2005 (11) TMI 437 - AT - Income Tax

Capital gain on sale of property - Transfer u/s 2(47)(v) - whether there was a transfer of property when the bank had a lien on the property? - mortgage of the property with the bank would in any way affect the rights of the transferee ? - HELD THAT - There is an agreement of sale dated November 27, 1997, the transferee has paid sale consideration in March 1998, and is willing to fulfil other conditions and has taken over possession of the same on March 31, 1998 and subsequently undertaken renovation of the same. Therefore, the transferee gets the rights over the property and the transferor-assessee can only enforce the rights expressly provided by the terms of the contract. But that has nothing to do with the ownership of the proposed transferor who remains the full owner of the lands till they are legally conveyed by a sale deed to the proposed transferee. Any mortgage of the property would not invalidate the contract of agreement of sale or part performance thereof, but would only give the right of preference for the satisfaction of the debt. Section 2(47)(v) of the Income-tax Act or section 53A of the Transfer of Property Act, do not speak of transfer of title of ownership, but only speaks of transfer of possession of the property. Section 53A of the Transfer of Property Act, deals with part performance of a contract of transfer and not a final transfer. Final transfer of the property could be only with the execution of the registered sale deed as provided under the law and that can be done only after the bank issues the no-lien certificate. Section 2(47)(v) of the Income-tax Act, refers to transactions in the nature of contracts referred to in section 53A of the Transfer of Property Act. Therefore, in our opinion, the condition u/s 53A of the Transfer of Property Act is satisfied in this case and as per section 2(47)(v), there is a transfer of immovable property in the assessment year 1998-99 only. Hence, the capital gains arise in this year only and not in 1999-2000. Thus, it is clear that the Assessing Officer was enthusiastic to tax the capital gains in the assessment year 1999-2000 since it had taxable positive income and the assessee would not be able to set off the business loss from the capital gains. In our opinion this approach of the Assessing Officer is not correct. The Revenue authorities have to follow the provisions of law and should not be guided by revenue collection only. In this case, we find that the capital gains arise in 1998-99 only and therefore, the business loss in the year 1998-99 can be set off from the capital gains. In this view of the matter, the assessee s appeal is allowed. In the result, the appeals filed by the assessee are allowed.

Summary

Issues:
Capital gains taxation on sale of property in assessment year 1998-99.

Analysis:
The case involved the assessment of capital gains arising from the sale of properties at Vartej plant by the assessee, a cosmetics manufacturing company. The dispute centered around whether the capital gain of Rs. 1,28,12,543 on the sale of the property should be taxable in the assessment year 1998-99 or 1999-2000. The assessee contended that as per section 2(47)(v) of the Income-tax Act, any transaction involving the allowing of possession of immovable property constitutes a 'transfer' and, therefore, capital gains should be levied when possession is given. The assessee had received the sale consideration in March 1998 and handed over physical possession on March 31, 1998. The Assessing Officer, however, assessed the gains in the subsequent year, 1999-2000, on a protective basis, leading to an appeal by the assessee.

The key legal provisions under scrutiny were section 45(1) of the Income-tax Act and section 2(47)(v) relating to the definition of 'transfer' involving possession of immovable property. The Tribunal analyzed the facts and legal framework, emphasizing the requirements of section 53A of the Transfer of Property Act for a valid transfer. It noted that the transferee had fulfilled the conditions by paying the consideration, taking possession, and performing acts in furtherance of the contract. The Tribunal clarified that the mortgage of the property did not impact the transfer of possession to the vendee, as it only created a right of interest for the bank, not ownership transfer.

The Tribunal highlighted the distinction between a mortgage and a sale, emphasizing that possession transfer, not title ownership transfer, was crucial for capital gains taxation. It underscored that the Transfer of Property Act's section 53A dealt with part performance of a contract, not final transfer, which required a registered sale deed. The Tribunal concluded that the conditions under section 53A were met, leading to a valid transfer of property in the assessment year 1998-99. It criticized the Assessing Officer's intent to tax the gains in 1999-2000 due to revenue considerations, stressing the need for adherence to legal provisions.

Consequently, the Tribunal allowed the assessee's appeal, directing the Assessing Officer to assess the income for the relevant years accordingly. The judgment clarified the legal interpretation of 'transfer' in capital gains taxation, emphasizing possession transfer as a critical factor. It upheld the assessee's position that the capital gains arose in the assessment year 1998-99, warranting taxation in that year, and criticized the revenue-driven approach of the Assessing Officer.