Capital gains timing and reassessment fail where transfer is complete on irrevocable sale agreement in part performance.

An irrevocable agreement to sell an undivided share in immovable property, coupled with consideration receipts, powers of attorney, indemnity bonds and part-performance rights, constituted transfer for capital gains purposes under section 2(47)(v) in assessment year 2006-07, not 2007-08, because the later registered sale deed did not postpone the date of transfer. On that basis, the same capital gains having already been disclosed and assessed in scrutiny for the earlier year, the reopening under section 147 lacked a bona fide basis of escapement and could not be sustained. The reassessment was therefore invalid and the assessee obtained full relief.

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Issues: (i) whether capital gains arising from transfer of the assessee's undivided share in the property were taxable in assessment year 2007-08 or in assessment year 2006-07; (ii) whether the reassessment initiated under section 147 was valid.

Issue (i): whether capital gains arising from transfer of the assessee's undivided share in the property were taxable in assessment year 2007-08 or in assessment year 2006-07.

Analysis: The transaction was found to have been concluded in October 2005 when the assessee and other co-owners entered into an irrevocable agreement to sell, issued receipts for consideration, executed powers of attorney, indemnity bonds and consent terms, and the purchaser was treated as being in part performance under section 53A of the Transfer of Property Act. Applying section 2(47)(v) of the Income-tax Act, 1961, capital gains become taxable in the year in which such transfer arrangement is entered into, even if formal conveyance is executed later. The later execution of the sale deed through the power of attorney holder in August 2006 did not defer the date of transfer. The same income had already been offered and assessed in assessment year 2006-07.

Conclusion: The capital gains were chargeable in assessment year 2006-07 and not in assessment year 2007-08, in favour of the assessee.

Issue (ii): whether the reassessment initiated under section 147 was valid.

Analysis: The recorded material did not disclose any proper basis to form the belief that income had escaped assessment, particularly when the very same capital gains had already been disclosed and assessed in scrutiny proceedings for assessment year 2006-07. The reopening was also influenced by an incorrect assumption that the transfer occurred only on registration in August 2006. On the facts, the formation of belief was not bona fide and the reassessment could not be sustained.

Conclusion: The reassessment under section 147 was invalid, in favour of the assessee.

Final Conclusion: The addition of capital gains in assessment year 2007-08 failed and the reassessment was set aside, resulting in complete relief to the assessee.

Ratio Decidendi: Where an assessee enters into an irrevocable agreement to sell an undivided interest in immovable property and hands over rights in part performance, the transfer is complete for capital gains purposes in that year under section 2(47)(v), and reassessment cannot be sustained on the same income already assessed in an earlier year without a bona fide belief of escapement.

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