No Capital Gain if the deal for transfer could not be materialised due to non payment

IT: Where assessee transferred land but transaction could not be materialized as payments

were stopped by purchaser, no profit or gains which could arise from such transfer would be brought to tax under section 45

■■■

[2019] 104 taxmann.com 130 (Pune – Trib.)

IN THE ITAT PUNE BENCH ‘B’

Appasaheb Baburao Lonkar

v.

Income-tax Officer, Ward – 4(4)*

1. SUSHMA CHOWLA, JUDICIAL MEMBER

AND ANIL CHATURVEDI, ACCOUNTANT MEMBER

IT APPEAL NO. 888 (PUN.) OF 2018

[ASSESSMENT YEAR 2011-12]

JANUARY 2, 2019

Section 2(47), read with section 45, of the Income-tax Act, 1961 – Capital gains – Transfer

(Land) – Assessment year 2011-12 – Assessing Officer received information regarding sale

of land by assessee along with other 13 co-owners – However, assessee did not receive

monetary consideration towards sale of said land as cheques given by purchaser were

stopped for payment – Also, possession of land was under dispute and parties approached

Court to decide differences that arose between them – Whether in such scenario, it could not

be said that part performance of contract was completed – Held, yes – Whether since transfer

of said land was not materialized, no profit or gain which arose from it could be brought to

tax under section 45, read with section 48 – Held, yes [Paras 11, 13 and 14] [In favour of

assessee]

FACTS

■ The assessee filed return of income.

■ The Assessing Officer received information regarding sale of immovable

property by assessee along with 13 other co-owners. It was noticed that the extract of the

land submitted by the assessee showed the property was registered in the name of ‘S

Properties’; therefore, the property was transferred to ‘S Properties’. The assessee submitted

that he did not receive monetary consideration towards sale of the said property as the

cheques which were handed over by the purchaser were stopped for payment and that the

cheques were still in assessee’s possession. Further, the possession of the property was

under dispute and the assessee had obtained injunction from the Civil Court to stop any

further transfer of the disputed property by the purchaser. According to the assessee the

transfer could not be considered only on the basis of agreement registered because neither

possession was transferred nor consideration was received in respect of the land.

■ The Assessing Officer rejected contentions of the assessee and held that the

land in question stood within the definition of the term ‘transfer’ as envisaged in the

provisions of section 2(47) and, therefore, it would attract long term capital gains. The

Assessing Officer also held it to be part performance in view of the provisions of section 53A

of the Transfer of Property Act and held the assessee liable to pay tax on long term capital

gains on his share of Rs. 55.18 lakh.

■ On appeal, the Commissioner (Appeals) confirmed the addition made by the

Assessing Officer on account of long term capital gains.

■ On the assessee’s appeal to the Tribunal:

HELD

■ Section 2(47) lays down that transfer in relation to capital asset includes

various modes of transfer in which under clause (v) it involves a transaction wherein allowing of possession of any immovable property is taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. Under section 53A of the Transfer of Property Act, where any person contracts to transfer for consideration any immovable property in writing, from which the terms necessary to constitute the transfer can be ascertained and the transferee has in part performance of the contract, taken possession of the property or any part thereof, and the transferee has performed or is willing to perform his part of contract, then it is called ‘Part Performance’. So, in part performance, there has to be willingness to perform his part of contract by the transferee and the transferee should have been put in possession in such part performance of the contract and the transferor has agreed to transfer the property for consideration.

However, in the facts of the case, before us, though there is a contract in writing between the parties but there is dispute between the parties as to the possession of the said property, wherein the transferor claims that possession has not been given and the transferee claims that the possession has been given but the said possession was subject to encashment of cheques which were issued by the transferee. Since the transferee had stopped payment of cheques issued by him, then the parties approached the Court to decide differences arising between them and the matter is pending before the High Court of Bombay in this regard. In such scenario, it cannot be said that part performance of the contract has been completed.

[Para 11]

■ The Apex Court in CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202/398 ITR 531 has held that the income from capital gains on a transaction which never materialized was at best, a hypothetical income. [Para 12]

■ The assessee has stated on oath that sellers had never parted with the possession of said land, for which litigation was pending before the High Court. In such circumstances, where the assessee has not received sale consideration and where the possession of land having not been transferred to the purchasers, provisions of section 45 are, thus, not attracted. [Para 13]

■ Now, applying the ratio laid down by the Apex Court to the facts of the instant  case, wherein the initial contract was between the parties on the ground that the assessee would get permission of other co-owners numbering about 13 so as to transfer immovable  asset to the purchasers. This was the basic condition of the said agreement between the parties. Admittedly, the said permission could not be obtained by the assessee and though sale deed was registered, transaction could not be culminated. It is further evidenced by the fact that only sum of Rs. 15 lakhs was paid as against total consideration of Rs. 2.75 crores settled between the parties. As per sale deed, sale consideration was to be paid as per Schedule A to the said agreement, for which post-dated cheques were issued, which were to be encashed as per the conditions mentioned for encashment of cheques. As per the relevant clause of the sale deed, the purchasers had given post dated cheques to sellers  and it was their responsibility to see that the postdated cheques get cleared for payment. In view of the said cheques being stopped for payment and the dispute arising between the parties and even the dispute being who is in possession of the said property, reflects that  even part performance of the contract has not been settled. Since the transaction has not materialized, no profit or gain which arises from the alleged transfer of capital asset could be brought to tax under section 45, read with section 48. Thus, the grounds of appeal raised by the assessee are to be allowed. [Para 14]

■ The appeal is allowed. [Para 15]

CASE REVIEW

CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202/398 ITR 531 (SC)

(para 14) followed.

CASES REFERRED TO

CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202/398 ITR 531 (SC) (para 12) and CIT v. Balbir Singh Maini [2015] 123 DTR 49 (Punj. & Har.) (para 12).M.K. Kulkarni for the Appellant. Pankaj Garg for the Respondent.

ORDER

Sushma Chowla, Judicial Member – The appeal filed by assessee is against order of CIT(A)-3, Pune, dated 25.01.2017 relating to assessment year 2011-12 against order passed under section 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short ‘the Act’).

2. The assessee has raised the following grounds of appeal:- (1) On the facts and the circumstances of the case and in law the AO was notlegally justified in assessing the Long Term Capital Gain on account of transfer of 1/4th share in his ancestral land as transfer of the land did not take  place for non-handing over of the possession and non receipt of full consideration. The Ld. CIT(A) erred in confirming the order of the AO who had taxed the LTCG without considering the Legal position that there was no transfer of land within the meaning of S. 2(47)(v) and S.53A of the Transfer of Property Act. The assessment order of the AO and appeal order of the Ld. CIT(A) be quashed.

(2) On the facts and the circumstances of the case and in law the Lower Court in the proceedings filed by the appellant granted Permanent Injunction and restraining the purchasers (Defendants) creating any third party interest till the appellant herein receives the full consideration. This proves beyond doubt that the appellant-assessee did not get the full consideration which is sine-qua-non for transfer of immovable property. No LTCG arose during the year or in any subsequent year and LTCG is not taxable in the absence of the transfer of the subject land.

(3) On the facts and the circumstances of the case and in law the full consideration settled between the parties for transfer of land was Rs.55,18,400/- which was said to have been paid by Post Dated cheques realizable on those dates. The said cheques are still in the possession of the assessee. In view of this and for want of non-receipt of the full consideration there was no transfer by way of handing over possession to the purchasers. Both the authorities bellow were not justified to hold and confirm that the LTCG was assessable in the hands of the appellant in the year under appeal which decision is contrary to law and is perverse. That both the orders be quashed.

(4) On the facts and the circumstances of the case and in law and in view of Civil Disputes between the parties involved the matter is still subjudice before the Hon’ble Bombay High Court in appeal No. 1192/2015 praying for cancellation of the sale Deed as it was revealed that the fraudulent intention of the purchasers came to fore after the execution of the alleged Sale Deed dt. 16-09-2010. That both the authorities below acted contrary to law to pass such perverse order when they were in the knowledge of fraud committed by the purchaser. The perverse orders be quashed.

(5) On the facts and the circumstances of the case and in law the filing of appeal is delayed as it could not be filed within limitation period of 60 days due to fact that the litigations ensued in civil courts and High Court. The appellant will file his application for condonation of delay supported by affidavit. The delay be condoned.

(6) On the facts and the circumstances of the case and in law the Assessing Officer is not justified in levying interest under S.234B/234C of the act.

3. The appeal of assessee was filed after delay of 417 days. The assessee filed an affidavit in this regard and in view of the reasons mentioned, we find merit in the plea of assessee and the delay of 417 days in filing the appeal late before the Tribunal is condoned.

4. The only issue raised in the present appeal is in respect of computation of long term capital gains, if any, in the hands of assessee.

5. Briefly, in the facts of the case, the assessee filed return of income in response to notice under section 148 of the Act at Rs. 2,94,897/-. The Assessing Officer had received information relating to sale of immovable property at Mundhwa by assessee along with other

13 co-owners for a total consideration of Rs. 2,75,73,600/-. The assessee submitted that he had not received monetary consideration towards sale of the said property and the cheques received from the pu rchaser viz. M/s. Sai Properties were still in assessee’s possession. The possession of the property was under dispute and the assessee had obtained injunction from the Civil Court to stop any further transfer of the disputed property by the purchaser. In view of the said facts, the assessee pleaded that transfer could not be considered only on the basis of agreement registered because neither possession was transferred nor consideration was received in respect of the impugned land. The Assessing Officer noticed that the Index-II and 7/12 extract of the land submitted by the assessee shows the property registered in the name of Sai Properties, therefore, the property had been transferred to Sai Properties. The Assessing Officer also considered the order of the Jt. Civil Judge (Senior Division) and held that the land in question stands within the defition of the term ‘transfer’ as envisaged in the provisions of section 2(47) of the Act, therefore, attracts long term capital gains. The Assessing Officer rejected various contentions raised by assessee holding it to be part performance in view of provisions of section 53A of Transfer of Property Act and held the assessee liable to pay tax on long term capital gains on his share of Rs. 55,18,400/-.

6. The CIT(A) after appreciating the facts of case held as under:-“5.3.3 It is not disputed that a sale deed was executed in respect of the property at Mundwa, by the appellant along with other 13 co-owners on 16/09/2010 for a consideration of Rs.2,75,73,600/-, Stamp Duty value of which was Rs.1,82,26,930/-. As per section 17 of the Registration Act and also sec. 21 of the Transfer of the Property Act, once a sale deed has been executed in by a owner with a consideration for transferring a property, the ownership of property vests immediately on execution of sale deed upon the purchaser. In the instant case, the above property situated at survey no.55A(hissa no.3E), was sold to Sai Properties on 16/09/2010 by registering a sale deed and, therefore, the appellant cannot take the stand that the foresaid property was not sold and had remained in the possession of all the 14 owners including the appellant himself, As apparent from the assessment order, the cheques were received by the appellant but was not en-cashed. Merely because the appellant did not encash the cheque by subsequently raising a dispute in the property for which suit was filed before the Civil Judge, it could not be claimed by the appellant that no monetary consideration was received by the appellant. In fact, the Hon’ble Joint Civil Judge (Sr.

Division) did not pass an order cancelling the impugned sale deed which enforces that the

sale deed was valid and was in invoke as on date of passing of the order by the Civil Judge.

It was only a restriction imposed upon the purchaser M/s. Sai Properties that the same could

not be sold to any third party or rather no third party interest could be created on the said

property by the purchaser. This does not make the sale did null and void ipso-facto. In the

case of the appellant, in my opinion, both the conditions pertaining to registration under the

registration Act and Transfer of Property Act were fulfilled and there was even no question of

part performance u/s. 53A of the Transfer of Property Act in the case of the appellant, as the

full transfer had taken place once the sale deed was registered. The appeal filed before the

Mumbai High Court against the order of Civil Judge is a Civil dispute and as the lower Court

has not treated the sale deed executed by and between the appellant and other 13

CO-owners and M/s. Sai Properties as void, the appellant cannot claim the said registered

sale deed as void or cancelled, for not computing the income from capital gains for transfer

u/s. 2(47) of the I.T. Act, 1961 of the capital asset u/s. 2(14) of the Act. I, therefore, do not

find any merit in the contention of the appellant that there was no transfer of capital asset

u/s. 2(14) of the Act and the assessee was not liable to pay the capital gains tax on such

sale of the land. Accordingly, no interference in the assessment order passed by the AO is

called for. The AO is however directed to compute long term capital gains after allowing the

appellant the cost of indexation of the property so sold. The addition made on account of

long term capital gains is hereby confirmed subject to allowing of cost indexation. Ground

nos. 1 (b) to (f) & (h), 2 & 3 are accordingly dismissed.”

7. Shri M.K. Kulkarni, the learned Authorized Representative appeared on behalf of

assessee and Shri Pankaj Garg, the learned Departmental Representative appeared on

behalf of Revenue and put forward their contentions.

8. We have heard the rival contentions and perused the record. For adjudicating the issue

raised, appreciation of peculiar facts of case are necessary, which are as under:-

“The impugned sale deed was registered on 16-Sep-2010 in disputed circumstances,

subsequent to which the purported buyer, Mr. Sanjay Sakharam Kamble, has not paid the

total consideration due as per the agreement.

The co-owners of the property, viz. Lonkar family, filed a special civil suit vide SCS

No.1461/2011 to seek temporary injunction restraining Mr. Sanjay S. Kamble from creating

any third party interest in the suit property till the decision of the suit.

An interim order was passed by the Shri S. S. Kharat, Civil Judge, Senior Division, Pune, on

09-Mar-2012, temporarily restraining Mr. Kamble as aforesaid in point # 2 above.

This decision was challenged by Mr. Kamble at the High Court of Mumbai vide Civil

Application No.1427/2012, which was disposed of on 13-Sep-2013.

Subsequently, the special civil suit No.1461/2011 was decided on 05-Oct-2013, which stated

as follows :-

1. Plaintiffs’ suit for declaration and cancellation of sale deed is dismissed.
2. Defendants are restrained from creating third party interest in the suit property

till the plaintiffs receive their balance consideration.

3. Aggrieved by this decision, the co-owners of the property preferred an appeal

in the Bombay High Court, vide reg. no. FA/1192/2015, which was presented on

06-Jan-2014.

4. A certified copy of the appeal filed with the Bombay HC is enclosed as

Annexure – V, wherein the Lonkar family has sought for the cancellation of the impugned

sale deed dated l6-Sep-2010.

5. Relevant excerpts of the appeal so filed are reproduced below for quick

reference:-

1. Page 10, point (d) :

………………… in the so called Sale Deed there is no any terms or conditions that the Sale

Deed can be cancelled. It is respectful submission of the Appellants that it is statutory right

of the Appellants herein to approach the Hon’ble Court under the provisions of Specific

Reliefs Act for cancellation of the sale deed.

1. Page 13, point (l):

…..the respondent no.1 herein himself has given Public Advertisement on 21.03.2011

wherein he has categorically stated that the possession of the suit property is in the hands of

the Appellants herein.

1. Page 16, point (q) :

………………. the Appellants herein will have the right to approach the Hon’ble Court for

filing the suit after cancellation of the said Sale Deed which is voidable.

1. Page 20, point (aa) :

……………… the Appellants herein never given possession of the suit property to the

Respondent no.1 herein as balance payment did not pay by the Respondent no.1. The

Appellant herein are having crops of Soyabin, Bajara, etc. and pik pani also reflect the same.

6. The appeal filed by the Lonkar family in Civil Application No.2796 of 2015 was admitted

vide order dated 28.08.2015, copy of which is placed at pages 61 & 62 of Paper Book.

7. The cross objections filed by purchasers in First Appeal No.1192 of 2015, in which

purchasers clearly admits that they are ready to pay consideration to the assessee.

However, also contends that purchasers were put in physical possession of the said

property.

8. The assessee claims that possession of immovable property has not been parted with, till

date as it has not received consideration against purported sale transaction.”

9. From the perusal of above said facts, it is clear that though an agreement was entered

into between the parties on 16.09.2010 which was also registered with the authorities, but

admittedly total consideration was not paid to the assessee as the cheques which were

handed over by the purchaser, were stopped for payment. The dispute arose between the

parties, wherein the sellers i.e. assessee and his family filed an Injunction against the

purchaser restraining him from creating any third party interest in the suit property till the

decision of suit and an interim order was passed, which was challenged and subsequently,

Civil Suit between the parties was decided, under which the suit of assessee and co-owners

for cancellation of sale deed was dismissed. The co-owners of the property filed an appeal

before the Hon’ble Bombay High Court. In the said appeal, it has been clearly mentioned

that the possession of immovable property had not been parted with till the date and also the

assessee had not received complete consideration for the purported sale transaction.

Though the case of purchasers was that they had entered into sale transaction with the

understanding that the assessee would get no objection from the other co-owners and for

this reason, sale deed was executed and the cheques were handed over. The claim of

purchasers before the Civil Courts was that they were put in possession since they had

handed over the cheques, however, the said cheques were stopped for payment by the

purchasers only, as it is clear from the communication placed on record by the assessee.

10. The issue which arises in such circumstances is that in view of the dispute between the

parties, can it be said that the assessee has completed sale transaction and hence is eligible

for assessability of capital gains in his hands.

11. Section 2(47) of the Act lays down that transfer in relation to capital asset includes

various modes of transfer in which under clause (v) it involves a transaction wherein allowing

of possession of any immovable property is taken or retained in part performance of the

contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. Under

section 53A of the Transfer of Property Act, where any person contracts to transfer for

consideration any immovable property in writing, from which the terms necessary to

constitute the transfer can be ascertained and the transferee has in part performance of the

contract, taken possession of the property or any part thereof, and the transferee has

performed or is willing to perform his part of contract, then it is called ‘Part Performance’. So,

in part performance, there has to be willingness to perform his part of contract by the

transferee and the transferee should have been put in possession in such part performance

of the contract and the transferor has agreed to transfer the property for consideration.

However, in the facts of the case before us, though there is a contract in writing between the

parties but there is dispute between the parties as to the possession of the said property,

wherein the transferor claims that possession has not been given and the transferee claims

that the possession has been given but the said possession was subject to encashment of

cheques which were issued by the transferee. Since the transferee had stopped payment of

cheques issued by him, then the parties approached the Court to decide differences arising

between them and the matter is pending before the Hon’ble High Court of Bombay in this

regard. In such scenario, it cannot be said that part performance of the contract has been

completed.

12. The Hon’ble Apex Court in CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251

Taxman 202/398 ITR 531 and bunch of other appeals arising from the order of Hon’ble High

Court of Punjab & Haryana CIT v. Balbir Singh Maini [2015] 123 DTR 49 has deliberated

upon the relevant sections i.e. section 53A of the Transfer of Property Act and sections

2(47), 45 and 48 of the Income Tax Act and also took note of the provisions of section

2(47)(vi) of the Act and vide para 27 held that the income from capital gains on a transaction

which never materialized was at best, a hypothetical income. In the facts of the case before

the Apex Court, the entire transaction of development envisaged in the JDA fell through

because of want of permission and hence, the Apex Court in such circumstances, held that

In point of fact, income did not result at all for the aforesaid reason. This being the case, it is

clear that there is no profit or gain which arises from the transfer of a capital asset, which

could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.

13. The assessee in the affidavit explaining the delay in filing the appeal late before the

Tribunal has also mentioned the factual aspects and the legal dispute and has stated on

oath that sellers had never parted with the possession of said land, for which litigation was

pending before the Hon’ble High Court. In such circumstances, where the assessee has not

received sale consideration and where the possession of land having not been transferred to

the purchasers, provisions of section 45 of the Act are thus, not attracted.

14. Now, applying the ratio laid down by Apex Court to the facts of present case, wherein the

initial contract was between the parties on the ground that the assessee would get

permission of other co-owners numbering about 13 so as to transfer immovable asset to the

purchasers. This was the basic condition of the said agreement between the parties.

Admittedly, the said permission could not be obtained by the assessee and though sale

deed was registered, transaction could not be culminated. It is further evidenced by the fact

that only sum of Rs. 15 lakhs was paid as against total consideration of Rs.

2,75,73,600/-settled between the parties. As per sale deed, sale consideration was to be

paid as per Schedule A to the said agreement, for which postdated cheques were issued,

which were to be encashed as per the conditions mentioned for encashment of cheques. As

per clause 8 of the sale deed, the purchasers had given postdated cheques to sellers and it

was their responsibility to see that the postdated cheques get cleared for payment. In view of

the said cheques being stopped for payment and the dispute arising between the parties and

even the dispute being who is in possession of the said property, reflects that even part

performance of the contract has not been settled. In such circumstances, we find guidance

from the ratio laid down by the Apex Court in Balbir Singh Maini (supra) that where the

transaction has not materialized, then no profit or gain which arises from the alleged transfer

of capital asset could be brought to tax under section 45 r.w.s. 48 of the Act. We hold so.

The grounds of appeal raised by assessee are thus, allowed.

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

sb

In favour of assessee.