Capital gains not taxable where no transfer u/s2(47) and full consideration received only in later year

ITAT held that no "transfer" under s.2(47) of the IT Act occurred in AY 2015-16, as only 5-13% of the agreed sale consideration was received and contractual clauses made full payment a condition precedent for transfer of title and handing over of documents/possession. Purchasers confirmed non-payment of full consideration and non-taking of possession. Consequently, capital gains were not chargeable in AY 2015-16. ITAT further accepted the alternate plea that the same capital gains, having been offered and assessed in AY 2018-19 upon receipt of full consideration, could not be taxed again without resulting in double taxation. The assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether execution and registration of agreements to sell, without receipt of full consideration and without handing over possession, constituted "transfer" of capital assets in the relevant previous year for levy of capital gains tax.

1.2 Whether capital gains on the same transactions, already offered and assessed in a subsequent assessment year at a higher figure, could again be brought to tax in the impugned assessment year, resulting in double taxation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Year of transfer and chargeability of capital gains

Legal framework (as discussed)

2.1 The Court proceeded on the basis that chargeability of capital gains arises on "transfer" of a capital asset, and that the determination of the year of transfer depends on the contractual terms and factual fulfilment of conditions relating to payment of consideration and possession, with reference to judicial precedents including the principles in decisions such as those in the nature of Chaturbhuj Dwarkadas Kapadia and subsequent applications thereof, and Tribunal decisions emphasizing intention of the parties and completion of essential conditions of sale.

Interpretation and reasoning

2.2 The Court examined the three agreements to sell, noting that only a small part of the agreed consideration (5% to 13%) was received during the relevant financial year and that possession of the properties was not handed over to the purchasers.

2.3 Specific reliance was placed on Clause 7 of the agreements, under which the purchaser became entitled to get the office transferred in his name only after payment of full consideration, and Clause 8, under which the vendor was obliged to hand over all documents/papers relating to the office only after full consideration was paid.

2.4 The Court recorded that, during the impugned year, these conditions were admittedly not fulfilled, and that the purchasers themselves, by written communications, confirmed non-payment of full consideration and non-taking of possession.

2.5 It was emphasized that mere registration of an agreement to sell, without fulfilment of contractual preconditions like full payment and handing over of possession, does not by itself effect a transfer of the immovable property; further, there was no evidence of execution and registration of a separate conveyance deed in the relevant year.

2.6 The Court drew support from precedents where it was held that: (i) the date of transfer is linked to the point when complete control over the property passes; (ii) registration is only prima facie proof of intention and does not by itself effect transfer where conditions precedent, such as payment of full price and delivery of possession, are not satisfied; and (iii) intention of the parties, gathered from the terms and conduct, is determinative of when a sale is completed for capital gains purposes.

Conclusions

2.7 The Court held that, in absence of full payment of sale consideration and handing over of possession in the relevant previous year, the "transfer" of the properties had not taken place in that year.

2.8 Consequently, chargeability to capital gains on these properties did not arise in the impugned assessment year, and the addition made on that basis was unsustainable in law.

Issue 2 - Double taxation of capital gains already offered and accepted in subsequent year

Interpretation and reasoning

2.9 The Court noted that the balance sale consideration for the same three properties was received in financial year 2017-18, relevant to assessment year 2018-19, and that the assessee had offered long-term capital gains of Rs. 1,06,43,565/- in that year.

2.10 It was recorded that the said return had been processed and accepted under section 143(1), and that the assessee had accepted the computation, even though indexed cost was not allowed and the capital gains figure so assessed exceeded the amount brought to tax in the impugned year.

2.11 The Court accepted the contention that, once the capital gains arising from the same transactions have been taxed and accepted in the correct subsequent year, bringing the same gains to tax in the impugned year would result in impermissible double taxation and undue hardship.

Conclusions

2.12 Independently of the primary finding on non-occurrence of transfer in the impugned year, the Court held that, since the entire capital gains on the same transactions had already been subjected to tax in assessment year 2018-19 and had attained finality, the gains could not again be brought to tax in assessment year 2015-16.

2.13 In view of both the absence of transfer in the impugned year and the avoidance of double taxation, the addition of Rs. 80,76,511/- under the head "capital gains" was directed to be deleted, and the appeal was allowed.

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