M/S. Madathil Brothers158, Arcot Road,Chennai - 600 026 v. The Deputy Commissioner Of Income Tax,Special Range – Vi

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 23.10.2007 Coram The Honourable Mr.JUSTICE K.RAVIRAJA PANDIANandThe Honourable Mrs.JUSTICE CHITRA VENKATARAMAN M/s. Madathil Brothers158, Arcot Road,Chennai - 600 026... Appellant versus The Deputy Commissioner of Income Tax,Special Range – VI, 122, Uttamar Gandhi RoadChennai – 600 034... Respondent Appeal under Section 260-A of the Income Tax Act against the orderdated 31.12.2002 made in ITA No.569/mds/98 "C" Bench against the C.I.T(appeal) Order dated 9.12.1992 in ITA.No.30/93-91/comp, on the file of theCommissioner of Income Tax (Appeal) VII, Madras, against the asessmentorder dated 26.3.1990 on the file of the Deputy Commisisioner of Incometax, Special Range-VII, Madras. CHITRA VENKATARAMAN,J. This Tax Case (Appeal) is preferred by the assessee against the orderof the Income Tax Appellate Tribunal relating to the assessment year 1987-88. 2. In the grounds of appeal, the assessee raised five questions oflaw. Except the one on the question of capital gains arising out of thesale of an immovable property at 35, Nungambakkam High Road, Chennai, fourquestions of law were admitted by this Court under order dated 23.4.2004. https://hcservices.ecourts.gov.in/hcservices/ 3. It is stated that subsequent to the disposal of the appeal, theapplicant filed M.P.Nos.21 & 87 (MDS)/2003 before the Tribunal seeking adecision again on the question of capital gains arising thereon treated asa short-term gain and not a long term one. The appellant also sought forreconsideration on the question of loss arising from the film "KasthuriVijayam". By order dated 1.9.2003, the Tribunal allowed the M.P on thequestion of capital gains on the sale of the immovable property acceptingthe same as long-term capital gains. It is stated that the Revenue filedan appeal in Tax Case No.272 of 2004. By order dated 6.8.2004, this Courttook the view that the order of the Tribunal granting the relief oncapital gains amounted to review of the order earlier passed rejecting thesaid plea. This Court took the view that the Tribunal had no authorityunder law to review its order. Hence, in the said view of the matter,considering the prejudice that might be caused to the appellant herein onthe question of capital gains on the sale of immovable properties, theappellant was permitted to raise the question on capital gains as aquestion of law for consideration along with other questions admittedearlier under order dated 23.4.2004. 4. Accordingly, the appellant filed T.C.M.P.No.50 of 2007 seeking thefollowing question also to be raised to consider: "Whether in law in holding that the capital gainsarising on the sale of immovable property at 35 ,Nungambakkam High Road is a short term capital gainand not a long term one?" By order dated 14.8.2007, this Court ordered the T.C.M.P. Thus, the saidquestion is also considered as part of the questions raised and admittedby this Court. 5. Hence, the questions of law that arise for consideration asadmitted by this Court are as follows: "1. Whether on facts and in the circumstances of the case, theTribunal was right in law in rejecting the appellant's claim ofloss arising from two movies by name "Kannamma" and "UzaikumKarangal"? 2. Whether the Tribunal was right in holding that the sumof Rs.1,26,000/- is unexplained cash credit under Section 68 ofthe Income Tax Act, 1961? 3. Whether the Tribunal was right in law in upholding thedisallowance of loss arising from "Kasturi Vijayam", withoutdealing with the said grounds of appeal? 4. Whether the Tribunal was right in disallowing theclaim of loss of Rs.3,60,000/- arising out of sale of shares ofM/s. Sudershan Clay and Ceramics Limited?5. Whether in lawin holding that the capital gains arising on the sale of https://hcservices.ecourts.gov.in/hcservices/ immovable property at 35, Nungambakkam High Road is a shortterm capital gain and not a long term one?" 2. Whether the Tribunal was right in holding that the sumof Rs.1,26,000/- is unexplained cash credit under Section 68 ofthe Income Tax Act, 1961? 3. Whether the Tribunal was right in law in upholding thedisallowance of loss arising from "Kasturi Vijayam", withoutdealing with the said grounds of appeal? 4. Whether the Tribunal was right in disallowing theclaim of loss of Rs.3,60,000/- arising out of sale of shares ofM/s. Sudershan Clay and Ceramics Limited?5. Whether in lawin holding that the capital gains arising on the sale of https://hcservices.ecourts.gov.in/hcservices/ immovable property at 35, Nungambakkam High Road is a shortterm capital gain and not a long term one?" 6. The assessee is a firm engaged in the business of distribution andexhibition of films. It is stated that the appellant herein had purchasedthe negative rights of two feature films, namely, "Kannamma" and "UzaikumKarangal" from its sister concern M/s.Kamakshi Agencies Private Limitedfor a consideration of Rs.5,76,000/- and Rs.12,01,000/- on 22.8.1986 and7.10.1986 respectively. These two films were released as early as 1972and 1976 respectively. The vendor, in turn, had purchased the rights inthe year 1982 and 1983 respectively from another sister concern of theassessee, i.e., M/s.Sudarsan Agencies, which is the proprietary concern ofM/s.Sudarsan Trading Company. It is stated that eversince the purchase ofthe two movies in 1982 and 1983, the vendor, M/s.Kamakshi Agencies PrivateLimited had not exploited these two movies in any manner and were shown asclosing stock and opening stock every year till finally the negativerights were disposed of in favour of M/s.Ashoka Brothers, a unit of theassessee herein, in the year 1986. The assessee contended that as per theagreement entered into by the assessee, these two films were given to themediators to exhibit the films in any particular area for a particularperiod and amounts were received thereon on the rights given. Admittedly,the assessee had not entered into any agreement with the exhibitorsdirectly. The total collection made for exhibiting these two films throughthe mediators were stated to be to the tune of Rs.1.26 lakhs. The cost ofthese two movies and the income earned were debited to the Profit and LossAccount and the assessee has showed a net loss of Rs.20,68,830/-. 7. In the course of the assessment proceedings, the appellant wasasked to show the necessary evidence as regards the exploitation throughthe mediators. The appellant herein produced confirmatory slips fromdifferent parties who had taken the films on hire, the amount of hirecharges for the period for which they were screened, and the place ofscreening. In terms of the addresses given in the confirmatory slips,enquiries were made as to whether the assessee had actually engaged themediators for the exhibition of the films. On enquiry, it was found thatnone of the parties mentioned in the confirmatory slips were foundexisting/or the addresses given were not found. There were instanceswhere the assessee could not give full addresses of the persons who hadclaimed to have taken these films for hire. By letter dated 31.1.1990,the assessing authority called upon the appellant herein to identify thepersons who were stated to have been given the exhibition rights andproduce those parties for verification. In its letter dated 12.2.1990, theappellant replied that it had received the contracts only through themediators and it had no direct contact with the exhibitors and that thefilms were given to the middlemen. Except for the confirmatory slipsproduced before the assessing authority as regards the receipt of filmhire charges, no details were furnished by the appellant herein. On theother hand, the appellant stated that since the transactions had takenplace well before 31.3.1987, it was not practically possible to produce the mediators before the assessing authority. The General Manager ofthe appellant firm, the former Managing Partner, expressed his inabilityto give the details or identify the persons to whom the exhibition rightswere given. He further stated that some of the middlemen approached himthrough some persons known to the appellant. The assessing authority notedthat nothing further could be elicited from the General Manager of thefirm Mr.C.V.Velayudham. In the face of total lack of evidence as regardsthe mediators and the exhibitors through whom the films were exhibited andin the absence of any material to substantiate the confirmatory slips, theassessing authority rejected the case of the appellant-assessee fortreating the loss as a business loss. On the other hand, the assessingauthority held that since the films purchased had not been exploitedduring the year, the entire cost of acquisition of the two films wereallowed to be carried forward as per Rule 9-B(iv) of the Income Tax Rules,1962. As regards the collection of Rs.1.26 lakhs for the exhibition ofthe movies, the assessing authority treated the same as unexplained cashcredits under Section 68 of the Income Tax Act, 1961, on the premise thatthese monies were really that of the appellant's money introduced in theguise of the receipts from the exploitation of the films. 8. The second issue relates to the disallowance of loss arising fromthe film "Kasthuri Vijayam". It is stated that the said film waspurchased by M/s.Ashoka Brothers under the banner "Moogambika Films". Thenegative rights were owned by the appellant-assessee firm. Since there wasno collection forthcoming, a sum of Rs.1,53,534.57 was written off. Theassessing authority took the view that as there was no credit ofcollection during this period, the said amount could not be written offunder Rule 9-B. 9. On the next question as to the short term capital loss ofRs.3,60,000/- arising out of sale of shares purchased from its sisterconcern M/s.Sudarsan Clay and Ceramics Limited, it was stated that theappellant-assessee had purchased one lakh shares of Rs.10/- each on3.10.1980. The shares were sold for a consideration of Rs.8,40,000/- on20.1.1987. This was claimed as a short-term capital loss in the statementof accounts. The assessing authority pointed out that M/s.Sudarsan ClayProducts was a losing company and the shares were originally transferredin the name of Mr.Velayudham, the Managing Partner and representative forand on behalf of the firm, and the company refused to register the sharesin the name of the firm. Subsequently, the shares were sold by theappellant-assessee at the best available price considering the fact thatthe company was a loss making company. The appellant herein receivedRs.6,00,000/- out of the total consideration of Rs.8,40,000/- and thebalance of Rs.2,40,000/- was still outstanding. The assessing authorityfelt that the claim of short term loss had been deliberately incurred bythe appellant herein to avoid the capital gains. It is an admitted factthat the company had not allowed any dividends at any point of time from1983 onwards. It is also pointed out that whether the valuation was by the yield method or under Rule 1D of the Wealth Tax Rules, the value of theshares were negative and the balance sheet of M/s.Sudarsan Clay ProductsLimited showed the value of the shares as 'nil'. The assessing authoritytook the view that there were no reasons stated for purchase of the sharesfrom the loss making company and there was equally no reason assigned forthe sister concern purchasing the shares from the assessee at Rs.7/- pershare. Hence, there was no bona fide commercial principle involved in thistransaction. Hence, the assessing authority held that it was only acolourable transaction to evade payment of income tax, which otherwisewould be liable to be paid under the capital gains. yield method or under Rule 1D of the Wealth Tax Rules, the value of theshares were negative and the balance sheet of M/s.Sudarsan Clay ProductsLimited showed the value of the shares as 'nil'. The assessing authoritytook the view that there were no reasons stated for purchase of the sharesfrom the loss making company and there was equally no reason assigned forthe sister concern purchasing the shares from the assessee at Rs.7/- pershare. Hence, there was no bona fide commercial principle involved in thistransaction. Hence, the assessing authority held that it was only acolourable transaction to evade payment of income tax, which otherwisewould be liable to be paid under the capital gains. 10. On the question of the claim for long-term capital gains on thesale of the immovable property at 35, Nungambakkam High Road, Chennai, theassessing authority applied the decision of the Hon'ble Supreme Courtreported in 57 ITR 185 (ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF INCOMETAX) to hold that the original agreement of sale dated 16.9.1995 did notconfer any title to the assessee that the sale deed was executed as perthe memo of compromise entered into in the O.S. Appeal before the HighCourt on 9[th] July 1986; that the sale deed was registered in favour of theappellant-assessee only on 10.7.1986. Hence, till the sale deed wasexecuted in favour of the appellant in the year 1986, the appellant didnot have any title as an owner; consequently, the sale effected by theappellant on 26.9.1986 resulted in short-term capital gains only. Theappellant-assessee did not hold the property for a period more than 36months to treat the gain as long term capital gains. 11. Aggrieved by the order of the assessing authority, the appellant-assessee went on appeal before the Commissioner of Income Tax (Appeals).By an order dated 9.12.1992, the Commissioner of Income Tax (Appeals)dismissed the appeal, upheld the order of the assessing authority, therebyconfirmed the assessment. 12. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the appellant-assessee preferred a further appeal before theIncome Tax Appellate Tribunal. By an order dated 31.12.2002, the Tribunalrejected the appeal, thereby confirmed the findings of the authoritiesbelow. As against this order of the Tribunal, the appellant -assessee haspreferred this appeal before this Court under Section 260-A of the IncomeTax Act, 1961 on the grounds as stated above. 13. Heard counsel for the parties. 14. On the first question of claim of business loss on the exhibitionof the films, a perusal of the order of the Tribunal shows the finding offact that the assessee could not produce any evidence as to the identityof the middle men and the exhibitors. The parties issuing the confirmatoryletters were also found as either not traceable or the addressees/addresswere not there. The Tribunal further pointed out to the finding of the https://hcservices.ecourts.gov.in/hcservices/ Assessing Officer that as there was no exhibition receipts, the write-offfor the films could not be allowed. The Tribunal further found that thefilms were not exhibited for quite some time and there was no demand forthose films. In the circumstances, the Tribunal upheld the order of theCommissioner of Income Tax (Appeals). The Tribunal further pointed outthat Sri.C.V.Velayudham, who had himself signed on the contracts, refusedknowledge about any of the alleged exhibitors. The Tribunal further statedthat when the said Velayudham was a signatory to the documents, his pleathat he had no knowledge about the same clearly showed that theexplanation given could not be acted upon that the receipt ofRs.1,26,000/- represented collection on the exhibition of films. In thebackground of these facts, rightly, the Tribunal upheld the orders of theauthorities below. 15. Learned counsel appearing for the appellant could not point outany error in the reasoning of the Tribunal, or for that matter, any of theauthorities. Being a pure question of fact and appreciation of evidenceand there being no material produced to point out any error in thefindings of the Tribunal, we do not find any ground to disturb thefindings. Hence, we reject the plea of the appellant-assessee on thisissue. 16. The assessing authority came to the conclusion that theappellant-assessee had no intention to exploit the films and these filmswere lying idle with the assessee's sister concern; that these films werepurchased at a cost higher than what was paid by the sister concern. TheTribunal referred to the findings of the assessing officer that the ideaof claiming loss was only to negate the capital gains incidence which theappellant-assessee had during this year. Hence, the plea of exploitationof the films through the mediators itself was a fabricated one. TheTribunal confirmed the findings of the assessing authority to hold thatsince the films were not exploited during the year, the entire cost ofacquisition of these films were to be carried forward as per Rule 9-B(4).Touching on this, learned counsel appearing for the assessee took usthrough the provisions of Rule 9-A and 9-B of the Income Tax Rules, 1962,to impress on the submission that these Rules have relevance for the newfilms for exhibition. He submitted that the assessing authority erred ininvoking Rule 9-B that the appellant could only have the benefit of carryforward of the loss as per Rule 9-B. He emphasized that Rule 9-B andRule 9-A have to be read harmoniously to get at the intention of the Rulesprovided therein that at best, these Rules have relevance for new filmsalone and cannot be extended to films already released and exhibited andfurther sold to others for exploiting the rights. In the context of thesubmissions, learned counsel stated that the appellant-assessee would beentitled to have the adjustment under the regular provisions of the Act.Elaborating on the facts, he submitted that the appellant herein had, infact, given the details as to the middle men through whom the films weregiven for exhibition before the assessing authority, and that by efflux oftime, the assessee had difficulty in tracing the exhibitors or the middle men. He further pointed out that when the details as regards those who hadexhibited the films through the middle men were furnished, the burden ison the Revenue to make necessary enquiries to consider the claim as towhether it is a genuine transaction or not. In the context of therejection of the claim for business loss and treating the sum of Rs.1.26lakhs as 'unexplained cash credit', learned counsel referred to Section 68of the Income Tax Act, 1961. He contended that when the assessee haddischarged its burden and the amount was found in credit in the books ofaccounts maintained by the assessee and an explanation was offered asrelating to the income earned on giving the films for exhibition throughmediators, the assessing authority cannot invoke the provisions of Section68 of the Income Tax Act, 1961, to treat the same as unexplained cashcredit. Learned counsel further pointed out that the Section enjoins uponthe assessing authority to record the satisfaction as to the materialsgiven by the assessee before embarking on the provisions under Section 68of the Income Tax Act, 1961. In the above circumstances, learned counselsubmitted that the assessing authority failed to observe the provisions ofSection 68 of the said Act and hence, to treat Rs.1.26 lakhs as anunexplained cash credit. 17. We do not agree with the aforesaid contentions by the learnedcounsel for the appellant-assessee herein. On the geniuneness of theclaim of the exhibition through the mediators, we have already rejectedthe plea of the appellant herein. As regards the contention as to theapplicability of Section 68 treating the alleged exhibition receipts ascash credits, it must be seen that the primary onus as to the receipt ofthe said amount is on the appellant-assessee to show the identity of theexhibitors and the mediators and the genuineness of the transaction. Onlywhere the assessee discharges the burden prima facie, that the burdenshifts on to the revenue. The mere production of the confirmatory letterswould not, by itself, prove the claim of the appellant as regards theexhibition of the films. Read in the context of the inability expressedby the assessee to bring the exhibitors before the assessing authority andconsidering the fact that the addressees were not there in the saidaddress or the particulars were not correct, the view of the assessingauthority could not be faulted with. It is no doubt true that law doesnot contemplate or require compliance of an impossible act. Yet, when thedetails regarding the particular receipt is exclusive to the knowledge ofthe assessee who has the necessary information relating to the same, theinitial burden is certainly on the tax payer to discharge the same so thatfurther enquiry thereon is taken to the logical end by the revenue. Goingby the findings recorded by the Tribunal, we do not find any ground toaccept the plea of the appellant-assessee in this regard. 18. On the question of the claim of loss and the applicability ofRules relating thereto, the amortization of costs of film either in thehands of the producer or the distributor is governed by Rules 9-A and 9-Bof the Income Tax Rules, 1962. A cursory glance of these provisions showthat Rule 9-A prescribes deductions in respect of expenditure on the production of feature films. Rule 9-B deals with the deduction availablein respect of expenditure on acquisition of distribution rights of featurefilms. While Rule 9-A concerns itself as to the case of the filmproducers, Rule 9-B is about film distributors, a stage after theproduction of the film. These Rules lay down the procedure for computingthe profits and gains from film production and/or film distributionbusiness. 19. Admittedly, the case herein relates to exhibition of old movies.Hence, going by the case of the appellant, the deduction falls forconsideration only under Rule 9-B. The manner of allowing such a deductionis given in Sub Rule (2) to Sub Rule (4). The explanation to Sub Rule (1)to Rule 9-B defines the cost of acquisition. It states, the cost ofacquisition in relation to feature film means the amount paid by the filmdistributor to the film producer or another distributor under an agreemententered into by the film distributor with such film producer or such otherdistributor as the case may be for acquiring the rights of exhibitionexpenditure. The provisions contained therein also stipulate the minimumperiod for which the film should have been exhibited for the purposes ofgaining benefit under these provisions. 20. A reading of Rule 9-B(1) with the explanation thereon leaves noroom for doubt that it intends to deal with films coming for exhibitionafter its release for the first time. The fact that it refers to"distribution from one distributor to another or from one distributor tosuch other distributors" clearly shows the futility in the contention ofthe learned counsel for the appellant to read this provision as relatableto new films and that there are no reference to relate the same to oldfilms. In contrast to Rule 9-B, Rule 9-A shows that it relates to a newfilm. The Section deals with deductions in computing the profits and gainsof production of feature films certified for release by the Board of FilmCensors in terms of the provisions of Sub-Rule (2) to Sub Rule (4). Areading of the provisions clearly show the difference in the area ofoperation of the provisions of Rule 9-A and 9-B. In the circumstances, wedo not find any justification to hold that invocation of Rule 9-B will nothave any bearing to the case on hand. We agree with the Tribunal that theappellant-assessee is, at best, entitled to the cost of acquisition ofthese films to be carried forward as per Rule 9-B(4). Consequently,questions 1 and 2 raised are answered against the assessee appellant. 21. As regards the third question raised by the appellant herein ondisallowance of loss arising from "Kasturi Vijayam", it may be noted thatRule 9-B(4) provides that in the event of the assessee not exhibiting thefilm on commercial basis or sell his rights of exhibition, therebyresulting in no deduction in respect of the cost of acquisition, theassessee is granted carry forward of the loss. Learned counsel for theassessee pointed out the provisions herein applied in relation to theassessment year 1987-88 that the provisions itself came to be effective onand from the assessment year commencing after 1.4.1987 (Sub Rule (7)). In these circumstances, the question of construing any benefit as per Sub-Rule (4) does not arise. Consequently, he states that the Rule has norelevance to this case. 22. As already noted, Sub-Rule (7) makes provisions effective from1.4.1987. The Rule itself was introduced for deduction in respect ofexpenditure on acquisition and distribution rights of the feature filmsunder the Income Tax (Seventh Amendment) Rules, 1976. Learned counselsubmitted that the normal Rule as regards the deduction have not beenapplied in this case. Learned counsel placed reliance on the decision ofJabalpur Bench of the Income Tax Bench reported in (1983) 5 ITD 142 in thecase of ITO Vs. R.S. Enterprises, which was referred to before theTribunal. The grievance of the appellant herein is that the Tribunal hadomitted to consider this issue raised. However, learned counsel fairlystated that the Tribunal considered the claim in the M.P. filed after thedisposal of the appeal only to reject the same once again. 23. A perusal of the order passed in M.P.Nos.21 & 87/03 dated1.9.2003 shows that the Tribunal considered the claim and pointed out thatthe facts relating to the expenditure on the production of the films whichwas abandoned were not placed before the authorities at all forconsideration. 23. A perusal of the order passed in M.P.Nos.21 & 87/03 dated1.9.2003 shows that the Tribunal considered the claim and pointed out thatthe facts relating to the expenditure on the production of the films whichwas abandoned were not placed before the authorities at all forconsideration. 24. It is no doubt true that the relevant Rule pertaining todeduction comes into operation from 1.4.1987. It may be noted that theassessee, in its application filed before the Tribunal after the disposalof the appeal, stated that the film was abandoned during the accountingyear 1987-88. The Tribunal pointed out that the contention that the filmwas abandoned during the year 1987-88 was not available in the petition toconsider the contention that Rule 9-B itself is not applicable as regardsthe assessment year 1987-88. It may be noted that even before this Court,except for the mere contention that Rule 9-B will not be applicable, nofacts are placed. As found by the authorities below, in the absence of anymaterial to substantiate his claim of expenditure, we do not accept theplea of the assessee. The Tribunal pointed out that as regards thisclaim, there are no evidence placed before the Tribunal to show that therights were abandoned, since there were no credit of collections.However, if the rights were purchased by the assessee and there were nocollection, the provision that would be applicable would be Rule 9-B,which had been rightly applied by the assessing authority concerned. TheRule provides for deduction on certain basis. The deduction is availableonly subject to exhibition of films for particular number of days. In theabsence of any details thereon, the claim of the assessee was rejected.While going through the order of the Commissioner of Appeals, it is seenthat when the assessee was asked to show how he was entitled to write offthe sum of Rs.1,53,534.57, it was stated that the assessee explained videletter dated 15.2.1989 that the amount should be allowed under Rule 9-Aand 9-B. If there are collections during the year, Rule 9-B expresslystates that the same should be credited to the books of accounts of the assessee and deduction granted in accordance with Rule 9-B. Since therewas credit of collections during the year, the assessee was not permittedthe write off by the assessing authority. Thus confirmed on factualaspect, we do not find any ground to interfere with the same in exerciseof the jurisdiction under Section 260-A of the Income Tax Act, 1961. Itmay also be pointed out that the assessee had not denied the applicabilityof Rule 9B in the proceedings taken before the assessing authority orbefore the first appellate authority. In any event, on the view taken onfacts and as to Rule 9-B and its applicability, we do not find anyjustification to accept the plea of the appellant herein. Hence the thirdquestion is answered against the assessee. assessee and deduction granted in accordance with Rule 9-B. Since therewas credit of collections during the year, the assessee was not permittedthe write off by the assessing authority. Thus confirmed on factualaspect, we do not find any ground to interfere with the same in exerciseof the jurisdiction under Section 260-A of the Income Tax Act, 1961. Itmay also be pointed out that the assessee had not denied the applicabilityof Rule 9B in the proceedings taken before the assessing authority orbefore the first appellate authority. In any event, on the view taken onfacts and as to Rule 9-B and its applicability, we do not find anyjustification to accept the plea of the appellant herein. Hence the thirdquestion is answered against the assessee. 25. As regards the fourth question on the disallowance of the claimof capital loss of Rs.3.60 lakhs, the Tribunal has considered the claimin detail to arrive at the finding of fact that the purchase of shares wasfrom a company which was economically not very sound. Learned counsel forthe appellant submitted that the commercial decisions cannot be dissectedto reject the claim of loss arising out of the sale of shares ofM/s.Sudarsan Clay and Ceramics Limited. A perusal of the order of theTribunal shows that whether it is by the application of break up valuemethod or by yield method, the value of shares of M/s.Sudarsan ClayProducts is shown as 'nil'; in fact it showed a negative figure for theyears 1984-85, 1985-86, 1986-87 and 1987-88. In the face of fullknowledge of the state of affairs of M/s.Sudarsan Clay Products, theTribunal held that the whole transaction lacked rational commercialprinciples involved in this. Thus the Tribunal confirmed the finding thatthe appellant-assessee could not prove the genuineness of the transaction,that the claim of the short term capital gains was deliberately made bythe appellant to avoid tax on capital gains. In the face of the findingsof the Tribunal on this issue which could not be assailed by theappellant, we do not find any justification to interfere and hence, thesame is rejected. 26. This takes us to the claim of long term capital gains arising onthe sale of an immovable property at 35, Nungambakkam High Road, Chennai.It is seen that the appellant-assessee had an agreement for sale underdocument dated 16.9.1975 and the possession was handed over to theappellant herein on 1.1.1976. During the assessment year 1987-88, theappellant -assessee sold the property at Nungambakkam High Road for a sumof Rs.45 lakhs to one Kalpatharu Private Limited on 30.9.1986. It isstated that the sale deed in favour of the appellant-assessee was executedon 10.7.1986 by Velayudham and registered on 26.9.1986. The AssessingAuthority took the view that since the appellant-assessee was inpossession for a period of about two months, it is a short-term capitalasset in terms of Section 2(42-A) of the Income Tax Act, 1961. Theassessing authority thus took the view that the sale proceeds from theshort-term capital asset should be assessed only as short term capitalgains. Aggrieved of this, the appellant-assessee went on appeal beforethe Commissioner of Income Tax (Appeals). The first appellate authority took the view that till 9[th] July 1986, the appellant was not the owner ofthe property, that the ownership could not be transferred by merepossession of the immovable property without a document registered to itsname. Hence, the appellant could not be held to be the owner holding theproperty for more than 36 months to treat the sale as resulting in long-term capital gains. Thus the appellate authority rejected the plea of theassessee. On further appeal by the appellant assessee, the Tribunal tooka view that the assessee had its agreement for sale under document dated16.9.1975 and possession was handed over to the appellant herein on1.1.1976. The sale deed in favour of the appellant herein was registeredon 26.9.1986 pursuant to the compromise memo recorded in the suitproceedings before the Original Side of this Court. The appellant-assessee, in turn, sold the property on 30.9.1986. The Tribunal viewedthat as per the law then stood, the transaction could be treated astransfer only on the registration of the document and part-performancecould not be treated as transfer. The Tribunal held that the definitionof "transfer" under Section 2(47) was amended to include even part-performance under Section 53-A of the Transfer of property Act, 1882,only on and from 1.4.1988. Hence, only from the date when the sale wasexecuted and registered that the appellant-assessee could be held to behaving the title to sell the property. Thus taking this view, the Tribunalupheld the orders of the authorities below holding the gains as short-termcapital gains. 27. Learned counsel appearing for the appellant pointed out that theappellant had entered into an agreement for purchase of the property on16.9.1975. He was put in possession as early as 1.1.1976. Hence, going bythe decision of the Calcutta High Court reported in 117 ITR 525 (CIT Vs.ALL INDIA TEA & TRADING CO. LTD.) and the possessory right in terms ofthe agreement for sale, the claim could not be considered as a short-termcapital gains to deny the benefit of set off. Learned counsel for theappellant also pointed out that when the vendor refused to go ahead withthe agreement entered into, a suit was filed before this Court on theOriginal Side in C.S.No.710 of 1980 for a relief of specific performance.Ultimately, the dispute resulted in a settlement in the appeal, whereby,the vendor agreed to execute the sale deed on a consideration of Rs.45lakhs as against the original consideration. In terms of the agreement,the sale deed was executed and registered on 30.9.1986. Learned counselpointed out that since the right is traceable to the original agreement,the claim of the appellant-assessee has to be seen from the date of theoriginal agreement. 28. Per contra, learned Senior Standing Counsel appearing for theRevenue submitted that it is an admitted fact that the original agreemententered into in the year 1975 underwent changes as regards theconsideration. Hence, there was a novation of contract and the fresh saleagreement was entered into and registered on 30.9.1986. Hence, the rightof the appellant-assessee has to be worked out from the date the documentwas executed and registered in favour of the appellant. Viewed thus, the claim could be nothing but a short-term capital asset giving rise toshort-term capital gains. 28. Per contra, learned Senior Standing Counsel appearing for theRevenue submitted that it is an admitted fact that the original agreemententered into in the year 1975 underwent changes as regards theconsideration. Hence, there was a novation of contract and the fresh saleagreement was entered into and registered on 30.9.1986. Hence, the rightof the appellant-assessee has to be worked out from the date the documentwas executed and registered in favour of the appellant. Viewed thus, the claim could be nothing but a short-term capital asset giving rise toshort-term capital gains. 29. A perusal of the documents filed before this Court shows thatadmittedly, the appellant-assessee was put in possession and enjoyment ofthe suit property as agreement holder right from 1.1.1976. The suit forspecific performance was filed by the appellant- assessee herein beforethe original side of this Court and in terms of the compromise memo filedin the suit, a decree was passed on 30.9.1983 in favour of this appellant.It is no doubt true that as part of the settlement terms, the partiesagreed to revise the sale consideration. However, the same was done withreference to the claim under the agreement. The sale deed was executed interms of the settlement reached in the suit proceedings. As such, therewas no novation of contract to result in a fresh agreement entered into. 30. On the question as to whether a possessory right under thisagreement, per se, confers an interest to claim long-term capital gains,we may have to look at the definition provisions relating to "CapitalAsset" under Section 2(14), "Short Term capital asset" under Section 2(42A) and 'Transfer" under Section 2(47) of the Income Tax Act, 1961. Therelevant provisions necessary for the purpose of our consideration are asfollows: Section 2(14) "Capital Asset":"capital asset" means property of any kind held by anassessee, whether or not connected with his business orprofession.." Section 2(42A) "Short Term capital asset":Short term capital asset means a capital asset held byan assessee for not more than thirty-six monthsimmediately preceding the date of its transfer: ... "Section 2(47)'Transfer":"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 anylaw; or (iv)in a case where the asset is converted by theowner thereof into, or is treated by him as,stock-in-trade of a business carried on by him,such conversion or treatment; (or) The following clause was inserted under Finance Act, 1987 witheffect from 1.4.1988: (v) any transaction involving the allowing of the https://hcservices.ecourts.gov.in/hcservices/ possession of any immovable property to be takenor retained in part performance of a contract ofthe nature referred to in section 53A of theTransfer of Property Act, 1882 (4 of 1882); or ........ " (ii)the extinguishment of any rights therein; or(iii)the compulsory acquisition thereof under anylaw; or (iv)in a case where the asset is converted by theowner thereof into, or is treated by him as,stock-in-trade of a business carried on by him,such conversion or treatment; (or) The following clause was inserted under Finance Act, 1987 witheffect from 1.4.1988: (v) any transaction involving the allowing of the https://hcservices.ecourts.gov.in/hcservices/ possession of any immovable property to be takenor retained in part performance of a contract ofthe nature referred to in section 53A of theTransfer of Property Act, 1882 (4 of 1882); or ........ " 31. A conjoint reading of the provisions, as they stood at thematerial assessment year, show that "capital asset" means "property of anykind held" by the assessee. It may be seen that the Income Tax Act, 1961,does not contain the definition of "property". In the decision reportedin 76 ITR 471 (AHMED G.H. ARIFF Vs. COMMISSIONER OF WEALTH-TAX), in thecontext of the Wealth Tax proceedings with reference to the definition of"Assets" in Section 2(e) to "include property of any description", theApex Court held that 'property' is a term of the widest import and,subject to any limitation which the context may require, it signifiedevery possible interest that a person can hold or enjoy. The definitionof "capital asset" under the Income Tax Act, referring to "property ofany kind" carry no words of limitation. The definition is of wideamplitude to include every possible interest that a person may hold andenjoy. The meaning ascribed by the Apex Court to the term "property"applies with equal force to the understanding of "capital asset" under theprovisions of the Income Tax Act. 32. The definition of "capital asset" refers to property of any kind"held" by an assessee. In contradistinction to the word "owner" or"owned", the definition uses the phrase "held". 33. Touching on the meaning of the term "owner" in the context ofassessability of the income from property under Section 22, in thedecision reported in 226 ITR 625 (C.I.T. Vs. PODAR CEMENT PVT. LTD.), theApex Court held that "Owner is the person who is entitled to receiveincome from the property in his own right." The Apex Court held that inthe context of Section 9 of the 1922 Act, the owner must be a person "whocan exercise the rights of owner not on behalf of the owner, but in hisown right." The Apex Court pointed out to the amendment to Section 27under the Finance Bill, 1987, to get over an obvious omission to themeaning of the word "owner" under Section 22 that even though in commonlaw, "owner" means a person who has got valid title legally conveyed tohim after complying with the requirements of law under the Transfer ofProperty Act and the Registration Act, having regard to the groundrealities and the object of the Act, namely, to tax income, in the contextof Section 22, the owner is the person who is entitled to receive incomefrom the property in his own right. Adverting to the provisions of theTransfer of Property Act under Section 53-A, 54 and 55, the Apex Courtheld that legal title does not pass unless there is a deed of conveyanceduly registered. Referring to the effect of Section 54, and Section 22 ofthe Income Tax Act, the Apex Court said "That, however, would not takeaway the right of the assessee to remain in possession of the property, torealise and receive the rents and profits therefrom and to appropriate the entire income for its own use. The so-called vendor is not permitted inlaw to dispossess or to question the title of the assessee (the so-calledvendee). It was for this very practical purpose that the doctrine of theequity of part performance was introduced in the Transfer of Property Act,1882, by inserting section 53A therein. The section specifically allowsthe doctrine of part performance to be applied to the agreements which,though required to be registered, are not registered and to transfers notcompleted in the manner prescribed therefor by any law. The section is,therefore, applicable to cases where the transfer is not completed in amanner required by law unless such a non-compliance with the procedureresults in the transfer being void." Affirming the view of the RajasthanHigh Court, the Apex Court held that in the context of Section 22, wherethe transferor had handed over possession of the property pursuant to anagreement for sale, "owner is a person who is entitled to receive incomefrom the property." The Apex Court held that the amendment introduced bythe Finance Bill, 1987, was declaratory/clarificatory in nature and hence,these provisions are retrospective in operation. 34. The Rajasthan High Court had an occasion to consider a casesimilar to the one that we have on hand. Applying the aforesaid decisionof the Apex Court to the case dealing with a question of capital gainswhere possession was given to an agreement holder, in the decisionreported in 259 ITR 724 (C.I.T. Vs. VISHNU TRADING AND INVESTMENT CO.),the Rajasthan High Court held "Following the view taken by theirLordships, we are of the view that for taxing the capital gain,registration of the sale deed is not necessary under the provisions of theIncome-Tax Act." The said decision of the Rajasthan High Court was againfollowed in the decision reported in 260 ITR 503 (C.I.T. Vs. RAJASTHANMIRROR MANUFACTURING CO.) . 35. Again, in the decision reported in 234 ITR 140 (M.SYAMALA RAO Vs.C.I.T.), the Andhra Pradesh High Court considered the situation, where,under the agreement of sale on the 1[st] May 1962, the assessee was put inpossession of the land. The document of sale was registered on 8[th] June1979. The assessee sold the land after converting it into plots. Thesale of these lands was sought to be assessed as capital gains. On areference, the Andhra Pradesh High Court held that though the document wasregistered on June 8 1979, it related back to the date on which theagreement of sale was executed in favour of the assessee by the vendor.Hence, the assessee was deemed to be the owner of the property with effectfrom 1962. The Andhra Pradesh High Court pointed out that the assesseehad held property for more than 36 months; hence, the capital gains couldnot be assessed as short-term capital gains. 36. Similar is the view expressed by the Punjab & Haryana HighCourt on the scope of Section 2(42-A) of the Income Tax Act, 1961, in thedecision reported