19. It is however pertinent to note that capital gains can be calculated only after computing the value of the 1/12th undivided share of land that was agreed to be transferred as per the agreement, and computation made in accordance with section 48 of the Act.

Hence, the appeal is only to be allowed setting aside the order of the appellate authority and the Tribunal. The matter is remitted to the Assessing Officer for the sole purpose of computation of capital gains under section 48 of the Act, after taking into account the value of 1/12th share in the landed property that was agreed to be sold. No order as to costs.

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