Court auction sale set aside: compromise receipt was not consideration for transfer and was outside long-term capital gains tax.

Where a court auction sale is ultimately set aside in appeal, the auction purchaser is treated as never having acquired an indefeasible transferable interest in the property. An amount received on compromise in connection with that setting aside cannot be characterised as consideration for transfer or relinquishment of a capital asset. The article rejects a substance-over-form approach that ignores the legal effect of the appellate order, and states that such a receipt is not taxable as long-term capital gain.

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Issues: Whether the sum of Rs. 20,000 received by the assessee on compromise, pursuant to the setting aside of a court auction sale, constituted long-term capital gain taxable as consideration for transfer or relinquishment of an interest in the property.

Analysis: Under the scheme of Order 21 of the Code of Civil Procedure, an auction purchaser does not acquire an indefeasible ownership interest until the sale becomes absolute on confirmation, and even then the appellate court may set aside the sale. When the sale is ultimately set aside in appeal, the confirmation order does not survive in substance or legal effect, and the auction purchaser is treated as never having acquired any transferable interest in the property. The receipt under the compromise could not, therefore, be characterised as consideration for transfer or relinquishment of a capital asset. The revenue's attempt to treat the transaction on a substance-over-form basis was rejected because the legal form and effect of the court proceedings could not be ignored.

Conclusion: The receipt of Rs. 20,000 was not taxable as long-term capital gain, and the question was answered in favour of the assessee.

Ratio Decidendi: Where a court auction sale is ultimately set aside, the auction purchaser is deemed never to have acquired a transferable interest in the property, and any amount received on compromise in connection with that setting aside is not consideration for transfer or relinquishment of a capital asset.

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