2014 (8) TMI 1063 - AT - Income Tax

Revision u/s 263 - non-taxability of capital gain on transfer of the property - conclusion of the CIT that the clauses in the Agreement are only to mask the transaction which in substance was transfer as defined in Sec.2(47)(v) - Held that - CIT s conclusion regarding substance of the transaction prevailing over the form of the transaction are without any basis and therefore to be disregarded. It was submitted that there was no loss to the revenue as capital gain payable on transfer was duly paid by the Assessees albeit in different assessment years. There was therefore no prejudice to the interest of the revenue. It was pointed out that execution of a general power of attorney by the Assessees in favour of M/S.Glory Estates Pvt.Ltd. was only for convenience and does not convey any right, title or interest over the property. The Assessees actually received sale consideration only as and when registered sale deeds were executed by the power agent. It was submitted that invoking the provisions of Sec.2(47)(v) of the Act by the CIT was erroneous. Transfer in section 2(47) also envisaged execution of registered deed in such circumstances. Capital gains become liable to be charged to tax only if they arise as a result of transfer of capital asset and the date on which they arise is date of transfer . If as a result of mutual arrangement by parties or otherwise, no registered deed is executed even after transaction is completed by delivery of possession and receipt of consideration, capital gains tax would escape assessment altogether or if such execution of registered sale-deed is postponed, the capital gains tax would also be postponed. In several cases it suited the parties to complete such transactions without execution of registered deed and thereby evade payment of tax on capital gains. The conditions necessary for application of the provisions of Sec.53A of the Act cannot be presumed to exist and the Tax authorities cannot blindly apply those provisions by merely relying on the fact that there was an agreement for sale and delivery of possession by the transferor/seller to the transferee/purchaser. If such a course is permitted to be adopted and the tax authorities are allowed to levy and collect tax on capital gain and later it turns out that the transaction is rescinded, there is no mechanism under the Act by which the Assessee can claim refund of such taxes levied and collected. Therefore invocation of the provisions of Sec.2(47)(v) in the facts and circumstances of the present case, in our view was not proper. Thus the order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore the CIT was not right in invoking jurisdiction u/s.263 of the Act. - Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 147 of the Income Tax Act.
2. Determination of capital gains tax liability under Section 45 of the Income Tax Act.
3. Application of Section 2(47)(v) and Section 53A of the Transfer of Property Act, 1882.
4. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act.
5. Condonation of delay in filing the appeal.

Detailed Analysis:

1. Validity of the Assessment Order under Section 143(3) read with Section 147 of the Income Tax Act:
The Assessing Officer (AO) issued notices under Section 148 to the assessees for the assessment year 2001-02. The assessees responded by requesting the AO to treat the original returns as filed in response to the notices. During the assessment proceedings, the AO considered whether any capital gain arose from the sale agreement dated 11.11.2000. The assessees argued that no capital gain accrued in the assessment year 2001-02, citing Section 2(47)(v) and Section 53A of the Transfer of Property Act. The AO completed the assessments without discussing the assessees' claims regarding capital gains, but it was acknowledged that the AO took cognizance of the assessees' submissions.

2. Determination of Capital Gains Tax Liability under Section 45 of the Income Tax Act:
The assessees contended that no capital gain arose from the agreement dated 11.11.2000 because they did not transfer possession of the property to the developer. They argued that the developer only had a license to carry out development activities, which did not constitute a transfer under Section 2(47)(v). The CIT, however, believed that the AO should have held that a transfer occurred, resulting in capital gains taxable in the assessment year 2001-02. The CIT's view was based on the interpretation that the developer was in possession of the property under the agreements and that capital gains should have been recognized.

3. Application of Section 2(47)(v) and Section 53A of the Transfer of Property Act, 1882:
The assessees argued that the provisions of Section 2(47)(v) and Section 53A require the transfer of possession of immovable property, which did not occur in their case. They cited clauses in the agreements explicitly stating that possession was not transferred. The CIT, however, concluded that the agreements effectively transferred possession and that the substance of the transaction should be considered over its form. The Tribunal found that the CIT's conclusions were without basis and that the legal consequences of the written agreements should not be disregarded.

4. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act:
The CIT invoked Section 263, asserting that the AO's assessment orders were erroneous and prejudicial to the interests of revenue. The CIT believed the AO failed to apply his mind to the facts and should have brought the capital gains to tax. The Tribunal, however, found that the AO had considered the assessees' submissions and that the absence of detailed discussion in the assessment order did not indicate a lack of inquiry. The Tribunal referenced the Delhi High Court's decision in Sunbeam Auto Ltd., which distinguished between "lack of inquiry" and "inadequate inquiry," concluding that the AO's actions did not warrant the CIT's intervention under Section 263.

5. Condonation of Delay in Filing the Appeal:
The assessees filed their appeals with a delay of 242 days, explaining that their initial counsel did not advise them to appeal against the CIT's order. Upon receiving proper legal advice, they promptly filed the appeals. The Tribunal, considering the Supreme Court's principles in Mst. Katiji and the Karnataka High Court's decision in ISRO Satellite Centre, condoned the delay, emphasizing that substantial justice should prevail over technical considerations.

Conclusion:
The Tribunal quashed the CIT's orders under Section 263, holding that the AO's assessment orders were neither erroneous nor prejudicial to the interests of revenue. The appeals by the assessees were allowed, and the Tribunal emphasized the importance of adhering to the legal rights and agreements between parties in tax assessments.

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