2011 (8) TMI 434 - HC - Income Tax

Court rules Income Tax Department liable for unearned increase under Transfer of Property Act

THE COMMISSIONER OF INCOME TAX, DELHI-IX. Versus M/s MONOFLEX INDIA P. LTD. & OTHERS

The court held that the unearned increase is payable under the Transfer of Property Act, 1882, and the sub-lease deed. The Income Tax Department, as the ... Auction of property to recover the tax dues - leasehold property - DDA being the lessor demanded 50% unearned increase for mutation of the property in favour of the purchasers/respondent no.1. - Disputes arose as to the liability to pay unearned increase and whether the same was payable by the purchasers/respondent no.1 or by the Income-Tax Department or as claimed by the appellant by the original sub-lease i.e. the defaulter assessee. - held that:- The pre-condition or the restrictions imposed in the sub lease have to be complied with. This would include the pre-condition to pay 50% of unearned increase. Without the payment of the unearned increase the leasehold right, title and interest of the sub-lessee will not vest in the purchaser. - Thus, unearned increase is payable.The terms of auction did not stipulate that the original sub-lessee shall pay 50% unearned increase. The appellant (Income Tax Department) had agreed and promised to issue sale certificate to the auction purchaser, whose bid was accepted. It is only on payment of 50% unearned increase that an effective transfer can be made by the said sale certificate. In these circumstances, it is for the appellant (Income Tax Department) to make payment of unearned increase. Of course, in case its dues are still payable, it is open to them to take appropriate proceedings against the defaulter assessee in accordance with law. Issues Involved:1. Liability to pay unearned increase.2. Validity of auction sale and transfer of property.3. Compliance with terms of sub-lease.4. Rights and obligations of parties involved.Detailed Analysis:1. Liability to Pay Unearned Increase:The core issue is whether unearned increase is payable and, if so, who is liable to pay it. The perpetual sub-lease deed clearly stipulates that 50% unearned increase is payable on the transfer of leasehold rights. The court held that the payment of unearned increase is a pre-condition for the transfer of leasehold rights from the sub-lessee to a third party. This condition is binding and without it being satisfied, the rights in the property cannot be transferred. The court concluded that unearned increase is indeed payable under the provisions of the Transfer of Property Act, 1882, and the sub-lease deed.2. Validity of Auction Sale and Transfer of Property:The property was auctioned by the Tax Recovery Officer to realize income tax dues from the defaulter assessee. The auction sale was confirmed, and a certificate of sale was issued. However, the auction notice did not stipulate that the bidder would have to pay 50% unearned increase. The court found that the terms of the auction did not impose this burden on the purchasers. The court held that the appellant (Income Tax Department) is responsible for paying the unearned increase to effectuate the transfer of the property, as the auction terms did not specify that the purchaser would bear this cost.3. Compliance with Terms of Sub-Lease:The sub-lease contained specific clauses that required the payment of unearned increase for any transfer of leasehold rights. The court emphasized that these terms are binding and must be complied with. The court also noted that the sub-lease rights could not be transferred without fulfilling the pre-condition of paying the unearned increase. The relevant clauses of the sub-lease were quoted to support this conclusion.4. Rights and Obligations of Parties Involved:The court addressed the inter se transactions between the purchasers and the respondent No. 1 (Monoflex India Pvt. Ltd.), noting that these were not the subject matter of the present decision. The court also clarified that the locus standi objection against the respondent No. 1 was no longer valid as Raj Kumar Dhingra and Manish Kumar Dhingra had been impleaded as respondents. The court further held that the appellant must deposit the unearned increase with the Delhi Development Authority (respondent No. 2) and that the latter could claim interest on the unearned increase from the appellant through appropriate legal proceedings.Conclusion:The court concluded that unearned increase is payable and that the appellant (Income Tax Department) is liable to pay it. The court extended the time for compliance and directed the appellant to deposit the unearned increase with the Delhi Development Authority. The appeal was disposed of with no order as to costs. The court also noted that the property is mortgaged with the State Bank of Bikaner and Jaipur, and the rights of the bank, if any, would not be affected by this judgment.