2025 (4) TMI 1270 - HC - Income Tax

Addition under the provision of section 56(2)(x) - year of assessment - purchase/sale/transfer of the said rice mill took place in the previous year OR this year - whether the assessee was right in contending that they purchased the assets in question namely a rice mill should be taken to be on the date when they entered into the agreement for sale of the property which was made on 13.12.2016 or when the registered sale deed was executed and registered on 21.3.2018? HELD THAT - A similar view was taken by the Hon ble Supreme Court in Commissioner of Income Tax vs. Balbir Singh Maini 2017 (10) TMI 323 - SUPREME COURT In the said case the Hon ble Supreme Court took note of the various clauses in section 2 (47) of the Act and what was relevant in the said case was clause (vi) and the Hon ble Supreme Court did not agree with the view taken by the High Court and held that under section 2 (47) (vi) any transaction which has the effect of transferring or enabling the enjoyment of any immovable property should come within its purview. Therefore the legal issue is well settled and the view taken by the tribunal that on execution of the agreement for sale no right accrues in favour of the assessee does not lay down on the correct legal principle. That apart the sale transaction was assessed to tax for the assessment year 2017-18 and the said assessment was subject matter of reopening u/s 147 of the Act and the re-assessment was completed. In fact the learned tribunal while considering the second issue as to the applicable circle rate of the property has held in favour of the assessee by taking note of the fact that the entire sale consideration has been paid at the time of execution of the agreement of sale and therefore the stamp duty value/circle rate as applicable on 30.12.2016 has to be applied in the assessee s case. Therefore this finding on the second issue is contrary to the finding rendered by the tribunal on the first issue which is the preliminary issue. Thus Tribunal committed an error in coming to the conclusion that the transfer did not take place in favour of the assessee on and from the date of execution of the agreement of sale pursuant to which the entire sale consideration was paid and the assessee was put in possession of the property which was purchased by them. The appeal is allowed. The order passed by tribunal is set aside and the substantial questions of law are answered in favour of the assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

a. Whether the addition under Section 56(2)(x) of the Income Tax Act, 1961 could be made for the assessment year 2018-19 when the purchase, sale, or transfer of the rice mill took place in the previous year relevant to assessment year 2017-18.

b. Whether the de-facto transfer of immovable property, as defined under Section 2(47)(ii) read with Section 2(47)(vi) of the Act, occurred on the date of the 'Agreement for Sale' (December 30, 2016), given that the full sale consideration was paid through banking channels, possession was delivered, and the assessee commenced production and offered profits to income tax for AY 2017-18.

c. Whether the extinguishment of rights in the capital asset took place on the date of execution of the 'Agreement for Sale' (December 30, 2016), as the assessee received the capital asset in exchange for full consideration on that date, pursuant to Section 2(47)(ii) of the Act.

d. Whether Section 2(47)(vi) of the Act applies to the enjoyment of immovable property by the transferee from the date of the agreement, irrespective of whether the transfer under the Transfer of Property Act, 1882, was completed, given that the assessee was enabled to enjoy the property from December 30, 2016.

2. ISSUE-WISE DETAILED ANALYSIS

Issue a: Applicability of Addition under Section 56(2)(x) for AY 2018-19 vs AY 2017-18

Relevant legal framework and precedents: Section 56(2)(x) deals with income from other sources, including receipt of property without consideration or for inadequate consideration. The timing of the transfer is crucial to determine the relevant assessment year. The Court examined the timing of the transaction to ascertain the applicable AY.

Court's interpretation and reasoning: The Court emphasized that the transaction in question-the purchase of the rice mill-occurred in the previous year relevant to AY 2017-18, as the full consideration was paid and possession was delivered on December 30, 2016. Hence, any addition under Section 56(2)(x) should relate to AY 2017-18 and not AY 2018-19.

Key evidence and findings: The agreement for sale dated December 30, 2016, stipulated full payment of Rs. 86 lakhs by that date, immediate delivery of possession, and rights to operate the rice mill. The assessee commenced production and declared profits in AY 2017-18.

Application of law to facts: Since the transaction and enjoyment of rights occurred in the previous year relevant to AY 2017-18, the addition under Section 56(2)(x) could not be made for AY 2018-19.

Treatment of competing arguments: The Tribunal had held that the transfer did not take place on the agreement date but on the date of registered sale deed (March 21, 2018), thereby allowing addition for AY 2018-19. The Court rejected this, finding it inconsistent with the facts and legal principles.

Conclusion: The addition under Section 56(2)(x) is not sustainable for AY 2018-19 as the transfer occurred earlier.

Issues b, c, and d: Date of Transfer and Extinguishment of Rights under Section 2(47) of the Act

Relevant legal framework and precedents: Section 2(47) defines 'transfer' for capital asset purposes, including clauses (ii) and (vi) which cover extinguishment of rights and enjoyment of immovable property. The Court relied heavily on the Supreme Court decisions in Sanjeev Lal vs. CIT and Commissioner of Income Tax vs. Balbir Singh Maini.

In Sanjeev Lal, the Supreme Court held that although ordinarily a sale is complete on execution of a registered sale deed, for income tax purposes, transfer can be deemed to occur on execution of an agreement for sale if rights in the property are extinguished and transferred to the buyer. The Court emphasized a purposive interpretation of Section 2(47) to effectuate the legislative intent and avoid tax avoidance.

In Balbir Singh Maini, the Supreme Court clarified that under Section 2(47)(vi), any transaction enabling enjoyment of immovable property by the transferee falls within the meaning of transfer, regardless of transfer under the Transfer of Property Act.

Court's interpretation and reasoning: The Court found that the assessee had paid the entire sale consideration on December 30, 2016, was put in possession of the rice mill, had the right to operate the business, and enjoyed the property from that date. This extinguished the vendor's rights and transferred them to the assessee, satisfying the conditions under Section 2(47)(ii) and (vi).

The Tribunal's contrary finding-that no right accrued on the agreement date-was held to be erroneous and inconsistent with the legal principles established by the Supreme Court.

Key evidence and findings: The agreement for sale explicitly provided for immediate possession and operational rights upon payment of Rs. 86 lakhs. The assessee commenced production and declared profits in AY 2017-18. The Tribunal's own finding on the circle rate for stamp duty was based on the date of the agreement, recognizing the transaction's effective date.

Application of law to facts: The Court applied the principles from the Supreme Court rulings to conclude that the transfer occurred on December 30, 2016, the date of the agreement, and not on the date of the registered sale deed.

Treatment of competing arguments: The Tribunal's reliance on the date of registered sale deed was rejected as it ignored the substance over form principle and the legislative intent behind Section 2(47). The respondent's argument that transfer occurs only on registration was found untenable in light of the facts and binding precedents.

Conclusion: The transfer for income tax purposes took place on the date of the agreement for sale, December 30, 2016, with the extinguishment of rights and enjoyment of the property vesting with the assessee from that date.

3. SIGNIFICANT HOLDINGS

The Court held:

"The legal issue is well settled and the view taken by the tribunal that on execution of the agreement for sale no right accrues in favour of the assessee does not lay down on the correct legal principle."

"Under section 2(47)(vi), any transaction which has the effect of transferring or enabling the enjoyment of any immovable property should come within its purview."

"The learned Tribunal committed an error in coming to the conclusion that the transfer did not take place in favour of the assessee on and from the date of execution of the agreement of sale pursuant to which the entire sale consideration was paid and the assessee was put in possession of the property which was purchased by them."

The Court established the core principle that for the purposes of capital gains tax and income tax, the transfer of immovable property may be deemed to occur on the date of the agreement for sale if the rights of the vendor are extinguished and the purchaser is put in possession with the right to enjoy the property, irrespective of the date of registration of the sale deed.

Accordingly, the Court answered the substantial questions of law in favour of the assessee, setting aside the Tribunal's order and holding that the transaction must be assessed in AY 2017-18, not AY 2018-19.

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