Ita/344/2010 Of Lachmandas & Sons,Cochin-35 v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE FRIDAY, THE 3RD DAY OF JANUARY 2014/13TH POUSHA, 1935 ITA.No. 344 of 2010 ( ) ------------------------ AGAINST THE ORDER IN ITA 953/COCH/2008 OF INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, COCHIN(ASSESSMENT YEAR 2005-2006) ----------------- APPELLANT/APPELLANT IN ITA : ------------------------------------------------ LACHMANDAS & SONS, COCHIN-35. BY ADV. SRI.K.SRIKUMAR RESPONDENT/RESPONDENT IN ITA : ------------------------------------------------------ THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2 (2) ERNAKULAM. BY SENIOR STANDING COUNSEL SRI. P.K.R. MENON BY ADV. SRI.JOSE JOSEPH, SC, INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03-01-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Mn ITA.No. 344 of 2010 ( ) APPENDIX PETITIONERS' ANNEXURES : RESPONDENT'S ANNEXURES : NIL //TRUE COPY// P.S. TO JUDGE Mn MANJULA CHELLUR, CJ & A.M.SHAFFIQUE, J. * * * * * * * * * * * * * I.T.A.No.344 of 2010 ---------------------------------------- Dated this the 3[rd] day of January 2014 J U D G M E N T MANJULA CHELLUR,CJ The following substantial questions of law arises forconsideration: “(i)In the facts and circumstances ofthe case whether the definition of capitalassets as indicated in Section 2(14) can begiven a restrictive meaning to the extent ofthat property owned by the assessee himselfin view of the judgment reported in [(1990)186 ITR 693]? (ii)In the facts and circumstances ofthe case, whether the tribunal was right inholding that the date of transfer of funds i.e.February 2004 is the date of acquisition asagainst the fact that the right to obtain theconveyance of immovable property was acquired in2001 by virtue of a MOU executedon 22/06/2001? (iii)In the facts and circumstances ofthe case whether the Tribunal was right inholding that the transaction is only a shortterm capital gain rather than a long termcapital gain as claimed by the assessee?” 2. This appeal is directed against the orders of the Appellate Tribunal. The relevant year of consideration isassessment year 2005-2006. The appellant/assesseeadmittedly is a partnership firm. While filing the return ofincome for the above assessment year, he declared hisincome as ` 36,75,130/-. When return came up for scrutiny,assessment was proceeded under Section 143(3) of theIncome Tax Act. It is also not in dispute that the return ofthe assessee indicated claim of long term capital loss of `45,51,944/-. The material placed before the AssessingOfficer was that the assessee entered into a memorandumof understanding (for short ‘MOU’) with M/s.Damodar Sons I.T.A.No.344 of 2010 3 & Co and also their partners for acquisition of property on22/06/2001. It is also not in dispute certain amounts weredue to Central Bank of India which had obtained recoverycertificate issued by Debt Recovery Tribunal. The propertyin question was attached by an order of attachment dulyregistered with the Sub Registrar, Ernakulam. 3.M/s.Damodar Sons & Co approached the presentappellant/assessee to sell the property after clearing off thedebt to the bank. As per the terms and conditions of theMOU, ` 3 crores was the sale consideration and however thesale deed which came to be executed on 25/02/2005 towhich the appellant/assessee was also a consenting party,the sale consideration was shown as ` 4,25,00,000/-. 4.The claim of the assessee was that he acquired aright when he entered into agreement of sale in 2001 (MOU)and irrespective of payment of ` 3 crores on 11/02/2004,looking at the date of sale deed 25/02/2005 it amounts tolong term capital gain. Therefore, after computing the cost I.T.A.No.344 of 2010 4 of acquisition of right to purchase the property at 3.M/s.Damodar Sons & Co approached the presentappellant/assessee to sell the property after clearing off thedebt to the bank. As per the terms and conditions of theMOU, ` 3 crores was the sale consideration and however thesale deed which came to be executed on 25/02/2005 towhich the appellant/assessee was also a consenting party,the sale consideration was shown as ` 4,25,00,000/-. 4.The claim of the assessee was that he acquired aright when he entered into agreement of sale in 2001 (MOU)and irrespective of payment of ` 3 crores on 11/02/2004,looking at the date of sale deed 25/02/2005 it amounts tolong term capital gain. Therefore, after computing the cost I.T.A.No.344 of 2010 4 of acquisition of right to purchase the property at ` 4,17,58,600/- on the date of MOU long term capital loss of` 45,51,944/- has to be taken into consideration. However,rejecting the contention of the assessee, the AssessingOfficer held that there was no right to purchase acquired byvirtue of MOU on 22/06/2001 unless and until the terms andconditions of MOU were completely fulfilled. Treating thegain on transfer of whatever right acquired by the assesseeby virtue of MOU opined that such right is a limited one andcomputed short term capital gain at ` 7,41,400/-. Aggrievedby the same, the assessee went in appeal before CIT(Appeals). However, CIT (Appeals) confirmed the findings ofthe Assessing Officer. 5.Thereafter, the appellant/assessee approached theAppellate Tribunal. The Appellate Tribunal also treated theamount as short term capital gain from the transfer ofproperty in question and came to the conclusion that it doesnot amount to long term capital gain. In other words, the Tribunal proceeded on the presumption that there is nodispute from either side so far as treating the transfer inquestion within the meaning of Section 2(47) of the Act. TheTribunal, further opined that as there was no dispute withregard to the occurrence of transfer within the meaning ofSection 2(47) of the Act proceeded to consider whether it isa short term capital gain or a long term capital gain.According to the Tribunal, after referring to the definition oflong term capital gain and short term capital gain, as thereis no scope for treating the same as long term capital gainentirely agreed with the view expressed by the AssessingOfficer which was confirmed by the CIT(Appeals). They alsoreferred to appreciation of materials by the assessingauthority for the assessment year. Accordingly the appealcame to be dismissed. Aggrieved by the same, the presentappeal is filed. 6.Learned counsel for the appellant/assesseeplacing reliance onJ.K.Kashyap v. Assistant 6 Commissioner of Income Tax [(2008) 302 ITR (Delhi)]contends that by virtue of MOU in 2001, theappellant/assessee acquired right which has to be treated asan asset. Therefore, as he was a party to the document ofsale in 2005, it has to necessarily be considered as a longterm capital gain. He also places reliance onCommissioner of Income Tax v. Vijay FlexibleContainers [(1990) 186 ITR 693]. 7. We have gone through the relevant facts and alsothe opinion of the High Court of Delhi and High Court ofBombay in the above two decisions. On a perusal of MOU, itis very clear that possession of the property was not handedover to the assessee as on the date of MOU in 2001. As onthe date of MOU ` 62,50,000/- came to be paid to theCentral Bank of India and so far as ` 3 crores to be paid tothe owner of the property, no amount as such came to bepaid. The said amount came to be paid only in the month ofFebruary 2004. It is not in dispute that in the month of 7. We have gone through the relevant facts and alsothe opinion of the High Court of Delhi and High Court ofBombay in the above two decisions. On a perusal of MOU, itis very clear that possession of the property was not handedover to the assessee as on the date of MOU in 2001. As onthe date of MOU ` 62,50,000/- came to be paid to theCentral Bank of India and so far as ` 3 crores to be paid tothe owner of the property, no amount as such came to bepaid. The said amount came to be paid only in the month ofFebruary 2004. It is not in dispute that in the month of February 2004, the funds that ought to be paid under MOUcame to be transferred to the bank and obtained no duescertificate from the Central Bank of India. It is also not indispute that on 25/02/2005 regular sale deed came to beexecuted by M/s.Damodar Sons & Co along with theassessee in favour of third parties for a sum ofRs.4,25,00,000/-. The cost of acquisition of right acquired bythe appellant/assessee that is right to get conveyance ofproperty was computed at Rs.4,17,58,600/- as on22/06/2001 which is also not disputed by the department. 8.The only question is whether the date of MOU i.e22/06/2001 or 11/02/2004 i.e. the date of payment of entireamount of Rs.3 crores as per MOU is to be considered asdate of transfer as defined under Section 2(47) of theIncome Tax Act. The terms and conditions of MOU clearlyindicates that property will not be transferred either in thename of appellant/assessee or his nominee till entireamount agreed upon as per the terms of MOU is paid. Mere MOU would not confer any right to appellant/assessee totransfer the property in favour of third parties. The right isacquired only after payment of entire amounts as per MOU.It would happen only with the fulfilment of terms andconditions under MOU which apparently occurred in 2004.Therefore, whatever right accrued to appellant/assesseeunder MOU accrued only with the complete payment ofamounts as per the terms and conditions of MOU on11/02/2004. Till this right accrued to the appellant/assessee,he could not have ventured to transfer any limited rightaccrued to him under MOU, to third parties. In the absenceof any regular document of conveyance in his favour orunless M/s.Damodar Sons & Co joined him in signing thedocuments of sale deed, he could not have transferred anyright even if it was limited right. The said execution of saledeed occurred in 2005. Therefore, the right accrued toappellant/assessee in 2004 came to be transferred alongwith M/s.Damodar Sons & Co only in 2005. Hence the I.T.A.No.344 of 2010 Assessing Officer was justified in saying it is a short termcapital gain and not long term capital gain. Accordingly, the appeal is dismissed answeringsubstantial questions of law against appellant/assessee. (sd/-) (MANJULA CHELLUR, CHIEF JUSTICE) (sd/-) (A.M.SHAFFIQUE, JUDGE) jsr 04/01/2014