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TMI Blog2012 (10) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... erty and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of S. 45 on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. Accordingly, issue relating to transfer of property u/s. 2(47)(v) is decided in favour of the Department See Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003 (2) TMI 62 - BOMBAY HIGH COURT ] Dis-allowance of interest expenditure on ground of fund being used for non-business purpose – diverted to sister concern - Held that:- Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. There should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii). That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed – Decided against assessee. - IT APPEAL NOS. 58 & 355 (HYD.) OF 2011 - - - Dated:- 20-7-2012 - CH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... q. yd at Sarojini Devi Road, Secunderabad. The assessee entered into a Development Agreement with M/s. Legend Estate Pvt. Ltd., on 19.4.2006. As per the said agreement, the developer M/s. Legend Estate Pvt. Ltd. was to develop the assessee's land of 3200 sq. yd and construct flats with an understanding to share the built-up area in the ratio of 50:50. During the course of assessment proceedings, the Assessing Officer noted that the agreement for development amounted to transfer of the assessee's land to the developer within the meaning of section 2 ( 47) and he brought to tax the resultant capital gain. While doing so, he arrived at the net capital gain on this transaction at Rs. 5,03,79,427 after adopting the value of the land at Rs. 25,000 per sq. yd . 5. The assessee challenged this issue before the CIT ( A). The CIT ( A) held that there is a transfer u/s. 2 ( 47) of the Act. However, regarding the valuation of the land at Rs. 25,000 per sq. yd ., he directed the Assessing Officer to adopt the value of land at Rs. 22,000 per sq. yd ., as per the SRO record and re-compute capital gain. Aggrieved, the Revenue is in appeal before us. Against the treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to apartments received in his return of income filed with the department for the AY 2008-09 and AY 2009-10 and paid tax on the capital gains. Though the assessing officer had this information in his possession, he overlooked these facts altogether while assessing the income for the AY 2007-08. Thus it resulted in double taxation of same income in two different years, which is bad in law. 8. The assessing officer considered Rs. 25,000 per square yard as deemed consideration for transfer of land. However. the assessing officer has not indicated any rationale for adopting the rate Rs. 25,000. Being a quasi-judicial officer the assessing officer ought to have justified such adoption. In view of this fact, assessing the consideration at the rate of Rs. 25,000 per square yard is a gross error. Therefore, the addition deserves to be deleted. The assessee was to receive 50% of the super built-up area of the property to be constructed by the developer. Overlooking this fact, the assessing officer considered that that the assessee has transferred the entire 3,200 square yards of land, thus he computed the capital gains adopting an ad hoc rate of Rs. 25,000 per square yard as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains. The assessing officer has not chosen to do so. Therefore the addition made is erroneous and deserves to be deleted. 11. Further the learned AR drew our attention to the Registration and Other Related Laws ( Amendment ) Act, 2001 specifically to amendment of section 17 which reads as follows: Amendment of section 17 - In section 17 of the Registration Act, - ( a ) After sub-section 1, the following sub-section shall be inserted, namely:- "(1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A". ( b ) In sub-section (2), in clause (v), for the opening words "any document", the words, brackets, figure and letter" any document other than the documents specified in sub-section (1A)" shall be substituted. 12. According to him, there was no registration of deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has a right to revoke the contract in certain eventualities. The language used in the contract also indicates that it is not a case of transferring the possession of the property to the developers to enjoy absolute rights over the said property, but it is a case of mere licence to him to enter upon and carry on the developmental activities in the said property. In the light of the specific clause in the agreement as regards the transfer of possession of the property, it is for the Revenue to prove that the assessee gave possession of the property to the developers before the end of the previous ear relevant to A.Y. 1988-89 and such transfer of possession, if any, debars the assessee from enforcing against the transferee or persons claiming under him any right in respect of the property. Thus, neither in terms of s. 2(47)(v) of the IT Act, nor in terms of s. 53A of the Transfer of Property Act, the impugned transaction can be classified as "transfer" of capital asset or would be considered as allowing of the possession of any immovable property in part performance of a contract of the nature referred to in s. 53A of the TP Act. The transaction can at best be classified as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital gains could not have been taxed in the in this assessment year in appeal before us. The other grounds raised by the assessees in their appeals have become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessees in the assessment year under consideration. Consequently, the appeal filed by the revenue in ITA No.328 to 331/Hyd/2011 have become infructuous and dismissed accordingly. 13. The learned DR contended that the action of the Assessing Officer and the contentions of the assessee's counsel revolved around two clauses of the development agreement dated 19.04.2006, as follows: . They are reproduced below: "Clause 7(t): The first (sic) has already delivered possession of the property to the second party and the second party has obtained all permissions and sanctions for the proposed resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taking of possession in part-performance of such contract had taken place. Incidentally it raises the question as to how the expression 'transaction' is to be understood. One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed is itself the 'transaction' contemplated by section 2(47)(v). It is enough if the agreement/contract falling within the description of section 53A' provides for taking possession at some stage before the ownership is transferred in a manner known to law. This interpretation has no doubt the merit of certainty. Take the date of execution of agreement as the relevant date of transfer and pay the tax on capital gains that would arise based on the price stipulated in the agreement - that is what this interpretation leads to ...... Meaning of 'possession' and how should it be understood in context of sub-clause (v) of Section 2(47) Possession is an abstract concept. It has different shades of meaning. It is variously described as 'a polymorphous term having different meanings in different contexts' and as a word of 'open te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire consideration is really not germane to the applicability of sub-clause (v) of section 2(47). The very purpose of expanding the definition of transfer will be frustrated if the test of ownership and title is applied. The readiness and willingness of the transferee who is put in possession to fulfil his obligations is sufficient to invoke the doctrine of part performance ....... Once it is held that the transaction of the nature referred to in sub-clause (v) of section 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee, has by virtue of that transaction, a right to enter upon and exercise the acts of possession effectively." Authority for Advance Rulings Jasbir Singh Sarkaria , In re. [2007] 164 Taxman 108 (AAR - New Delhi) 15. As per clause 7(f) of the development agreement, the first party i.e., the assessee had already delivered possession of the property to the second party i.e., M/s Legend Estate Private Ltd. Deriving support from the ruling of the Authority for Advance Rulings extracted as above, this act of the assessee amounts to "transfer" as defined in Section 2(47) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of 4-1/2 flats to be given to her by the developer. Thus, it was a case of exchange as understood in clause (i) of section 2(47). There was no force in the argument that the handing over of the possession was not in pursuance of part performance of the contract. Possession of the land being one of the interest in property had been transferred to the developer who also would be enjoying the usufruct of the land. If the shield of section 53A was available to the developer, it obviously meant that handing over of the possession was pursuant to the transfer contemplated under the Transfer of Property Act and hence under clause (v) of section 2(47). In the present case, this was not a sale transaction as money was not the consideration but some other valuable consideration was passing to the assessee in the form of 4-1/2 flats. Therefore, the transfer in the present case was for consideration and it was immaterial that the consideration may be received in future. Therefore, the development agreement in the present case had the effect of transfer as contemplated in section 2(47). (Head Note)" 18. The learned DR submitted that the case of the assessee is identical to that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l come into operation. Another point is also equally noticeable that by the presence of the deeming provision, the income on account of arousal of the capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place. Due to the presence of this statutory fiction, the actual year in which the entire sale consideration is received, is beside the point but what needs to be judged is the point of time at which the transfer took place either by handing over of the possession or by allowing the entry into the premises or by making the constructive presence of the vendee nevertheless duly supported by a legal document. 22. But the issue do not get settled only by the interpretation of s. 45 and s. 2(47)(v) because the definition of "transfer" not merely prescribes allowing of possession but to be retained in part performance of a contract of the nature referred in s. 53A of the Transfer of Property Act. Therefore, it is further requisite to deal with the relevant section contained in Transfer of Property Act. 23. Transfer of Property Act contains S. 53A under the heading "Part performance" and, for deciding the case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2(47)(v) of I T Act. It is pertinent to clarify that one must not mistake to identify the issue of capital gain with the term "transfer" as defined in s. 54 of Transfer of Property Act. At the cost of elaboration, we may like to add that in the past there was a long line of pronouncements; while deciding income tax cases, that unless and until a sale deed is executed and that too it is registered, transfer cannot be said to have been effected. The consequence of said catena of decisions was that no capital gain tax was directed to be levied so long as "transfer" took place as per the generally accepted connotation of the term under Transfer of Property Act. The resultant position was that the levy of capital gain tax thus resulted in major amendments in the income-tax statute. The main objective of those amendments was to enact that for the purposes of capital gains, the transaction involving transfer of the nature referred are not required to be registered under Registration Act. Such arrangement does not include transfer of certain rights vesting to a purchaser; however such "transfer" does confer certain privileges of constructive ownership with connected bundle of rights. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contemplated in cl. (v) need not necessarily be sole and exclusive possession, so long as the transferee is enabled to exercise general control over the property and to make use of it for the intended purpose. The mere fact that the assessee owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of the agreement, did not restrict the rights of the developer or did not introduce any incompatibility. In a situation like this when there is a concurrent possession of both the parties, even then cl. (v) has its full role to play. There is no warrant to postpone the operation of cl.(v) to that point of time when the concurrent possession would become exclusive possession of the developer. Any other interpretation i.e., possession means exclusive possession, shall defeat the purpose of amendment. The possibility of staggering of payment linked with possession is ruled out by this amendment so that the taxability of gain may not be shifted to an uncertain distant date. We have no hesitation in saying that even if some part of consideration remains to be paid, the transaction shall not affect the liability of capital gains ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Thus, if the possession and control of the property is already vested with the transferee and the impugned development agreement has been duly acted upon and it is still in operation, it has to be decided that there is a transfer u/s. 2(47)(v) of the Act. We have to see the real intention of the parties. As per the well known cannon of construction of document, the intention generally prevails over the word used and that such a construction placed on the word in a deed as is most agreeable to the intention of the parties. If there are grounds appearing from the face of the instrument affording proof of the real intention of the parties, then that intention would prevail against the obvious and ordinary meaning of the words used. Entering into the property and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of S. 45 of the Act on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein to be seen. 27. Accordingly, we decide the above issue relating to transfer of property u/s. 2(47)(v) of the IT Act in favour of the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered personal by the assessing officer are as under: Investments Amount (Rs.) Investment in property at MG Road 40,71,489 Investment in property at SD Road 40,32,320 Total 81,03,809 Deposits Amount (Rs.) APCPDCL 34,560 AP Genco 3,221 Country Club 15,999 Electricity (Hydri) 36,604 Electricity (Meher) 5,082 Govt. of India Security 1,400 Mobile Phone 14,210 Ordinance Factory 3,338 EMD - AP Genco 2,000 Rent 1,75,000 Revata Aqua Mineral Deposit 1,000 Telephone - Tata 14,500 Telephone - BSNL 10,000 Sales Tax (Ahm Branch) 5,000 Sales Tax 3,000 Distribution deposit - VV Hitech 50,000 Total 3,74,914 31. With reference to the deposits, the AR submitted that all the deposits are made for the purpose of business and are not personal deposits. He submitted that it is necessary for a business of the assessee size to have such business deposits. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be appreciated that the non-interest bearing unsecured loans available for investment are Rs. 64,28,456. Thus the aggregate capital and the non-interest bearing funds available to the assessee are Rs. 2,63,84,867. In view of this fact, assessee's capital and the non-interest bearing funds are sufficient to cover the investments and deposits aggregating to Rs. 84,78,723. 33. From the foregoing facts, it is apparent that the assessee had sufficient own funds to meet the investments. Thus holding the interest paid on unsecured loans as not for business purpose and disallowing the same is erroneous and baseless. The AR submitted that the disallowance made by the assessing officer be deleted. The AR submitted that from the Balance Sheet of RS Arora Rubber Corporation, the assessing officer noticed that the unsecured loan balances stood at Rs. 1,09,44,009 and the investments in Arora Tower MG Road stood at 40,71,489, investment in property at SD Road stood at Rs. 40,32,320 and deposits stood at Rs. 3,74,914. Without bringing any information on record, the assessing officer held that the assessee had diverted the loan amount towards the investments and deposits. Thus the assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in his submissions segregated the interest bearing and non interest bearing unsecured loans, out of the unsecured loans procured from friends relative in two firms namely M/s. R.S. Rubber Crop. M/s. Fixo Seal Stopper and Profiles. The assessee in his arguments during appellate proceedings worked out a formula by arriving at difference between the investments and non-interest bearing unsecured loans and treated the difference as interest bearing loans and proportionately disallowed the interest from the said difference. This contention of the assessee was not taken during the assessment proceedings but is taken for the first time before the appellate proceedings and voluntarily conceded certain portion of the interest to be disallowed. In support of the non-interest bearing loans the assessee has not produced any evidence or substantiated with any documentary evidence as to how they would qualify for non interest bearing funds which are not utilized for the business purposes. No doubt that the assessee is a proprietor but he cannot work hotchpotch without any basis or any evidence and come to a conclusion on his own that his affairs are properly managed. There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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