No capital gains tax in hands of assessee if sale deeds became invalid due to dishonour of post-dated cheques

Ijyaraj Singh [2020] 117  424 (Jaipur – Trib.)

Where assessee entered into two sale deeds for sale of its lands, however sale transactions could not materialize as post dated cheques issued in discharge of consideration had been dishonored, thus, no transfer of land having taken place and no real income having arisen to assessee, assessee would not be exigible to capital gains tax

Summary of the case:

1. Section 2(47), read with section 45, of the Income-tax Act, 1961

 – Capital gains

– Transfer (Land)

– Assessment year 2013-14 – Assessee entered into two sale deeds for sale of its land whereby sale consideration had been discharged by issue of post dated cheques

– However, sale transaction could not be materialized as few cheques had been dishonored and returned unpaid to assessee

 – Whether therefore, there was no transfer of land in terms of section 2(47)(v) and no real income which had accrued or arisen to assessee as there was no receipt of full sale consideration and in absence thereof, assessee would not be exigible to capital gains tax

 – Held, yes

 [Paras 24 and 26][In favour of assessee

Others Issues in the case:

1. Whether Development expenses incurred on land before its sale, required to put property in saleable condition would be allowable?

Summary of the Issue:

I- Section 37(1) of the Income-tax Act, 1961

– Business expenditure

– Alienability of (Cost of improvement)- Assessment year 2013-14

– Assessee submitted details regarding development expenses which includes leveling, stone supply charges, machine charges, repairs of boundary walls and wells etc. incurred on land before its sale, required to put property in saleable condition

 – Commissioner (Appeals) appreciated nature of expenses and allowed proportionate claim of Rs. 4.56 lakhs

 – Whether there being no infirmity in findings of Commissioner(Appeals) in allowing these expenses towards cost of improvement, findings of Commissioner(Appeals) were to be confirmed

– Held, yes [Para 35]

[In favour of assessee]

2. Where assessee received interest and remuneration receipts from various firms in which he was a partner, business expenditure incurred under various heads such as salary and wages to staff, postage, Travel and conveyance and legal fees etc. for earning such business income as claimed by assessee would be allowable?

Summary of the Issue :

– Section 37(1) of the Income-tax Act, 1961 – Business expenditure

 – Alienability of (Expenditure incurred on earning business income)

 – Assessment year 2013-14

 – Whether assessee having received interest and remuneration receipts from various firms in which he was a partner, business expenditure incurred under various heads such as salary and wages to staff, postage, Travel and conveyance and legal fees etc. for earning such business income as claimed by assessee would be allowable

– Held, yes [Para 42][In favour of assessee]

3. Whether to bring a case within purview of section 57(iii), it is necessary that expenditure must be laid out or expended wholly and exclusively for purpose of making or earning income?

Summary of the Issue :

 – Section 57 of the Income-tax Act, 1961

 – Income from other sources

 – Deductions (Condition precedent) – Assessment year 2013-14

 – Whether to bring a case within purview of section 57(iii), it is necessary that expenditure must be laid out or expended wholly and exclusively for purpose of making or earning income

– Held, yes

4. Assessee had offered interest income from his savings and fixed deposits maintained with various banks under head ‘Income from other sources’ and claimed expenses in nature of salary and allowances, postage, telephone, travel, car and conveyance, bank charges, other business expenses, legal expenses, depreciation, and other misc. expenses, however, question whether these staff, office and other related expenses had been incurred wholly and exclusively for purpose of making or earning such interest income had not been examined. Whether therefore, matter was to be remanded back for adjudication afresh?

 – Held, yes [Para 49]

[Matter remanded]

5. Where assessee transferred land alongwith wells, baories, road, boundary wall etc. as these were attached to land, proportionate cost of these structures (after indexation) against full value of consideration in terms of sale deed so executed would be allowable to assessee?

Summary of the Issue :

– Section 48 of the Income-tax Act, 1961

– Capital gains

– Computation of (Indexed cost of acquisition)

– Assessment year 2013-14 – Assessee transferred land vide sale deed and claimed cost of acquisition on basis of registered valuer’s report wherein value of property so estimated by registered valuer includes market value of two baories, three wells and other structures said to have existed on land which was transferred

– Assessing Officer held that assessee transferred bare land without any construction work as per registered sale deed and thus full value of consideration was only for transfer of land, hence, full value of consideration was only for bare land transferred, hence, indexed cost of acquisition of land only was deductible under section 48

 – However, DVO had acknowledged existence of roads, wells, Baories and boundary walls on impugned land

 – Further, assessee had also submitted an affidavit that these structures had been transferred along with sale of land as part of sale deed and land area so reflected in sale deed included area occupied by these structures

 – Whether therefore, proportionate cost of these structures (after indexation) against full value of consideration in terms of sale deed so executed would be allowable to assessee

 – Held, yes [Para 57]

[In favour of assessee]

6. Legal expenses incurred for filing of two court cases in respect of invalid sale deeds would not be allowable as said sale deeds were not subject to capital gains tax and therefore expenses incurred for same could not have been allowed while computing capital gains in respect of other sale transaction which had been brought to tax?

Summary of the case:

– Section 37(1) of the Income-tax Act, 1961

– Business expenditure

– Alienability of (Legal expenses) – Assessment year 2013-14

 – Whether legal expenses incurred for court, consultancy and advice, and other expenses for filing of two court cases in respect of invalid sale deeds would not be allowable as said sale deeds were not subject to capital gains tax and therefore expenses incurred for same could not have been allowed while computing capital gains in respect of other sale transaction which had been brought to tax

– Held, yes[Para 63]

[In favour of revenue]