2025 (9) TMI 277 - AT - Income Tax

Capital gains not taxable for AY 2007-08 where sale failed due to developer's fraud and cheque dishonour

ITAT held that capital gains were not assessable in AY 2007-08 because the sale did not materialize due to the developer's fraud; the sale deed provided ... Capital gain tax - Year of assessment - sale of agriculture land - Nature of land sold - HELD THAT:- We find that consistently Tribunal has accepted the stand of the farmers that in the year of Sale Agreement, capital gain is not assessable in the hands of these assessees because the developer has committed a fraud with them and actually transfer could not be construed as materialized in assessment year 2007-08. These farmers have received the sale consideration after intervention of the Hon'ble Courts. Also a perusal of the Sale Deed would reveal that in the Sale Deed, it has been specifically mentioned that in case cheque bounces, the registered Sale Deed shall automatically stand cancelled. There is no dispute with regard to the fact that cheque could have not been encashed. Therefore, capital gain tax in the case of the assessee would not be leviable in assessment year 2007-08. ISSUES PRESENTED AND CONSIDERED 1. Whether long-term capital gain on sale of agricultural land is taxable in the year of registration of the sale deed when only token/10% consideration was actually received and balance consideration was withheld and received in subsequent year(s). 2. Whether exemption under Section 54B (and by extension Section 54F) is allowable where substantial part of sale proceeds was received in a subsequent year and was invested in agricultural land thereafter. 3. Whether the asset sold should be treated as belonging to the individual assessee or to the HUF, where sale deed and receipt of proceeds are in the name of the individual. 4. Whether assessment reopened under Section 148/147 can stand in circumstances where year of taxability depends on factual determination of receipt of consideration and where identical issues have been adjudicated by coordinate benches of the Tribunal (issue of restoration for verification). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Year of taxability of capital gains where only part consideration (10%) was received at time of sale deed and balance was received later Legal framework: Capital gain is taxable when transfer is effected; however, the question turns on whether a transfer is treated as materialized for tax purposes when consideration is not paid and sale deed contains conditions rendering sale cancellable (and possession not effectively transferred until full payment). Relevant principles include recognition of income based on receipt/realisation where transfer is conditional or tainted by fraud; assessment year depends on year in which the taxpayer actually realises the capital receipt. Precedent treatment: Coordinate bench decisions (lead: Rajiv Kumar; followed in Purshottam Kumar, Sheo Ram and other grouped ITAT orders) were considered and applied. Those decisions analyzed facts where builders paid only token sums, issued undated/post-dated cheques for balance, and High Court intervention/SIT proceedings demonstrated that buyers had no intention to make full payment at registration; the Tribunal there held taxability arose in the year of actual receipt (post judicial intervention) and not the year of registration. The Court/Tribunal in the present judgment follows these precedents. Interpretation and reasoning: The Tribunal examined documentary evidence (sale deed clause that sale deed stands cancelled if cheque bounces), the pattern of transactions in comparable matters, and the factual matrix that developers withheld major consideration and possession was contingent on full payment. It took judicial findings in connected public interest litigation (High Court/SIT action protecting farmers and directing payments) as corroborative of absence of genuine transfer/realisation in the year of registration. In light of identical facts and the sale deed clause making the sale cancellable on cheque failure, it concluded transfer could not be said to have materialised for tax purposes in the impugned year. Ratio vs. Obiter: Ratio - where sale deed is executed but buyer's obligation to pay major consideration is not honoured, and sale deed contains clause cancelling registration on dishonour/non-payment, capital gains are taxable in the year of actual receipt of consideration (as supported by comparable ITAT decisions). Obiter - observations about broader systemic fraud by builders and general policy implications are ancillary to the factual ratio. Conclusion: Capital gain was not leviable in the assessment year of registration (2007-08); taxability is to be determined in the year when substantial consideration was actually received, subject to verification by the Assessing Officer of factual parity with precedents. Issue 2 - Allowability of exemption under Section 54B/54F where substantial sale proceeds received in later year and invested thereafter Legal framework: Section 54B provides exemption for capital gains from compulsory/involuntary transfer of agricultural land if capital gain is invested in acquisition of agricultural land within specified time/conditions. Eligibility depends on timing and source of investment (must be from sale proceeds and within prescribed period). Deposit into Capital Gains Account Scheme is an alternative where timing prevents immediate investment. Precedent treatment: In the grouped precedents, the Tribunal restored claims for exemptions under Sections 54B/54F to the ledger of the Assessing Officer for fresh adjudication after determination of the correct year of taxability. The present Tribunal applied the same approach, treating these issues as consequential on the primary year-of-taxability finding. Interpretation and reasoning: The Tribunal reasoned that if the assessee can demonstrate that the major portion of sale proceeds was received in a subsequent year and was then invested in agricultural land, the condition of depositing in the Capital Gains Account Scheme would be inapplicable (impracticable because proceeds were not yet received). Therefore, upon verification of actual receipt and subsequent investment, the assessee may be entitled to deduction under Section 54B. The Tribunal remitted the factual verification to the Assessing Officer. Ratio vs. Obiter: Ratio - entitlement to Section 54B deduction is to be adjudicated in the year of actual receipt/investment; impossibility of depositing unrealised proceeds in Capital Gains Account Scheme negates that requirement where proceeds were not in hand. Obiter - remarks on procedural filing of returns and documentary lacunae in particular past instances are ancillary. Conclusion: The question of exemption under Section 54B/54F is to be decided after factual determination of year of receipt of sale proceeds; if major proceeds were received subsequently and invested in agricultural land, exemption should be allowed (remitted to AO for verification). Issue 3 - Whether the asset/capital gain should be assessed in the name of HUF rather than individual Legal framework: Assessment should be in the name of the person/entitiy who owned the asset and received proceeds; formal title, manner of sale, and account of proceeds determine ownership and assessability. Precedent treatment: The Tribunal adhered to orthodox treatment - where sale deed and receipts are in individual's name and subsequent acquisition is in individual's name, claim that asset belonged to HUF must be pleaded and proved; failure to press or substantiate the HUF claim is fatal. Interpretation and reasoning: The Tribunal found land and sale proceeds were in the individual's name, sale was effected by the individual (not as Karta of HUF), investments from proceeds were in the individual's name, and the HUF contention was not pressed before the lower appellate authority. Thus the HUF plea was treated as an afterthought and rejected. Ratio vs. Obiter: Ratio - assessment follows the recorded ownership and receipt of proceeds; unpressed or unproved contention of HUF ownership fails. Obiter - none significant beyond procedural admonition. Conclusion: The plea that income/capital gains should be assessed to HUF is dismissed on facts and for lack of prosecution/evidence; assessment in individual's name is correct. Issue 4 - Validity of reopening (Section 148) where primary question is factual year of realisation and identical issues have been decided by coordinate benches Legal framework: Reopening under Section 148/147 is subject to assessment of reasons and factual matrix; however, reopening does not preclude AO from verifying facts. Where identical issues have been considered by Tribunal, AO may be directed to verify parity of facts and decide accordingly. Precedent treatment: Coordinate bench judgments were relied upon to direct restoration to Assessing Officer for limited purpose of verification and fresh adjudication in accordance with findings in those precedents. The Tribunal consistently remits factual verification rather than striking down reopening where factual parity is open. Interpretation and reasoning: The Tribunal observed that the AO had reopened and assessed LTCG; given identical decisions in several precedents and the factual similarity, the appropriate course is to restore the matter to the AO for verification of identity of facts with those precedents, and then pass orders in accordance with law. The present Tribunal applied this approach but finally, on the facts and sale deed clause, concluded no taxability in the impugned year and deleted additions. Ratio vs. Obiter: Ratio - reopening may stand but where parallel decisions exist, AO must verify factual parity; if parity is established, assessment must follow the precedents. Obiter - procedural criticisms of faceless assessments or prosecution defaults are ancillary remarks. Conclusion: Matter remitted to AO for factual verification where required; on verification of the present sale deed and surrounding facts (including clause cancelling sale on cheque dishonour), Tribunal held capital gain not taxable in the year of registration and deletions granted.