+Ita 55/2014, C.m. Appl. 2383/2014 & 2384/2014Sh. Gulshan Malik v. Commissioner Of Income Tax…

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 18.02.2014Pronounced on: 14.03.2014 +ITA 55/2014, C.M. APPL. 2383/2014 & 2384/2014SH. GULSHAN MALIK …..AppellantThrough:Sh.PrakashKumarandSh.SheelVardhan, Advocates. Versus COMMISSIONER OF INCOME TAX…..Respondents Through: Sh. Rohit Madan, Sr. Standing Counsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE R.V. EASWAR MR. JUSTICE S. RAVINDRA BHAT % 1.This is an appeal filed against the order of the Income TaxAppellantTribunal(“ITAT”)inITANo.161/Del/2012dated27.02.2013, which upholds the order of the Commissioner of IncomeTax (Appeals) (“CIT-A”) confirming the assessment order of theAssessing Officer (“AO”). The short question of law that arises iswhether on facts, capital gains are taxable as long-term or short-termcapital gains. The brief facts are as follows: 2.The appellant (the assessee) and his wife had booked anapartment vide an application dated 31.07.2004, by payment of abooking amount of ` 2,00,000/-on 3.08.2004 and consequently, it isclaimed, acquired rights or interests in the same. The builder DLFUniversalLimited(“DLF”)issuedaletterdated6.08.2004 provisionally allotting the apartment and two parking spaces, statingspecifically the receipt of ` 2,00,000/- (Annexure 3). Consequent tothis, regular payments were made per the payment plan of thebuilder. A buyer’s agreement was executed on 4.11.2004 betweenDLF and the allottees i.e. the appellant and his wife. Per the paymentschedule, a total payment of ` 87,12,500/- was made from31.07.2004 to 03.08.2006 towards the purchase of the apartment.Following this, the appellant and his wife entered into an agreementto sell dated 2.11.2007 to sell their booking rights/rights or interest inthe apartment to Smt. Srilekha Nayak for a sum of ` 1,44,87,500/-.The period between acquisition and sale of the booking rights in theapartment is claimed to be 39 months and 2 days, thus greater than36 months, i.e. from 31.07.2004 to 02.11.2007. The appellantsubsequently filed return of income on 31.3.2009 for the assessmentyear 2008-2009, with income declared to be ` 3,84,874/-. In thecomputation of income, the appellant had declared a long termcapitalgainof`31,35,740/-onthesaleofbookingrights/extinguishment of rights in the apartment. An exemption wasclaimed under Section 54 of the Act, 1961 as the same was investedin purchase of another apartment in June 2008. 3.After the return was processed under Section 143(1) of the Actand the case was thereafter selected for compulsory scrutiny, anorder of assessment was passed under Section 143(3) of the Act on30.12.2010 whereby an addition of ` 28,20,000/- was made by the 3.After the return was processed under Section 143(1) of the Actand the case was thereafter selected for compulsory scrutiny, anorder of assessment was passed under Section 143(3) of the Act on30.12.2010 whereby an addition of ` 28,20,000/- was made by the Assessing Officer (AO) to the income declared by the appellant onaccount of short-term capital gain. No deduction under Section 54was allowed since it is available only in respect of long-term capitalgains. The total income was thus assessed to be ` 32,10,145/-. Theappeal against the order of the AO before CIT-A was dismissed by anorder dated 25.11.2011, on the grounds that the rights in theapartment accrued to the appellant only when the apartment waspurchased by the agreement dated 4.11.2004. It was also noted thatonly rights in the property and not title were transferred vide theagreement of 2.11.2007 as the assessee never had possession of theapartment. The assessee’s second appeal before the ITAT was alsodismissed vide order dated 27.02.2013 on the ground that no rightsin the property accrued to the appellant/allottees on the date offiling of the application for allotment i.e. 31.7.2004, as notes 1 and 2enclosed with the confirmation letter dated 06.08.2004 received inresponse to the allotment application states clearly that no rights tothe property would accrue to the allottees until the buyer’sagreement was signed and returned; the buyer’s agreement wasexecuted only on 4.11.2004. Consequently, the ITAT found that thecapital asset was sold within a period of 36 months thus renderingthe profits from the sale taxable as short-term capital gains, which donot qualify for the deduction under Section 54. 4.The question that arises for consideration is whether any rightaccrued to the assessee by way of the application for allotment that can be considered a capital asset; this would determine whether thedate of application for allotment of the apartment or the date of thebuyer’s agreement ought to be considered the date of acquisition ofthe capital asset that was sold on 2.11.2007 as well as whether thecapital gain is taxable as long-term or short-term capital gains. 5.The appellants submit that by way of application dated31.7.2004 for allotment and payment of the booking amount, theappellant had acquired the“right to purchase the property”/bookingrights, which were extinguished by execution of the agreement to selldated 2.11.2007 in favour of Smt. Srilekha Nayak, thus making hisbooking rights a long-term capital asset, held for a period of 39months and 2 days. Alternatively, the appellant submits placingreliance on Commissioner of Income Tax v. Ved Parkash and Sons(HUF), [1994] 207 ITR 148 that rights in the apartment were acquiredon the date of receipt of allotment letter i.e. 6.8.2004, by which theapartment was provisionally allotted to him, which rights were soldon 2.11.2007 thus making his right in the apartment a long-termcapital asset. The two grounds for this submission are first, thatSection 2(47) of the Act, which defines “transfer” in relation to acapital asset, is a wide and inclusive definition that encompasseseven transfer of a right in property, thus including within its ambit,transfer of booking rights, second, that a combined reading ofSections 2(14) and 2(47) of the Act show that transfer of a capitalasset is not restricted to transfer of ownership in immovable property alone. The learned counsel for the Revenue, on the other hand, relieson the order of the learned ITAT member who held that bookingrights accrued in the assessee only once the buyer’s agreement of4.11.2004 was signed, thus making the profits from sale taxable asshort-term capital gains. 6.It would be appropriate to extract Section 2(14), 2(42A), 2(47)here in relevant part. Section 2 of the Act reads: “2.In this Act, unless the context otherwise requires, – (14) "capital asset" means property of any kind held byan assessee, whether or not connected with his businessor profession, but does not include – xxx alone. The learned counsel for the Revenue, on the other hand, relieson the order of the learned ITAT member who held that bookingrights accrued in the assessee only once the buyer’s agreement of4.11.2004 was signed, thus making the profits from sale taxable asshort-term capital gains. 6.It would be appropriate to extract Section 2(14), 2(42A), 2(47)here in relevant part. Section 2 of the Act reads: “2.In this Act, unless the context otherwise requires, – (14) "capital asset" means property of any kind held byan assessee, whether or not connected with his businessor profession, but does not include – xxx (42A) "short-term capital asset" means a capital assetheld by an assessee for not more than thirty-six monthsimmediately preceding the date of its transfer: xxx (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 ownerthereof into, or is treated by him as, stock-in-trade of abusiness 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 thepossession of any immovable property to be taken orretained in part performance of a contract of the naturereferred to in section 53A of the Transfer of Property Act,1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming amember of, or acquiring shares in, a co-operative society,company or other association of persons or by way ofany agreement or any arrangement or in any othermanner whatsoever) which has the effect of transferring,or enabling the enjoyment of, any immovable property. Explanation 1.-- xxx Explanation 2.--For the removal of doubts, it is herebyclarified that "transfer" includes and shall be deemed tohave always included disposing of or parting with anasset or any interest therein, or creating any interest inany asset in any manner whatsoever, directly orindirectly, absolutely or conditionally, voluntarily orinvoluntarily, by way of an agreement (whether enteredintoinIndiaoroutsideIndia)orotherwise,notwithstanding that such transfer of rights has beencharacterised as being effected or dependent upon orflowing from the transfer of a share or shares of acompany registered or incorporated outside India….” 7.It is clear that a “capital asset” under the Act is property of“any kind” that is “held” by the assessee. Necessarily, a capital assetmust be transferable. Thus, to understand what kind of property canbe considered a capital asset, it would be apposite to refer to thedefinition of transfer in Section 2(47) of the Act. Section 2(47)(v) and(vi), and Explanation 2 make it adequately clearthat possession,enjoyment of immovable property, as well as an interest in any asset 7.It is clear that a “capital asset” under the Act is property of“any kind” that is “held” by the assessee. Necessarily, a capital assetmust be transferable. Thus, to understand what kind of property canbe considered a capital asset, it would be apposite to refer to thedefinition of transfer in Section 2(47) of the Act. Section 2(47)(v) and(vi), and Explanation 2 make it adequately clearthat possession,enjoyment of immovable property, as well as an interest in any asset are all transferable “capital assets”. The reference to acquisition “byway of any agreement or any arrangement or in any other mannerwhatsoever” establishes that it is not conveyanceof property or thedoctrine of part performance (enacted through Section 53A of theTransfer of Property Act) which result in enforceable rights, for thepurposes of the Income Tax.The scheme of the Act puts it beyonddoubt that even rights or interests in a property are kinds of propertythat are transferable capital assets. Thus, there is no doubt thatbooking rights or rights to purchase the apartment or rights to obtaintitle to the apartment are also capital assets that can be transferable.However, even while this Court agrees with the submissions of theappellant, it is pertinent to note that this question does not arise inthese facts. Neither the CIT-A nor the ITAT have held that a capitalasset can only be title to/ownership of the apartment. The order ofthe CIT-A locates the source of the booking rights i.e. date ofacquisition of capital asset as the buyer’s agreement dated4.11.2004, which finding is subsequently confirmed by the ITAT byadditionally relying on the receipts at the time of confirmation ofallotment. Thus, in these facts, the question of whether the bookingrights are a transferable capital asset is not contentious. Thejudgment in Ved Parkash (supra) is also consequently of no assistancein this matter since the reasoning therein turns on whether “capitalasset” refers only to title to property as opposed to otherrights/interests in the property. 8.This being the case, the only question that arises forconsideration is whether the booking rights to the apartment accruedto the assessee on the date of application for allotment/confirmationof allotment or on the date of execution of the agreement to sell i.e.the buyer’s agreement. This Court is of the opinion that a right orinterest in an immovable property can accrue only by way of anagreement embodying consensus ad idem. The nature of the rightsought to be transferred here is the right to purchase the apartmentand obtain title, termed “booking rights”. Only that agreement whichintends to convey these rights according to both parties can beconsidered as the source of accrual of rights to the assessee. Theconfirmation letter dated 6.8.2004 (Annexure 3) specifically statesfirst, that no right to provisional/final allotment accrues until theBuyer’s Agreement is signed and returned to the builders and second,that no right to claim title/ownership results from the confirmationletter itself. Thus, it is clear that the Builders do not intend to conveyany right of provisional/final allotment or any right to claimtitle/ownership under the confirmation letter. There being nointentiontoconveyrightsinthisdocument,itwouldbeimpermissible for this Court to find that the right to obtaintitle/“booking rights” emanated from the confirmation letter. Theserights may only be located in the Buyer’s agreement, and thus, thedate of acquisition of the capital asset must be considered the date ofsigning of said agreement i.e. 4.11.2004 9.These rights were transferred by the assessee on 2.11.2007.Thus, this Court is of the opinion that the capital asset in the form ofthese rights was held for a period of 35 months and 28 days, i.e. ashort-term capital asset thus rendering the profits from the transferof this capital asset taxable as short-term capital gains. 9.These rights were transferred by the assessee on 2.11.2007.Thus, this Court is of the opinion that the capital asset in the form ofthese rights was held for a period of 35 months and 28 days, i.e. ashort-term capital asset thus rendering the profits from the transferof this capital asset taxable as short-term capital gains. 10.Ved Parkash (supra), in any event, can be distinguished fromthe facts in this case. In Ved Parkash (supra), the assessee sought toclaim that the date of acquisition of the capital asset was the date ofentering into the agreement to sell with the builder, by which theassessee had also received possession of the property. TheDepartment, on the other hand, claimed that according to theconditions of the agreement, no right, title or interest in the propertywould be conveyed to the assessee until all instalments due andpayable under that agreement were completed. It was also sought tobe argued that the assessee became the titleholder to the propertyonly once all the instalments were paid, and that title to the propertywas the only capital asset that could be transferred. It was in thecontext of these arguments that the Court held first,that it isincorrect to say that the assessee had no right or interest in theproperty until the completion of payment of all instalments under theagreement as the assessee was a beneficial owner from the date ofsigning the agreement, having been put in possession of the propertyas of that date and second, that Section 2(42A) of the Act, in anyevent only uses the term “held” and not “owned”, thus indicating that a capital asset need not only refer to full title over any property.Ved Parkash (supra) can thus be distinguished on two grounds, first,that in the instant matter, booking rights are sought to be sourced intheallotmentapplication/confirmationletterandnotinanagreement to sell, second, no right of possession or similar beneficialinterest was conveyed to the assessee in the instant case when theapplication for allotment was made/confirmation letter was received.The agreement to sell was considered to be the source of a beneficialinterest to the assessee in Ved Parkash (supra) only because the rightof possession had been transferred to the assessee along with theagreement to sell.There cannot be any parity between the allotmentapplication/confirmation letter in the instant case and the agreementto sell in Ved Parkash (supra), since the confirmation letterspecifically states that no right of provisional allotment/finalallotment will result from it to the assessee. 11.This Court is thus of the opinion that there is no legal infirmityin the order of the ITAT. The appeal is thus dismissed along withpending applications. S. RAVINDRA BHAT(JUDGE) MARCH 14, 2014 R.V. EASWAR(JUDGE)