Tribunal rules "Agreement to Sell" doesn't transfer property, corrects capital gain computation

The Tribunal held that an "Agreement to Sell" did not result in the transfer of the property, overturning the A.O.'s decision. The Tribunal concluded that the computation of capital gain made by the A.O. for the assessment year 2011-12 was incorrect and upheld the assessee's computation. As a result, the Tribunal allowed both appeals of the assessee, setting aside the orders of the lower authorities regarding the computation of capital gain for both years.

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Issues Involved:
1. Year of transfer of property and accrual of capital gain.

Detailed Analysis:

1. Year of Transfer of Property and Accrual of Capital Gain:

The main issue in both appeals relates to determining the year of transfer of property and the subsequent accrual of capital gain. The assessee claims the property was transferred in the assessment year 2011-12, while the Assessing Officer (A.O.) asserts the transfer occurred in the assessment year 2008-09.

The facts reveal that the assessee, a private limited company engaged in real estate development, won a bid for a property in Hudi village in an auction conducted by the Hon’ble High Court of Karnataka for Rs. 9.00 crores. The High Court directed the official liquidator to execute a registered sale deed in favor of the assessee, which was done on 20.10.2010. The assessee arranged the bid amount through own funds and an advance from Shri Ramaiah Reddy, a director in the assessee company, as per an agreement for sale entered on 11.10.2007.

The A.O. noticed that the assessee had shown the cost of land at Rs. 9.00 crores as a fixed asset in the Balance Sheet, and the amount received from Shri Ramaiah Reddy was shown as a liability. The entire parcel of land, including adjacent lands, was sold for Rs. 113 crores on 18.1.2021 to M/s. Total Environment Habitat Pvt. Ltd., with the sale consideration pertaining to the 2 acres and 15 guntas of land being Rs. 18.05 crores, divided between the assessee and Shri Ramaiah Reddy.

The assessee computed long-term capital loss for the assessment year 2011-12, but the A.O. took the view that the transfer of 80% undivided share in the land to Shri Ramaiah Reddy occurred in the assessment year 2008-09, based on the reasoning that the transaction was akin to "extinguishment of rights" in the capital asset as per the definition of "transfer" in section 2(47) of the Act. Consequently, the A.O. computed long-term capital gain for the remaining 20% of land in the assessment year 2011-12 and short-term capital gain for the sale to Shri Ramaiah Reddy in the assessment year 2008-09.

The assessee challenged the assessment orders for both years before the Ld. CIT(A), who upheld the A.O.'s view that the transfer to Shri Ramaiah Reddy took place in the assessment year 2008-09. However, the Ld. CIT(A) deleted the computation of short-term capital gain for the assessment year 2008-09, citing a clerical error. Aggrieved, the assessee filed appeals for both years.

The assessee's representative argued that the "Agreement to Sell" with Shri Ramaiah Reddy did not transfer the title of the land, and only a registered sale deed would result in a transfer of the asset. The representative cited the decision of the Hon’ble Gujarat High Court in Ushaben Jayantilal Sodhan vs. ITO, which held that an agreement to sell does not result in the transfer of property under the Income Tax Act. The representative contended that the transfer of 80% of the property occurred in the assessment year 2011-12 when the property was sold to M/s Total Environment.

The Department's representative supported the orders of the Ld. CIT(A), arguing that the agreement to sell would also transfer the property.

Upon hearing rival contentions and perusing the record, the Tribunal noted that the issue boils down to whether the "Agreement to Sell" would result in the transfer of the asset. The Tribunal referred to the Hon’ble Gujarat High Court's decision in Ushaben Jayantilal Sodhan, which concluded that an agreement to sell does not transfer the property. The Tribunal observed that the A.O. did not argue that section 53A of the Transfer of Property Act applied to the transaction and noted the assessee's submission that possession was never given to Shri Ramaiah Reddy. Therefore, the Tribunal held that the agreement to sell did not result in the transfer of the asset, and there was no extinguishment of rights as held by the A.O. and confirmed by the Ld. CIT(A).

The Tribunal concluded that the computation of capital gain made by the A.O. in the assessment year 2011-12 was incorrect and upheld the computation of capital gain made by the assessee in the assessment year 2011-12. Consequently, the Tribunal set aside the orders passed by the Ld. CIT(A) and the A.O. for both years regarding the computation of capital gain.

In the result, both appeals of the assessee were allowed.

Order pronounced in the open court on 2nd Feb, 2022.

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