2024 (9) TMI 1046 - AT - Income Tax

Nature/characterization of gain - immovable properties of the guarantor is taken over by the financial institution against the loans of the company for which guarantor has stood guarantee - sale of immovable property should be considered as income from capital gains or not? - scope of condition of section 2(47) - sale deed refers to the urgent need of money for repayment of loan amount - whether the takeover of these properties results in capital gains taxable in the hands of the assessee? HELD THAT - A perusal of the sale deed shows that there is no mention in the sale deed that the transfer of the immovable properties was on account of the enforcement of the guarantee clause. The recital to the sale deed refers to the urgent need of money for repayment of loan amount. The recital to the sale deed also clearly mentions that consideration has been received in full and final satisfaction from the vendee/purchaser. Admittedly, there is no clarity in the sale deed as to how the consideration has passed, whether it is in cash. Clause (2) of the sale deed specifically refers that vendors/sellers have delivered the possession of the scheduled property physically to the purchasers. Clause (6) of the sale deed specifically mentions that the scheduled land or any portion thereof have not been acquired by the government by way of lease nor it has been given as equitable mortgage to any bank or financial institution. A perusal of the above recording in the sale deed when compared with the recording as the guarantor to the loans and the guarantee clause and the mortgage clause clearly shows that though admittedly originally the said immovable properties were mortgaged, something has happened between them by which the mortgage has been released and the properties have been sold to the financial institutions as an asset free from any incumbrance. A perusal of the provisions of section 2 (47) of the Act defines the transfer to be inclusive definition. The facts in the present case clearly shows that the sale deed what has been executed is plain and simple sale deed and immovable properties of the assessee, herein, has been transferred for variable consideration. Once the condition of section 2(47) of the Act is applied, then the provisions of section 45 and 48 of the Act would come into play. The cost of the properties is very much available, the consideration of the properties sold is very much available, capital gains is very much computable and this is what has been done by the Assessing Officer and upheld by the ld CIT(A),which we are in full agreement. Sale deed is not the actual picture and the sale deed has been executed under compulsion for taking over of the immovable properties by the financial institutions due to defaults in payment of the loans of the various companies in respect of which the assessee has given guarantee - The same raises a lot of question. The loan was granted in September, 2014 and in six months, the guarantor s properties are taken away. In short, nearly Rs. .70 crores of loans taken by the various three companies from the financial institution has become bad and that too pay to such an extent that the guarantor s immovable properties has been acquired by the financial institution in this short period of time. It is an admitted fact that before giving loans, the financial institution would look for financial stability of the various companies but how such loans was granted knowing fully well or evident that the companies would sick. Even assuming that what is claimed by the assessee is true what normally happens is when the immovable properties of the guarantor is taken over by the financial institution against the loans of the company for which guarantor has stood guarantee. The guarantor steps into the shoes of the financial institution as a creditor in the books of account of the company, who has taken said loans. A valuable right accrues and is acquired by the said guarantor. The claim of the assessee that she has received no consideration or benefits would not stand to reason insofar as the assessee is a Director and that too having substantial shareholding pattern in all the said companies. She would have received salary and other benefits from the said companies. Thus, when she steps into the shoes of the financial institution to the extent of the loan, which has been repaid by the acquisition of the immovable properties in which she had put as guarantee, the consideration become evident insofar as she become the creditors to that extent. This view of our also find support from the decision of Attili N Rao 2001 (10) TMI 5 - SUPREME COURT . The findings of the AO as upheld by the ld CIT(A) stands confirmed. Decided in favour of revenue.

Summary

Issues Involved:
1. Whether the sale of immovable property should be considered as income from capital gains.
2. Misapplication of the ratio decidendi of CIT v. Attilli N. Rao and T.S. Hajee Moosa & Co Vs. ACIT by CIT (Appeals).

Issue-wise Detailed Analysis:

1. Whether the sale of immovable property should be considered as income from capital gains:

The assessee, a director in six companies, mortgaged her immovable properties to secure loans for these companies from SREI Equipment Finance Ltd. Due to the companies' failure to repay the loans, SREI took over the mortgaged properties. The primary issue is whether the takeover of these properties results in capital gains taxable in the hands of the assessee.

The assessee argued that since she did not receive any consideration from the sale, no capital gains should be levied. According to Section 48 of the Income Tax Act, capital gains are computed based on the consideration received or accrued. The assessee contended that the sale consideration of Rs. 1,89,13,000/- was neither received by her nor set off against the loans, thus failing the requirement under Section 48.

The Tribunal noted that the sale deed executed by SREI Equipment Finance Ltd. mentioned the consideration and the transfer of possession. The Tribunal emphasized that the sale deed did not indicate enforcement of the guarantee clause. The property was sold as a free asset, and the sale deed mentioned that the consideration was received in full satisfaction. Therefore, the Tribunal concluded that the sale of the immovable property falls under the definition of "transfer" under Section 2(47) of the Act, making it liable for capital gains tax as per Sections 45 and 48.

The Tribunal also observed that the assessee, being a director and substantial shareholder in the companies, would have received benefits indirectly. When the immovable properties were taken over by the financial institution, the assessee stepped into the shoes of the financial institution as a creditor to the companies. This right to recover the loan amount from the companies constitutes a form of consideration.

2. Misapplication of the ratio decidendi of CIT v. Attilli N. Rao and T.S. Hajee Moosa & Co Vs. ACIT by CIT (Appeals):

The CIT (Appeals) relied on the judgments in CIT v. Attilli N. Rao and T.S. Hajee Moosa & Co Vs. ACIT to support the taxation of capital gains. However, the assessee argued that these cases were factually different from her case.

In CIT v. Attilli N. Rao, the Supreme Court held that the entire sale consideration realized from the auction of the property, including the amount used to settle the kist dues, should be considered for capital gains. The Tribunal noted that in this case, the property was sold, and the consideration was received and then applied to settle the dues. This scenario differs from the assessee's case, where the property was transferred without any monetary transaction.

In T.S. Hajee Moosa & Co Vs. ACIT, the ITAT Chennai held that the assessee, who had mortgaged property as security for loans taken by group concerns, was liable for capital gains tax as the sale proceeds were used to settle the loans. The Tribunal observed that in this case, the consideration was realized and then applied to settle the debts, unlike the assessee's case where no consideration was received or accrued.

The Tribunal concluded that the factual matrix of the cited cases did not apply to the assessee's case. The assessee's income was diverted at source without any consideration received or accrued, falling under the principle of "Diversion of Income by Overriding Title."

Conclusion:

The Tribunal upheld the order of the Assessing Officer and CIT (Appeals), confirming the levy of capital gains tax on the sale of the immovable properties. The appeal of the assessee was dismissed. The Tribunal emphasized that the sale deed executed indicated a plain and simple sale, and the conditions under Sections 2(47), 45, and 48 of the Income Tax Act were met, making the transaction liable for capital gains tax.