2015 (12) TMI 1616 - AT - Income Tax

Tax on the capital gain on a transfer - transfer of an Agricultural land to non- agriculturists - Held that - Entire amount of sale consideration was refunded and original documents with respect to this property were also received back by the assessee. The perusal of the above clearly shows that transfer was illegal in the eyes of law from the very beginning and therefore, it can be clearly said that the transfer was void ab initio. No legal rights had accrued to the parties on execution of sale deed, as the same was void ab initio in the eyes of law. No transfer of the impugned land had taken place, and therefore, no amount of capital gain was taxable as per law. Under the given facts, we should keep in mind the concept of Real Income theory. According to this theory, an assessee can be made to pay tax only and to the extent of income actually earned by him, and not beyond that. In the facts before us, the accepted factual and legal position is that no valid transfer (of the impugned land) had taken place as per law, and therefore, no question can arise of earning of capital gain and taxing the same under the income tax law. It is further noted by us that it is settled law that an assessee can resile from its return if it is found at any later stage that the income offered therein was not taxable in accordance with law. Immediate reference can be made on the judgment of in the case of Bharat General Reinsurance(1970 (12) TMI 5 - DELHI High Court), which was subsequently approved in the case of Rampur Distillery and Chemical Co Ltd vs CIT (1990 (11) TMI 3 - SUPREME Court ) - Decided in favour of assessee Claim of long term loss in respect of investment in shares disallowed - Held that - We agree with the view taken by the lower authorities that a loss or gain can arise u/s 45 of the Income Tax Act 1961 only from transfer of a capital asset, effected in the previous year. Since, no transfer of the aforesaid shares was effected during the previous year, therefore, no claim of loss could have been allowed to the assessee, as per law. The contention of the Ld. Counsel that provision for decline in value of investment has been made because of mandatory requirement of Accounting Standard-13, is also not sustainable for the reason that accounting entries are not determinative for the taxability or otherwise of the transactions of the assessee. It is settled law that taxability of the transactions of the assessee has to be determined in view of the provisions of the Income Tax Act, and not on the basis of entries made in the books of accounts by the assessee. Therefore, keeping in view all the facts and circumstances of the case, we find that the said loss was not allowable - Decided against assessee

Summary

Issues Involved:
1. Taxation of long-term capital gain at Rs. 4,51,95,233/-.
2. Non-allowance of long-term loss of Rs. 3,70,50,000/- in respect of investment in shares of Niru Jewels Pvt. Ltd.

Issue-wise Detailed Analysis:

1. Taxation of Long-Term Capital Gain at Rs. 4,51,95,233/-:

The assessee challenged the action of the Ld. CIT(A) in confirming the AO's decision to tax long-term capital gain at Rs. 4,51,95,233/-, as opposed to 'nil' as claimed in the revised computation of income. The assessee argued that the original return showed long-term capital gain of Rs. 4,53,22,995/- from the sale of agricultural land. However, this transaction was later cancelled, and a cancellation deed was registered, with the entire amount refunded, resulting in no actual income from capital gain. The AO did not accept the revised computation, holding that the capital gain becomes taxable in the year of transfer itself. The Ld. DR supported the lower authorities' decision, stating that the transfer took place during the year, thus attracting capital gain tax.

Upon review, it was noted that the transfer was void ab initio under Section 63 of the Gujarat Tenancy & Agricultural Land Act, 1948, which bars the transfer of agricultural land to non-agriculturists. The Tribunal referred to the judgments of the Hon'ble Gujarat High Court in CIT vs. Vithalbhai P. Patel and the Hon'ble Supreme Court in Ramanlal Bhailal Patel & Ors. vs. State of Gujarat, which held that transfers violating Section 63 are void. The Tribunal noted that the entire sale consideration was refunded, and the original documents were returned, indicating the transfer was illegal from the beginning. The Tribunal concluded that no legal rights accrued from the sale deed, rendering the transfer null and void. Therefore, no capital gain was taxable, and the addition made by the AO was directed to be deleted. Ground No. 1 was allowed.

2. Non-Allowance of Long-Term Loss of Rs. 3,70,50,000/- in Respect of Investment in Shares of Niru Jewels Pvt. Ltd.:

The assessee challenged the lower authorities' refusal to allow the claimed long-term loss of Rs. 3,70,50,000/- due to the declining value of shares in Niru Jewels Pvt. Ltd. The assessee argued that the company's assets were seized by creditors, rendering the shares worthless. The loss was claimed in compliance with Accounting Standard (AS-13) for Investment Accounting. The Ld. DR contended that the loss was not allowable as no actual sale or transfer of shares occurred during the year.

The Tribunal agreed with the lower authorities that a loss or gain under Section 45 of the Income Tax Act, 1961, arises only from the transfer of a capital asset. Since no transfer of shares took place during the previous year, no loss could be claimed. The Tribunal noted that accounting entries do not determine taxability; rather, the provisions of the Income Tax Act do. Therefore, the claimed loss was not allowable, and the lower authorities' decision was upheld. Ground No. 2 was rejected.

Conclusion:

The appeal of the assessee was partly allowed, with the addition of long-term capital gain being deleted and the claim for long-term loss on shares being rejected. The order was pronounced in the open court on 4th December 2015.