Ita/33/2010 Of The Commissioner Of Income Tax v. M/S.harbour View

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 24TH DAY OF SEPTEMBER 2018 / 2ND ASWINA, 1940 ITA.No. 33 of 2010 AGAINST THE ORDER/JUDGMENT IN ITA 509/COCH/2006 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 20-04-2009 APPELLANT/S:/APPELLANT/REVENUE : THE COMMISSIONER OF INCOME TAX,COCHIN. BY SRI.PKR MENON, SR. COUNSEL, GOI (TAXES)ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S:/RESPONDENT/ASSESSEE : M/S.HARBOUR VIEW(NOW KNOWN AS HARBOUR VIEW RESIDENCY PVT.LTD.), OPP. COCHIN SHIPYARD, M.G.ROAD, ERNAKULAM. BY ADVS.SRI.T.M.SREEDHARAN (SR.)SMT.BOBY M.SEKHARSMT.DIVYA RAVINDRANSRI.V.P.NARAYANAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24.09.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T Ashok Menon, J. The Revenue is in appeal under Section 260A of theIncome Tax Act, 1961 ('Act' for short) challenging thefindings of the Income Tax Appellate Tribunal, CochinBench in ITA No.509/COCH/2006 dated 20.4.2009 for theassessment year 1999-2000. The following questions oflaw arise for consideration: “1.Whether, on the facts and in thecircumstances of the case, the assessee isexigible to income tax for short termcapital gains in the assessment year 1999-2000? 2.Whether, on the facts and in thecircumstances of the case:(i)In the light of the law relating topart performance (Sec.2(47)(v) of theIncome Tax Act read with Section 53A ofthe TP Act) the Tribunal is right in lawtohaveconsideredeventsandcircumstances beyond the previous yearrelevant to the assessment year 1999-2000?(ii) If the answer to the above questionis in the negative is not the order ofthe Tribunal against law?(iii) If the Tribunal is justified ininterferingwiththeorderofassessment?”2.The facts in brief are thus: Following a search and seizure under Section 132 of theAct at the premises of the assessee on 6.8.2003, notice was issued under Section 153A read with Section 153C ofthe Act on 5.8.2004. The assessee filed a return on27.12.2004 declaring 'nil' income, consequent to whichnotice was issued under Section 143(2) and assessmentcompleted making an addition of Rs.1,87,00,000/- asbeing concealed income under 'short-term capital gain'.The assessee, which was a partnership firm and laterregistered as a Company, owns 30.7 cents of land in aprime location at Ernakulam. While the assessee was afirm, it started construction of a building and fromout of that, a constructed area of 4,300 sq.ft. on theground floor was agreed to be sold to M/s.Sai Sales andServices, vide Annexure-A agreement dated 12.4.1996 fora sale consideration of Rs.2.58 crores and received asum of Rs.1.25 crores. The building was intended forthe purpose of Indica Car Showroom. However, theshowroom was not commenced due to technical reasons andthereafter, M/s.Sai Sales and Services formed anotherCompany by name M/s.Malabar Automobiles (P) Ltd. (MAPL)and entered into Annexure-B renewed agreement with theassessee on 4.12.1998 for the same sale considerationand with the same advance; which was adjusted by way of refund and receipt. One-twelfth undivided share in theland over which the building was constructed, was alsoagreed to be sold to the purchaser. Permissions wereobtained under Section 269UL of the Act on 6.1.1999 forregistration of the sale deed. According to theRevenue, possession was handed over to the purchaser inpart performance of the contract. The AssessingOfficer (AO) had received the sworn statement(Annexure-C) of the Managing Partner and also letterdated 28.8.2003 (Annexure-D) of the assessee admittingthat the possession of the property was handed over,and that MAPL had possession of the property since4.12.1998. Based on these admissions of partperformance, the assessee was proceeded against. Noreturn for the year under consideration was filed tillthe search was effected and even then the assesseefailed to disclose any capital gain on account oftransfer. The AO estimated the capital gains at Rs.1.87crores and subjected the same to tax. The assessmentorder is Annexure-E. 3.Following a dispute between the proposedvendor and vendee, the agreement was terminated by mutual consent during the financial year 2003-2004 andRs.1.25 crores was refunded to M/s.MAPL. The balancenon-refundable amount of Rs.1.05 crores was creditedtowards the profit and loss account for the year ending31.3.2004 by the assessee and offered for tax as incomefrom other sources. The Assessing Officer did notaccept the objections raised and explanations offered,and went ahead to complete the assessment by fixing thetotal income at Rs.1,87,00,000/- 4. Aggrieved by the assessment, the assesseewent on appeal before the Commissioner of Income Tax(Appeals-I), Kochi and that was allowed vide Annexure-Forder. Revenue challenged that order before the IncomeTax Appellate Tribunal and vide Annexure-G order, theappeal was dismissed. Hence, the Revenue is aggrievedand before us. 5.The learned Senior Standing Counsel, Government of India (Taxes) states that the Tribunalfailed to note that except a nominal balance ofRs.12,92,649/-, the entire sale consideration was paidby M/s.MAPL to the assessee. The possession was alsotaken over. The Tribunal failed to note the conduct of the parties to the agreement that the act of theparties to the agreement would amount to partperformance under Section 53A of the Transfer ofProperty Act, 1882 ('TP Act' for short), which wouldsquarely bring it under the purview of transfercontemplated under Section 2(47)(v) of the Act. TheTribunal gave much importance to the events andcircumstances, which transpired in the previousassessment year 1999-2000 and concluded that theparties have voluntarily rescinded from the agreementand a major portion of the consideration was alsoreturned to the assessee and therefore, the Tribunalheld that, in the circumstances, the AO was wrong infinding that there was a transfer of possession andpart performance of contract making out the transfer toresult in accrual of 'short term capital gains' at thehands of the assessee, and confirmed the order of theCIT (Appeals) deleting the assessment and dismissingthe appeal, which is not sustainable, is thesubmission. 6.Per contra, the assessee would contend thatunless there is transfer of asset as envisaged under 6.Per contra, the assessee would contend thatunless there is transfer of asset as envisaged under Section 2(47), no capital gains can be computed underSection 45. Electricity and phone connections weretaken by M/s.MAPL with the intention to start business,which was a non starter, and ultimately ended up inrescission of contract. The learned counsel for theassessee points out that there is no recital in theagreement for sale produced at Annexures-A and Bregarding possession being handed over to the vendee.Certain acts such as taking of electric and phoneconnections, alone will not amount to transfer ofpossession in part performance of contract, unless itis so explicitly stated in the agreement for sale.Neither Annexure-A nor Annexure-B indicates suchtransfer of possession as is required under Section 53Aof the TP Act. That apart, the learned counsel alsopoints out Section 17(1A) of the Registration Act,1908, which makes it compulsory for a sale agreementto be registered to have effect of part performanceunder section 53A of the TP Act. Unless such anagreement was registered, it would not have any effectin law. That is, in the eyes of law, there would be no contract that could be taken cognizance of for thepurpose of section 53A of the TP Act. 7.It is argued, in the instant case, that theagreement at Annexures-A and B have not been registeredand therefore, there is no propriety in stating thattransfer as contemplated under Section 2(47) of the Acthas taken place. The learned counsel also relies on thedecision of the Honourable Supreme Court in (2017) 398ITR 0531 (SC) [Commissioner of Income Tax v. BalbirSingh Maini] in support of his arguments. 8.There is no dispute that except for a balancesum of Rs.12,92,649/-, the entire sale considerationwas paid by M/s.MAPL to the assessee. Subsequent tothe rescission of the contract, the assessee hasreturned only a sum of Rs.1.25 crores and retained thebalance. The contention of the assessee, which isupheld by the Tribunal, is that there was no partperformance of the contract coming within the purviewof Section 53A of the TP Act and therefore, theprovisions of Section 2(47) of the Act will not beattracted. The relevant portion of Section 2(47)(v) ofthe Act reads thus: “Section 2(47) “transfer” in relation tocapital asset, includes,-(v) any transaction involving the allowing ofthe possession of any immovable property tobe taken or retained in part performance of acontract of the nature referred to in section53A of the Transfer of Property Act, 1882.”9.A reading of the above cited provision would indicate that the possession of the immovable property following a transaction; enabling retention by theexpected vendee, would be part performance of thecontract as contemplated under Section 53A of the TPAct. Section 53A of the TP Act reads thus: “Section 53A : Part performance : Where anypersoncontractstotransferforconsideration any immovable property bywriting signed by him or on his behalf fromwhich the terms necessary to constitute thetransfer can be ascertained with reasonablecertainty, and the transferee has, in partperformance of the contract, taken possessionof the property or any part thereof, or thetransferee, being already in possession,continues in possession in part performanceof the contract and has done some act infurtherance of the contract, and the transferee has performed or iswilling to perform his part of the contract, then, notwithstanding that where thereis an instrument of transfer, that thetransfer has not been completed in the mannerprescribed therefor by the law for the timebeing in force, the transferor or any personclaiming under him shall be debarred fromenforcing against the transferee and personsclaiming under him any right in respect ofthe property of which the transferee has and the transferee has, in partperformance of the contract, taken possessionof the property or any part thereof, or thetransferee, being already in possession,continues in possession in part performanceof the contract and has done some act infurtherance of the contract, and the transferee has performed or iswilling to perform his part of the contract, then, notwithstanding that where thereis an instrument of transfer, that thetransfer has not been completed in the mannerprescribed therefor by the law for the timebeing in force, the transferor or any personclaiming under him shall be debarred fromenforcing against the transferee and personsclaiming under him any right in respect ofthe property of which the transferee has taken or continued in possession, other thana right expressly provided by the terms ofthe contract: Provided that nothing in this sectionshall affect the rights of a transferee forconsideration who has no notice of thecontract or of the part performance thereof.”10.Section 53A was inserted to the TP Act by the Transfer of Property Amendment Act, 1929 to importinto India the equitable doctrine of part performance. The Hon'ble Supreme Court Court has in 2002 (3) SCC676 at 682[Shrimant Shamrao Suryavanshi & Anr. v.Pralhad Bhairoba Suryavanshi (D) by LRs. & Ors.], stated as follows: "16. But there are certain conditions whichare required to be fulfilled if a transfereewants to defend or protect his possessionunder S.53 - A of the Act. The necessaryconditions are: (1) there must be a contract to transfer forconsideration of any immovable property; (2) the contract must be in writing, signed bythe transferor, or by someone on his behalf; (3) the writing must be in such words fromwhich the terms necessary to construe thetransfer can be ascertained; (4) the transferee must in part - performanceof the contract take possession of theproperty, or of any part thereof; (5) the transferee must have done some act infurtherance of the contract; and (6) the transferee must have performed or bewilling to perform his part of thecontract."11.To claim benefit of part performance underSection 53A, the above mentioned requirements must be satisfied. The thrust of the argument advanced by thelearned Senior Counsel appearing for the assessee isthat the Revenue has not succeeded in establishing thatSection 53A of the TP Act is attracted in this case. Itis pointed out that the documents do not indicatehanding over of possession, which is an essentialingredient under Section 53A of the TP Act and in theabsence of that, possession cannot be one under partperformance of the contract and therefore, does notattract Section 2(47)(v) of the Act. 12.It is true that the documents at Annexures-A and B do not necessarily spell out handing over ofpossession, but the parties to the agreement admithanding over of possession. In the deposition given onbehalf of the assessee before the AO, it is submittedthat the possession of the property was handed over tothe expected vendee and that the vendee continues toremain in possession. The vendee, M/s.MAPL, haswritten a letter to the Department, which is producedat Annexure-D admitting that the possession of thebuilding was taken by them on 4.12.1998. Hence, interse parties, there is no dispute that the possession was handed over in pursuance to the agreement for sale. Itis also admitted in the deposition as well as in theletter that the building continues to be in thepossession of M/s.MAPL during the assessment period. handed over in pursuance to the agreement for sale. Itis also admitted in the deposition as well as in theletter that the building continues to be in thepossession of M/s.MAPL during the assessment period. 13.There is no doubt that only when theagreement to sell is coupled with delivery ofpossession, does it confer right on the vendee todefend his possession under Section 53A of the TP Act.In this proceedings, however, we are not concernedabout whether the vendee is entitled to protect theirpossession or not. What we are concerned is whetherthere was a sale and handing over of possession ascontemplated under Section 53A of the TP Act attractingSection 2(47)(v) of the Act. The decision in BalbirSingh Maini(supra) can be distinguished on facts. Inthat case, there was a tripartite Joint DevelopmentAuthority(JDA) between the owner of the land i.e,Pujabi Co-operative Housing building Society Ltd., andthe developers, Hash Builders Pvt. Ltd., and TataHousing Development Company Ltd. The JDA was to developthe land belonging to the Society. Different amountswere payable and flats allotable to members having different plot sizes from which some installments werepaid. Due to different reasons, the JDA did not takeoff the ground. The Assessing Officer held that sincephysical and vacant possession of the land had beenhanded over under the JDA, the same would tantamount to“transfer” within the meaning of Sections 2(47)(ii),(v)and (vi) of the Act. Long term capital gain was alsoassessed. According to the assessee therein, thepossession of the land was handed over as only alicence to develop the land and not a possession ascontemplated under Section 53A. The project was alsoterminated. The High Court accepted that argument. TheHon'ble Supreme Court did not find it necessary to gointo the question of whether the possession was only alicence to develop the land, because, the JDA was foundto be not having any efficacy in law due to nonregistration of the agreement as required under Section17(1A) of the Registration Act. 14. The above cited decision relied upon by thelearned Senior Counsel for the assessee pertains tohanding over of possession of land for the purpose ofdevelopment and construction by means of a tripartite agreement (JDA) with the developers and not anagreement for outright agreement for sale as it is inthe instant case, and therefore, the decision has noapplication to the case in hand. In the instant case,in view of the categorical admission by both theparties to the agreement that possession was handedover, the AO rightly took the view that the sale is oneas contemplated under Section 53A of the TP Act. Hisview is supported by the fact that in part performanceof contract, the vendee has done something in theproperty, such as electrification and drawing oftelephone lines. The vendee could not have done suchacts without taking possession of the building inpursuance of the agreement. 15.Another argument advanced by the learnedSenior Counsel for the assessee is that partperformance is not valid because the agreement has notbeen registered as is required under the provisions ofSection 17(1A) of the Registration Act. The relevantprovision reads thus:- “17Documents of which registration iscompulsory- (1A) The documents containingcontracts to transfer for consideration, anyimmovable property for the purpose of 15.Another argument advanced by the learnedSenior Counsel for the assessee is that partperformance is not valid because the agreement has notbeen registered as is required under the provisions ofSection 17(1A) of the Registration Act. The relevantprovision reads thus:- “17Documents of which registration iscompulsory- (1A) The documents containingcontracts to transfer for consideration, anyimmovable property for the purpose of section 53A of the Transfer of Property Act,1882 (4 of 1882), shall be registered ifthey have been executed on or after thecommencement of the Registration and otherrelated laws (Amendment) Act, 2001, and ifsuch documents are not registered on orafter such commencement, then, they shallhave no effect for the purposes of the saidsection 53A.”16.Additional condition of registration of anagreement for sale in which there is a claim of partperformance, was introduced only by way of amendment ofthe Registration Act in 2001. The propositionpropounded in Balbir Singh Maini (supra), on the basisof Section 17(1A) has no application because, thetransaction in that case was in 2007, subsequent to theamendment of the Registration Act. Annexures-A and Btransactions took place much prior to the amendment,and sub-Section (1A) of Section 17 of the RegistrationAct has no retrospective effect. Hence, the argument ofthe learned counsel that Section 53A of the TP Act willnot be attracted as the agreements are not registered,will not hold good. 17.Hence, we find that the Tribunal went wrongin holding that the possession was not handed over inpursuance to the agreement for sale as contemplatedunder Section 53A of the TP Act. Once the sale agreement comes under the provisions of Section 53A ofthe TP Act, handing over of possession takes place andthe provisions under Section 2(47) would squarelyapply. That apart, the argument of the learned SeniorCounsel for the assessee that contract was subsequentlyrescinded will not be of any help because the contractwas rescinded only subsequent to the assessment yearand what we are concerned for the purpose of the Act isthe transactions which took place during the assessmentyear. The fact that the contract was subsequentlyterminated on mutual consent will not improve the caseof the assessee to wriggle out of the the purview ofSection 2(47) of the Act and the liability to pay taxon short term capital gains under Section 45 of theAct. 18. Here, to dispel any reasonable doubt whichmay arise, we extract below one of the conditionsstated in Shrimant Shamrao Suryavanshi (supra) : “(6) the transferee must have performed or bewilling to perform his part of the contract." Here the agreement was rescinded between the partiesbut long after the assessment year in which theagreement was entered into and possession handed over. At least when the returns were filed there was a rightconferred on the tranferee as per Section 53A of theT.P. Act. The transferor though subsequently wasabsolved from the rigour of Section 53A; in the closeof assessment year was obliged to return the capitalgains as per Section 2(47) (v) of the IT Act. The ITAct by the definition clause includes a transaction inaccordance with Section 53A as a transfer in relationto a capital asset. The consequence flowing from theinclusive definition has to be given effect as on thesubject assessment year and the transferor beingabsolved subsequently from the rigour of Section 53A asagainst the transferee is of no consequence in applyingthe rigour under the taxation enactment. Thetransaction failed and the parties settled betweenthemselves, but the voluntary act of the parties cannotefface the tax liability. We hence answer thequestions of law on the facts arising in the above caseagainst the assessee and in favour of the revenue. 19.It is however pertinent to note that capitalgains can be calculated only after computing the valueof the I/12 undivided share of land that was agreed to 19.It is however pertinent to note that capitalgains can be calculated only after computing the valueof the I/12 undivided share of land that was agreed to be transferred as per the agreement, and computationmade in accordance with Section 48 of the Act. Hence, the appeal is only to be allowed settingaside the order of the Appellate Authority and theTribunal. The matter is remitted to the AssessingOfficer for the sole purpose of computation of capitalgains under section 48 of the Act, after taking intoaccount the value of 1/12[th] share in the landedproperty that was agreed to be sold. No order as tocosts. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENONJUDGE APPENDIX PETITIONER'S/S EXHIBITS:ANNEXURE A COPY OF AGREEMENT WITH M/S. SAI SALES AND SERVICES DATED 12.04.1996. ANNEXURE B ANNEXURE C ANNEXURE D ANNEXURE E ANNEXURE F ANNEXURE G jg COPY OF AGREEMENT WITH M/S. MALABAR AUTOMOBILES (P) LTD., DATED 04.12.1998. COPY OF SWORN STATEMENT OF MANAGING PARTNER OF THE ASSESSEE. COPY OF LETTER M/S. MALABAR AUTOMOBILES(P) LTD., DATED 28.08.2003. COPY OF ASSESSMENT ORDER U/S. 153A DATED 30.03.2006 FOR THE ASSESSMENT YEAR 1999-2000. COPY OF THE ORDER DATED 08.06.2006 OF THE COMMISSIONER OF INCOME TAX (APPEALS). COPY OF THE ORDER DATED 20.04.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.509/COCH/2006. //TRUE COPY//