Commissioner Of Income Taxchennai v. J.mahalingam

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 08.07.2013 CoramThe Honourable Mrs.Justice CHITRA VENKATARAMANandThe Honourable Ms.Justice K.B.K.VASUKITax Case (Appeal) No.229 of 2010--- Commissioner of Income TaxChennai .. Appellant -vs- J.Mahalingam .. Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of theIncome Tax Appellate Tribunal, Chennai 'B' Bench dated 18.09.2009 passed in ITA.No.1115/Mds/2009. For appellants : Mr.M.SwaminathanStanding Counsel forIncome Tax Dept. For respondent : Dr.Anita Sumanth COMMON JUDGMENT (The Judgment of the Court was made by CHITRA VENKATARAMAN, J.) The following substantial questions of law are raised by the Revenue in the present Tax Case Appeal preferred as against the order of the Income Tax Appellate Tribunal, Chennai 'B' Bench dated18.09.2009 passed in ITA.No.1115/Mds/2009 for the assessment year 2006-07. "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding thatthe assessee became a owner of the 3 plots as per the agreement dated 10.10.95 that was enteredinto between the assessee and the original owners and the assessee had possessed the plots as acapital asset and had sold it to the purchaser ? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding thatthe amount of Rs.90 lakhs received being the value of the 3 grounds of plot, to be assessed asincome from profession and to be assessed to capital gains ?" 2. The assessee entered into an agreement with one Chakravarthy and E.Umapathy on 10th October,1995 in respect of the property situate in Puliyur village, Kodambakkam. The said Chakravarthy wasthe absolute owner of 3 grounds of land measuring about 7,200 sq.ft. The said Umpathy was theabsolute owner of 2 grounds measuring about 4,800 sq.ft in the same property. At the time ofregistration of the document in favour of the above two persons, the vendor promised to furnish thecopy of the proper layout plan to them. However, when the said parties found that there were noproper layout or even a rough sketch, leading to difficulties in identifying the boundaries, thepurchasers viz., Chakravarthy and Umapathy approached J.Mahalingam, the assessee herein,seeking his services for getting necessary patta as well as for getting the necessary layout of theproperties purchased by them. 3. Incidentally, it is a matter of record that the said J.Mahalingam is a practising Advocate. It is amatter of record that with the object of getting patta and layout, the owners of the property werestated to have entered into an agreement with J.Mahalingam. In pursuance of the agreement, theowners of the property handed over possession of this property to the assessee. 4. The agreement stated that the assessee herein would undertake the job of preparing a sketch ofthe entire area and obtain patta from the Revenue Authorities. For the services to be rendered bythe assessee herein, the owners agreed to transfer 3 grounds of land in T.S.No.35, Block No.1,Village No.109, Puliyur Village, Kodambakkam, Madras and that the owners would take one groundeach as apportioned by the assessee herein. The agreement has specifically pointed out that afterobtaining patta in the names of the owners, the assessee herein would take possession of theproperty and obtain patta in the names of the owners, Umapathy and Chakravarthy. Thereupon, theywould transfer the rights of 3 grounds of plot to the assessee free of cost as the assessee would beincurring huge expenses in preparing the plan and in the process of obtaining patta. 5. It is a matter of record that there were certain acquisition proceedings in respect of certainproperties around the subject property and an Award Proceedings was there by the AcquisitionTahsildar and the compensation amount was deposited in the City Civil Court under Section 30 ofthe Land Acquisition Act. The proceedings were referred to the Civil Court and as on the date of theagreement, acquisition proceedings were pending adjudication. 5. It is a matter of record that there were certain acquisition proceedings in respect of certainproperties around the subject property and an Award Proceedings was there by the AcquisitionTahsildar and the compensation amount was deposited in the City Civil Court under Section 30 ofthe Land Acquisition Act. The proceedings were referred to the Civil Court and as on the date of theagreement, acquisition proceedings were pending adjudication. 6. With the above facts in background, the owners of the property approached the assessee for hisassistance. Subsequent to this agreement, the owners of the property viz., Chakravarthy andUmapathy executed a General Power of Attorney registered in the Office of Sub-Registrar, AnnaNagar empowering the assessee herein to apply for patta in the owners' name and sell 3 grounds ofland and that the remaining 2 grounds should be handed-over to the owners viz., Chakravarthy andUmapathy after fencing for their enjoyment. Accordingly, the original title itself was handed-over tothe assessee as their Power of Attorney and the said Deed of Document was executed on 21.08.1996. 7. It is further found that there was a sale agreement entered into between the owners of the property viz., Chakravarthy and Umapathy as Vendors 1 and 2 and the assessee herein as aconfirming party and M/s.Indu Projects Ltd., as Purchaser on 28th December 2005. 8. Referring to the Deed of General Power of Attorney dated 21.08.1996, giving the assessee fullpower to sell three grounds of property, an agreement was executed to transfer the property of anextent of 3 grounds to the purchaser on a sale consideration of Rs.1,50,00,000/- (Rupees One Croreand fifty lakhs only). The said amount was to be paid by the purchaser to the Vendors andConfirming Party (the assessee herein) at Rs.30,00,000/- (Rupees Thirty Lakhs only) in favour ofChakravarthy, Rs.30,00,000/- (Rupees Thirty Lakhs only) in favour of Umapathy and Rs.90,00,000/-(Rupees Ninety Lakhs only) in favour of the assessee as confirming party. The Agreement furtherpointed out that the Vendors and the Confirming Party agreed to adjust the sum towards the saleconsideration and thereby releasing the purchaser from any further payment whatsoever towardsthe sale consideration. Evidently the sale agreement did not mention about the first agreementbetween the assessee and the owners of the property viz., Chakravarthy and Umapathy. 9. In the background of these facts, when the assessment was taken up for consideration for the year2006-07, the Assessing Authority rejected the case of the assessee offering the considerationreceived on sale of the property, for capital gains. The order of assessment pointed out to theagreement dated 10.10.1995 and held that the role of the assessee was only that of a Professional;consequently, the receipt was to be assessed as income from professional services. 10. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax(Appeals), wherein, the Commissioner of Income Tax (Appeals) reasoned out that if the transactionwas to be taken as for rendering professional services, then the receipt from the professional servicewould generally be limited to minimum 5% to 10% in most of the cases. However, to say that thereceipt of 60% of total sale consideration as 'business income' and treating it as such was devoid oflogic or merit. In that view of the matter, the Commissioner of Income Tax (Appeals) allowed theappeal, directing the Assessing Officer to treat the amount as 'capital gains' after ascertaining theperiod of holding and to re-work the capital gains accordingly. 10. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax(Appeals), wherein, the Commissioner of Income Tax (Appeals) reasoned out that if the transactionwas to be taken as for rendering professional services, then the receipt from the professional servicewould generally be limited to minimum 5% to 10% in most of the cases. However, to say that thereceipt of 60% of total sale consideration as 'business income' and treating it as such was devoid oflogic or merit. In that view of the matter, the Commissioner of Income Tax (Appeals) allowed theappeal, directing the Assessing Officer to treat the amount as 'capital gains' after ascertaining theperiod of holding and to re-work the capital gains accordingly. 11. Aggrieved by the said order, the Revenue went on appeal before the Income Tax AppellateTribunal. The Tribunal rejected the Revenue's appeal and referred to the agreement dated10.10.1995 executed between the owners of the property and the assessee and pointed out that thenarration in the agreement clearly pointed out that the property in the hands of the original ownerswas more of a liability and considering the difficulty in obtaining patta, the owners consequentlyapproached the assessee for obtaining patta and offered 3 grounds of lands towards the charges forrendering services and the expenses on getting the patta and the layout. 12. The Income Tax Appellate Tribunal held that once the patta was obtained and the plots wereproperly identified, the original owners were to transfer title to the assessee. In terms of theagreement, possession was immediately handed over to the assessee. It is important to note that thepower to sell the land does not find place in the agreement dated 10.10.1995 and the assessee didnot act in the capacity of a professional Advocate to render the services. Considering the above saidcircumstances and going by the definition of 'transfer' as per Section 2(47) of the Income Tax Act,1961, the Income Tax Appellate Tribunal held that the receipts at the hands of the assessee couldonly be treated as income available for capital gains. The Income Tax Appellate Tribunal furtherpointed out that even though the assessee was put in possession of 5 grounds of land, what wasoffered in the agreement as towards his services was only 3 grounds. The General Power of Attorneyexecuted in favour of the assessee also pointed out that out of 5 grounds, only 2 grounds were to beretained for the benefit of the owners and 3 grounds was given to the assessee. Thus, the Tribunalpointed out that "receipts" should be read in the context of the transfer of 3 grounds "for the services rendered" and not "for the professional services rendered" or "for services rendered as alawyer". Thus, the Department's contention therein was not accepted on its face value. In this viewof the matter, the Revenue's appeal was dismissed. Aggrieved by the same, the present Tax CaseAppeal is preferred by the Revenue. 13. Learned Standing counsel appearing for the Revenue submitted that considering the fact thatthe assessee is a practising lawyer and had received the consideration on the sale of the propertyand the income received need not be one in cash, the consideration in the form the lands given couldbe treated as "Professional Receipt". The owners took the service of the assessee only in the capacityof "Advocate" and the assessment be accordingly made treating the receipts as professional income. 13. Learned Standing counsel appearing for the Revenue submitted that considering the fact thatthe assessee is a practising lawyer and had received the consideration on the sale of the propertyand the income received need not be one in cash, the consideration in the form the lands given couldbe treated as "Professional Receipt". The owners took the service of the assessee only in the capacityof "Advocate" and the assessment be accordingly made treating the receipts as professional income. 14. We do not agree with the said line of reasoning of the learned Standing counsel appearing forthe Revenue, since, the original agreement dated 10.10.1995 between the assessee herein and theoriginal owners viz., Chakravarthy and Umapathy, makes no reference at all to the profession statusof the assessee for taking the services of the assessee. There is not even a mention about theassessee being an Advocate and his services was taken by the original owners of the property only inthat capacity. In the circumstances, in the absence of any material to show that the payment wasmade only for the services rendered by the assessee as an Advocate, we do not accept the plea of theRevenue that the receipt was to be assessed as professional income. 15. Section 2 (47) of the Income Tax Act, 1961 defines "transfer" to include any transaction involvingthe allowing of the possession of any immovable property to be taken or retained in partperformance of a contract of the nature referred to in Section 53A of the Transfer of Property Act,1882 (4 of 1882). Section 2 (47) reads as under:- 2. Definitions (47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in- trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken orretained in part performance of a contract of the nature referred to in section 53A of the Transfer ofProperty Act, 1881 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operativesociety, company or other association of persons or by way of any agreement or any arrangement orin any other manner whatsoever)which has the effect of transferring, or enabling the enjoyment of,any immovable property." 16. Section 53A of the Transfer of Property Act defines "Part performance" in the following manner:-" Where any person contracts to transfer for consideration any immovable property by writingsigned by him or on his behalf from which the terms necessary to constitute the transfer can beascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or anypart thereof, or the transferee, being already in possession, continues in possession in partperformance of the contract and has done some act in furtherance of the contract,and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer that the transfer has not beencompleted in the manner prescribed therefor by the law for the time being in force, the transferor orany person claiming under him shall be debarred from enforcing against the transferee and personsclaiming under him any right in respect of the property of which the transferee has taken orcontinued in possession, other than a right expressly provided by the terms of the contract ;Provided that nothing in this section shall affect the rights of a transferee for consideration who hasno notice of the contract or of the part performance thereof. " then, notwithstanding that where there is an instrument of transfer that the transfer has not beencompleted in the manner prescribed therefor by the law for the time being in force, the transferor orany person claiming under him shall be debarred from enforcing against the transferee and personsclaiming under him any right in respect of the property of which the transferee has taken orcontinued in possession, other than a right expressly provided by the terms of the contract ;Provided that nothing in this section shall affect the rights of a transferee for consideration who hasno notice of the contract or of the part performance thereof. " Under Section 2(47) of the Act, "transfer" is an inclusive definition and therefore it extends to eventsand transactions which may not otherwise be 'transfer' according to its ordinary popular naturalsense; the definition also mentions such transaction as sale, exchange etc to which the word"transfer" would properly apply on its popular and natural import. 17. Thus a reading of Sections 5 and 53-A of the Transfer of Property Act, 1882, shows that partperformance is assumed where any person contracts to transfer for consideration, any immovableproperty and in pursuance of which possession is handed over to the other party towards partperformance of the contract. 18. Reading Sections 5 and Section 53-A of the Transfer of Property Act, 1882 with Section 2(47) ofthe Income Tax Act, 1961 on facts, we find that the entrustment of the possession of the entire 5grounds to the assessee was with the specific object of getting patta and layout of the property. Thesale agreement makes it very clear that the transfer of 3 grounds of land to the assessee herein wasintended as by way of consideration for securing patta and lay-out and as such, the original ownershad entrusted the entire land to the assessee. 19. Thus, when possession was given to the assessee enabling exercise of general control fordischarging certain services, in consideration whereof the assessee was to be given 3 grounds ofland coupled with the power given to the assessee to sell the 3 grounds, we hold, rightly theassessee placed reliance on Section 2(47)(v) of the Income Tax Act, 1961 read with Section 53A ofthe Transfer of Property Act, 1882 that the receipt would attract capital gains at his hands. There isnothing on record to show that the services to be rendered was taken in the capacity as a lawyer. 20. On the admitted fact that the assessee had performed his part of contract when the sale wassought to be effected, rightly, the assessee acted as 'Confirming Party' as per the terms of theagreement and the assessee was given Rs.90,00,000/-. 21. In the background of the above facts, we do not accept the case of the Revenue that on the mereincident of the assessee being a practising advocate, he is dis-entitled to claim the receipt as incomeassessable under capital gains. In the circumstances, the Tax Case (Appeal) filed by the Revenue isrejected. The substantial questions of law are answered in favour of the assessee and against theRevenue. No costs. To 1. Commissioner of Income Tax,Chennai2. The Commissioner of Income Tax (Appeals) VI121, Nungambakkam High Court,Nungamabakkam,Chennai-34 3. The Income Tax Appellate Tribunal,Chennai Bench 'B'Chennai Bench 'B' nvsri