2006 (12) TMI 170 - AT - Income Tax

Tribunal Invalidates Reassessment; Capital Gains from Land Sale Cannot Be Taxed for 1996-97 Due to Non-Compliance.

The Tribunal allowed the appeal, determining that the reassessment proceedings under section 147 of the IT Act, 1961, were invalid due to the failure to ... Validity of the reassessment proceedings u/s 147 - Capital Gains - deemed transfer u/s 2(47)(v) - sale of plot of land - meagre - whether the transferee to have 'performed or is willing to perform' his obligations under the agreement - HELD THAT:- It is not possible to hold that the transferee was willing to perform his obligations in the financial year 1995-96 in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down u/s 53A of the Transfer of Property Act was not satisfied. Once we come to the conclusion that the transferee was not 'willing to perform', as stipulated by and within meanings assigned to this expression u/s 53A of the Transfer of Property Act, his contractual obligations in this previous year, it is only a corollary to this finding that the development agreement dt. 12th Oct., 1995, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a 'contract of the nature referred to in s. 53A of the Transfer of Property Act' and, accordingly, provisions of s. 2(47)(v) cannot be invoked on the facts of this case Chaturbhujdas Dwarkadas Kapadia vs. CIT's case [2003 (2) TMI 62 - BOMBAY HIGH COURT] undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as 'willingness to perform' has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of s. 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue's case is thus devoid of legally sustainable basis. In the present case, the situation is that the assessee has received only a meagre amount' out of total sales consideration, the transferee is avoiding adhering to the payment schedule on one ground or the other, and there is no surety that the sales consideration will actually be realized by the assessee, and yet the assessee is expected to pay capital gains on the entire agreed sales consideration. It is also important to bear in mind that this order, it was specifically agreed between the parties under the agreement in question that 'that the Lok Housing will not issue stop payment instructions in any circumstances nor put forward any excuses of any type to avoid presentation and consequent encashment of the said cheques on their respective due dates. Further encashment of the said cheques on presentation shall be as of the essence of the contract'. This condition of the contract was, by no stretch of logic, fulfilled. The transferee did request the assessee to reschedule the payments. When payment on time is essence of the contract, and the payments are not made in time, it cannot be said that such a contract confers any rights on the transferee to seek redressal u/s 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in s. 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of s. 2(47)(v) will apply in the situation before us. For all these reasons, we are of the considered view that the assessee deserves to succeed on both the counts-i.e. for the reason that the reopening of assessment was not justified, as also for the reason that the capital gains, on sale of plot in question, could not have been taxed in the particular assessment year in appeal before us. For our purposes, it is not necessary to go into the question as to in which year the capital gain on sale of plot will be taxable. We leave it at that. In the result the appeal is allowed. Issues Involved:1. Validity of the reassessment proceedings.2. Determination of the correct assessment year for taxing capital gains on the sale of a plot of land.Issue-wise Detailed Analysis:1. Validity of the Reassessment Proceedings:The appellant challenged the validity of the reassessment proceedings under section 147 of the IT Act, 1961. The appellant argued that the reopening of the assessment was improper and should be quashed. The CIT(A) had upheld the reopening, but the appellant contended that the CIT(A) erred in confirming it.The Tribunal noted that the reasons recorded for reopening the assessment were not furnished to the assessee, which is a requirement as per the Supreme Court's judgment in the case of GKN Driveshaft (India) Ltd vs. ITO. The Tribunal found that the AO had proceeded to reopen the assessment based on an erroneous assumption that mere grant of a license and entering into a development agreement were sufficient to invoke deemed transfer under section 2(47)(v) of the IT Act. This assumption was legally unsustainable. Therefore, the Tribunal concluded that the reopening of the assessment was vitiated in law.2. Determination of the Correct Assessment Year for Taxing Capital Gains:The central issue was whether the capital gains on the sale of the plot of land should be taxed in the assessment year 1996-97. The AO had reopened the assessment on the grounds that the capital gains arising from the transfer of the plot of land had escaped assessment. The AO relied on the judgment of the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia vs. CIT, which dealt with the scope of section 2(47)(v) of the IT Act. This section includes 'any transaction involving the possession of immovable property to be taken or retained in part performance of the contracts of the nature specified in section 53A of the Transfer of Property Act, 1882.'The Tribunal noted that for section 2(47)(v) to apply, the conditions under section 53A of the Transfer of Property Act must be satisfied. One of these conditions is that the transferee must have performed or be willing to perform their part of the contract. The Tribunal found that the transferee in this case had neither performed nor was willing to perform their obligations under the agreement. This was evident from the transferee's repeated defaults in making payments and the subsequent legal disputes that arose, culminating in a settlement before the Bombay High Court.The Tribunal concluded that since the transferee was not willing to perform their obligations, the conditions of section 53A were not satisfied. Consequently, the development agreement could not be deemed a 'contract of the nature referred to in section 53A of the Transfer of Property Act.' Therefore, the provisions of section 2(47)(v) could not be invoked, and the capital gains could not be taxed in the assessment year 1996-97.Conclusion:The Tribunal allowed the appeal, holding that the reopening of the assessment was not justified and that the capital gains on the sale of the plot of land could not be taxed in the assessment year 1996-97. The Tribunal did not address the issue of the exact assessment year in which the capital gains would be taxable.