2019 (12) TMI 702 - SC - Income Tax

Supreme Court upholds capital gains tax on property transfer under Income Tax Act.

The Supreme Court affirmed the lower authorities' findings that the transaction constituted a transfer under Section 2(47)(ii) and (vi) of the Income Tax ... LTCG - Transfer of a capital asset within the meaning of Section 2(47) - Power of Attorney (POA) for development of land - compromise deed - as per the deed, various amounts had to be paid by the Builder to the owner so that a complete extinguishment of the owner’s rights in the property would then take place - HELD THAT:- Section 53A of the T.P. Act be attracted, first and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof. Secondly, the transferee must have performed or be willing to perform his part of the agreement. It is only if these two important conditions, among others, are satisfied that the provisions of Section 53A can be said to be attracted on the facts of a given case. On a reading of the agreement to sell dated 15.05.1998, what is clear is that both the parties are entitled to specific performance. (See Clause 14). Clause 16 is crucial, and the expression used in Clause 16 is that the party of the first part hereby gives ‘permission’ to the party of the second part to start construction on the land. Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be ‘possession’ within the meaning of Section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, Section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone. We now turn to the argument of the learned senior counsel appearing on behalf of the assessee based on Section 2(47)(vi). it is clear that the expression “enabling the enjoyment of” must take colour from the earlier expression “transferring”, so that it can be stated on the facts of a case, that a de facto transfer of immovable property has, in fact, taken place making it clear that the de facto owner’s rights stand extinguished. It is clear that as on the date of the agreement to sell, the owner’s rights were completely intact both as to ownership and to possession even de facto, so that this Section equally, cannot be said to be attracted. Coming to the third argument of the learned senior counsel on behalf of the appellant, what has to be seen is the compromise deed and as to which pigeonhole such deed can possibly be said to fall under Section 2(47). A perusal of the compromise deed shows that the agreement to sell and the Power of Attorney are confirmed, and a sum of ₹ 50 lakhs is reduced from the total consideration of ₹ 6.10 crores. Clause 3 of the said compromise deed confirms that the party of the first part, this is the appellant, has received a sum of ₹ 4,68,25,644/- out of the agreed sale consideration. Clause 4 records that the balance ₹ 1.05 crores towards full and final settlement in respect of the Agreement entered into would then be paid by 7 post-dated cheques. Clause 5 then states that the last two cheques will be presented only upon due receipt of the discharge certificate from one M/s. Pioneer Homes. In this context, it is important to advert to a finding of the ITAT, which was that all the cheques mentioned in the compromise deed have, in fact, been encashed. This being the case, it is clear that the assessee’s rights in the said immovable property were extinguished on the receipt of the last cheque, as also that the compromise deed could be stated to be a transaction which had the effect of transferring the immovable property in question. The pigeonhole, therefore, that would support the orders under appeal would be Section 2(47)(ii) and (vi) of the I.T. Act in the facts of the present case. Appeal dismissed. Issues Involved:1. Applicability of Section 2(47)(v) of the Income Tax Act, 1961.2. Applicability of Section 2(47)(vi) of the Income Tax Act, 1961.3. Validity of the Best Judgment Assessment Order under Section 144 of the Income Tax Act.4. Interpretation of the agreement to sell and the Power of Attorney.5. Effect of the compromise deed dated 19.07.2003.Detailed Analysis:1. Applicability of Section 2(47)(v) of the Income Tax Act, 1961:The core issue was whether the transaction could be considered a 'transfer' under Section 2(47)(v) of the Income Tax Act, which involves the allowing of possession of immovable property in part performance of a contract as referred to in Section 53A of the Transfer of Property Act, 1882. The Tribunal and the High Court found that the conditions of Section 2(47)(v) were not met because the obligations under the agreement to sell were not carried out in their true letter and spirit. The compromise deed showed that the obligations were not fully performed, thus Section 53A of the Transfer of Property Act could not be attracted. The Supreme Court concurred, noting that the license given to the builder to develop the land did not amount to possession under Section 53A, which requires control over the land.2. Applicability of Section 2(47)(vi) of the Income Tax Act, 1961:The appellant argued that the transaction fell under Section 2(47)(vi), which includes any transaction enabling the enjoyment of immovable property. The Supreme Court referred to the judgment in Commissioner of Income Tax v. Balbir Singh Maini, which clarified that the expression 'enabling the enjoyment of' must take color from 'transferring,' implying a de facto transfer of ownership. The Court found that as of the date of the agreement to sell, the owner's rights were intact, and thus, Section 2(47)(vi) was not attracted.3. Validity of the Best Judgment Assessment Order under Section 144 of the Income Tax Act:The appellant failed to file any return for the Assessment Year 2004-2005, leading to a Best Judgment Assessment Order under Section 144 of the Income Tax Act. Despite multiple notices, the appellant did not comply, resulting in the entire sale consideration being treated as a capital gain and brought to tax. The Supreme Court did not find any fault with the procedural aspects of the assessment order.4. Interpretation of the Agreement to Sell and the Power of Attorney:The agreement to sell dated 15.05.1998 and the subsequent Power of Attorney executed on 27.11.1998 were scrutinized. Clause 14 of the agreement entitled both parties to specific performance, and Clause 16 gave the builder permission to start construction, which was interpreted as a license rather than possession. The Power of Attorney allowed the builder to execute necessary documents for development and sale but did not transfer possession.5. Effect of the Compromise Deed Dated 19.07.2003:The compromise deed confirmed the agreement to sell and the Power of Attorney, reducing the total consideration and outlining the payment schedule. The ITAT found that all cheques mentioned in the compromise deed were encashed, indicating that the assessee's rights in the property were extinguished upon receipt of the last cheque. The Supreme Court concluded that the compromise deed effectively transferred the property, thus falling under Section 2(47)(ii) and (vi) of the Income Tax Act.Conclusion:The Supreme Court dismissed the appeal, affirming the findings of the lower authorities. The transaction was found to be a transfer under Section 2(47)(ii) and (vi) of the Income Tax Act, resulting in capital gains tax liability for the Assessment Year 2004-2005.