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TMI Blog2024 (9) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort 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. - Shri George Mathan, Judicial Member And Manish Agarwal, Accountant Member For the Assessee : Shri Purnendhu Bhusan Mohanty, CA For the Revenue : Shri S.C.Mohanty, Sr DR ORDER PER BENCH This is an appeal filed by the assessee against the order of the ld CIT(A), NFAC, Delhi dated 14.8.2023 in Appeal No.CIT(A), Cuttack/10363/2019-20 for the assessment year 2015-16. 2. Shri Purnendhu Bhusan Mohanty, ld AR appeared for the assessee and Shri S.C.Mohanty, Sr.Dr appeared for the revenue. 3. It was submitted by ld AR that the assessee is a Director in six companies, namely; (i) M/s. Maa Durga Rice Processing Pvt Ltd., (ii) M/s. Maa Durga Flour Mills Pvt Ltd., (iii) M/s. Maa Durga Rice Products Pvt Ltd., (iv) M/s. Maa Durga Commotrade Pvt Ltd., (v) M/s. Navadurga Industries Ltd., and (vi) M/s. Maa Durga Thermal Power Company Ltd. It was the submission that M/s. Maa Durga Thermal Power Company Ltd., took loan of Rs. .53,50,00,000/-, M/s. Maa Durga Coomotrade Pvt Ltd., took loan of Rs. . 20,00,00,000/- and M/s. Navadurg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction Pvt. Ltd ITA No. 928/Del/2016 (ITAT Delhi) 20 2 Add l CIT vs Glad Investments (P.) Ltd (2006) 102 ITD 227 (ITAT Delhi) 18 3 Badridas Daga vs. Commissioner of Income Tax, 34 ITR 10 (SC) 1 4 CIT v. Attilli N. Rao 252 ITR 880 (SC) 26 5 CIT v. Bagyalakshmi and Co. [1965] 55 I'TR 660 (SC) 24 6 CIT v. Patuck (1969) 71 [TR 713 (Bom) 10 7 CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) 5 8 CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) CIT vs. Shoorji Vallabhdas Co. 46 ITR 144 (SC) 5 9 CIT vs. A. Gajapathy Naidu 53 ITR 114(SC) CIT vs. Ahmedbhai Umarbhay Co. 18 ITR 472 (SC) 5 10 CIT vs. Ahmedbhai Umarbhay Co. 18 ITR 472 (SC) 5 11 CIT vs. Pepsu Road Transport Corpn.253 ITR 303 (Punj. Har.) 5 12 CIT Vs. Crawford Bayley Co., 106 ITR 884 (Bom.) 23 13 Commissioner of Income Tax vs. Chetnavis (SM) AIR 1932 PC 178 1 14 DCIT vs. T. Jayachandran [2018] 406 ITR 1 (SC) 13 15 Dy.CIT v. Mrs. Lakshmi M.Aiyar (2011) 131 1TD 436 (Mum) 11 16 E. D. Sassoon Co. Ltd. vs. CIT [1954] 26 ITR 27 (SC) 4 17 Godhra Electricity Co. Ltd. vs. CLT 225 ITR 746 (SC) 2 18 Gujarat Municipal Finance Board vs. Dy. CIT (Assessment) 221 ITR 317 (Guj.) 6 19 Indermani Jatia vs. CIT 35 ITR 298 (SC) 5 20 K. | P. Varghe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MENT OF ISSUES 1. The Ld. CIT (Appeals) considered the Sale of Immovable Property as Income from Capital Gain which is without any basis and devoid of any merits. 2. The Ld. CIT (Appeals) mis applied the ratio dicidendi of CTT v. Attilli N. Rao 252 ITR 880 (SC) and T.S. Hajee Moosa Co Vs. ACIT (ITAT Chennai) in the Appeal Number: ITA No. 2686/CHNY/2018 which is squarely not applicable to the instant case. D. SUMMARY OF ARGUMENTS 1. The Lid. CIT (Appeals) considered the Sale of Immovable Property as Income from Capital Gain which is without any basis and devoid of any merits. The taxation of Capital Gain under the Income Tax Act, 1961 is governed by the provisions of section 45 (charging section) and Section 48 (Mode of Computation). As per the provisions of section 45 r.w.x. section 45 Capital gain is levied when there is transfer of Capital Asset and consideration is received or accrued by virtue of such transfer. However, in the instant case even though the Capital Asset has been transferred but consideration was neither received nor accrued to the assessee. Hence, the Income is not taxable under Capital gain as consideration never received or accrued to the assessee. That apart, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the real income, the question is not the physical receipt of income but of the concept of receipt in law. When there is no provision of exemption or deduction in the law, the concept of real income has been considered in ascertaining whether an amount is taxable or not. The Privy Council in Commissioner of Income Tax vs Chetnavis (SM) AIR 1932 PC 178 had allowed a bad debt as an allowable item on the basis of commercial principles, when there is no provision in law to allow such claim. The Hon'ble Supreme Court in the case of Bodridas Daga vs. Commissioner of Income Tax. 34 ITR 10 (SC) had allowed 'loss on embezzlement', though not an expenditure, as a deduction on the principle of real income theory. This theory is propounded more particularly when there is no assistance in the form of law, so that tax was levied on real income and not on hypothetical income, either on the basis of the entries in the books of account or otherwise. There are many grey areas as to whether a particular receipt is income or a particular payment is a revenue expenditure on which a decisive answer was not forthcoming. The concept of real income is often invoked to decide the issue one way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out, and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner and dovetailing these factors together, but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made 'no income'. In this connection the following proposition emerge: (i) It is the income which has really accrued or arisen to the assessee that is taxable Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation (ii) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue (iii) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed (iv) Where the Act applies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be said to have resulted at all, there is neither accrual nor receipt of income, even though an entry might have been made in the books of account as held in CIT vs. Shoorji Fallablulas Co. 46 IT'R 144 (SC). In the decision of CIT vs. Sitaldar Tirathdas 41 ITR 367, Hon'ble Supreme Court has ruled that what is to be subject for taxation is only real income over which the assessee possesses a right and not any other thing. In Somaiya Organo Chemicals Ltd vs CIT 216 ITR 291, the issue considered by Bombay High Court was whether the cess collected and kept in a separate bank account as per the statutory order and to be utilized for a particular purpose, was income in the hands of assessee? It was held that the statutory levy could not be equated as the 'real income' of the assessee. In Rajkot District Gopalak Co-op Milk Producers Urion Lid vs. CIT 204 ITR 590, the question which fell for consideration was whether income of the project assigned to a Co-operative Society on lease and license basis and profits of which were to be paid to the State Governmem, could be treated as 'income' of the assessee? It was held that the entire income belonged to the Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , be chargeable to income-tax under the head Capital gains , and shall be deemed to be the income of the previous year in which the transfer took place. ----------------------------------------------- ---------------------------- Mode of computation. 48. The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- ------------------------ From conjoint reading of both the sections it is apparent that the assessee shall be liable to pay tax from Income under the Head Capital Gain only when the following conditions are fulfilled; i) Asset should be a Capital Asset; ii) There should be a transfer; and iii) Consideration is received or accrued as a result of the transfer of Capital Asset. In the instant case, first two conditions were met whereas the last condition is not fulfilled. The Consideration was neither received nor accrued in the hand of the assessee as the asset was transferred by virtue of a contractual obligation overriding the income. At this juncture, it is of paramount significance to understand the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsion of income by overriding title will insulate the recipient from tax consequences and merely because he receives the same, he could not be taxed. An example of overriding charge is that person giving a property as a gift to another person may create a charge that the recipient is eligible to enjoy the property and its income subject to satisfying certain conditions. The conditions could be to pay a specified sum to a particular person at periodic intervals or to share the rental income from the property with a particular person for a particular period of time. In Nariman B. Bharucha's case (1981) 130 ITR 863 Shri. Nariman Bharucha running a proprietary concern converted the same into partnership by admitting his two sons as partners and allotted 37.5 percent share to each son. The balance of 25 percent share of profit or loss was retained by him. The deed of partnership contained a recital that in the event of the demise of the erstwhile proprietor, the surviving partners have to pay 25 percent share of profits of the firm to the widow of the deceased partner (i.e. wife of erstwhile proprietor and mother of two surviving partners). It so happened that the erstwhile propriet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would make no difference so far as the income-tax law is consequence in recipient's assessment. The above said concept of diversion of income by overriding title exempts the actual recipient of income from tax consequences. However, the person to whom the income is diverted is chargeable to tax for the income so received by him. An interesting case of a recipient receiving such payment from a partnership firm was discussed in Dy.CIT v. Mrs. Lakshmi MiAiyar (2011) 131 ITD 436 (Mum). In this case, the assessee, a widow of deceased partner, became eligible for 5% of the gross receipts ofthe firm for a period of 10 years as per the condition laid down in the deed of partnership. She received a sum of I 20.26 lakhs in the financial year 2004-05 but did not offer the same as income for the reason that it is a capital receipt and did not have any semblance of revenue nature. The Tribunal held that the assessee had received the amount from the firm and such receipt was not in relation to any service or business done by her for the firm. It was not to compensate for any loss suffered by her because of the firm. Similarly, it is not a compensation for the services rendered by her either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was legally entitled to receive the income, it was not his income at the very outset. Say an income is received by the assessee and held in trust on behalf of its real owner, who acquires a title over the income before it reaches the hands of the assessee. This occurs when, by reason of a superior title or overriding obligation, voluntary or otherwise, income is diverted at the source itself and it never reaches the person whose hands it is sought to be assessed. The income earned by the assessee is really not his income, but belongs to somebody else and the assessee has no title to it. On the contrary, if the source is not assigned to, or transferred but passes through the assessee to an ultimate purpose, the case is of application of income in a particular manner. Even though he may enter into a legal obligation to apply it in a certain way, still it remains the income of the assessee. This distinction has been maintained by Hon'ble Supreme Court on numerous occasions. See for example Raja Bejoy Singh Dudhuria vs. ClT [1933J 1 ITR 135 (PC); P. C. Mullick vs. CIT [1938J 6 ITR 206 (PC); ClT vs. Sitaldas Tirathdas [1961J 41 lTR 367 (SC) and Vibhuti Glass Works vs. ClT [1989J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson will not lead to transfer of taxability of any income which is generated from such an asset and thus, the same shall continue to be taxed in the hands of the person who transfers the asset. When income is said to be diverted by overriding title? The principle is simple enough but now and again, the question arises as to what is the criteria to determine, when does the income attributable to an assessee get diverted by overriding title? ]4 It may be difficult, in a particular case, to distinguish between what is an 'application' of income and what amounts to 'diversion'. The landmark case of the Supreme Court in CIT vs. Sitaldas Tirathdas (supra) is probably the best answer to this vexed question. A 3 Judge Bench of the Apex Court has wonderfully explained in what circumstances there is a diversion of income by overriding title and where the income can be said to have been applied after it is received by a taxpayer. The assessee in that case, claimed a deduction from his total income, the amount paid under a consent decree as maintenance to his wife and children. The assessing officer however disallowed said deduction, which was confirmed by the Commissioner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the nature of the obligation by reason of which the income becomes payable to a person other than the one entitled to it. The expressions 'reaches the assessee' and 'has been received have not been used in the sense of the income being received by one person or another. Where the obligation flows out of an antecedent and independent title in the former (such as, for example, the rights of dependants to maintenance or of coparceners on partition, or rights under a statutory provision or an obligation imposed by a third party and the like), it effectively slices away a part of the corpus of the right of the latter to receive the entire income and so it would be a case of diversion. On the other hand, where the obligation is self-imposed or gratuitous, it can be only a case of an application of income. See Moti Lal Chhadami Lal Jain vs. CIT [1991] 190 ITR I (SC) wherein the above has been laid down. Further, the appearing or non-appearing of a particular income in the books of account of un assessee is not a relevant criterion to determine the question of diversion of income As held by the Hon'ble Supreme Court, the expressions 'reaches the assessee and has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of income by the assessee and not of diversion of income by overriding title (ii) If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about the hypothetical income which does not materialize. (iii) The existence or absence of entries in his books of account cannot be decisive or conclusive in the matter (iv) The concept of 'real income' must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principle of law of income-tax as developed Apart from the aforesaid submission, views expressed in AddL CIT vs Glad Investments (P.) Ltd (2006) 102 ITD 227 (Delhi) is in pari materia with the instant case. The relevant portions of the judgement are given below; We are now left with the argument of the revenue that constructively the assessee should be treated to have received the amounts of sale proceeds. It is argued that credit institutions sold the shares in question on behalf of the assessee and the sale proceeds were applied in discharge of debts owed to the credit institutions by Pertech and Swati on behalf of the assessee. We do not see any basis for these arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the assessee. Further, reliance is placed on the judgements of ACIT Vs Emaar MGF Construction Pvt. Ltd (ITAT Delhi) ITA No. 928/Del/2016 and Shroff Eye Centre vs. ACIT (ITAT Delhi). For the sake of brevity, the relevant portions of the judgements are reproduced below; ACIT Vs Emaar MGF Construction Pvt. Ltd (ITAT Delhi) ITA No. 928/Del/2016 We find that the assessee is under the obligation to part away with the source of income to the holding company and it was not its volition alone, to give away the revenue that could have been otherwise accrued to them. An agreement entered into by the holding company with the assessee for providing financial security cover and to part away 25% sales proceeds was clearly a case of division of source of income between the holding company and the assessee. The flats to be constructed, by the assessee company were the source of income and the holding company had created a lien over 25% for a quid pro quo thereof and therefore took away 25% shares from the sale proceeds. It is not a case that the entire sale proceeds of flats and therefore, the income there from would have accrued to the assessee and 25% thereof had been applied or given aw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the appeal of the assessee. The coordinate bench has also dealt with the issue whether the payment of the disbursement income to the holding company was diversion of income by overriding title or merely on application of income. The coordinate bench has held in paragraph number 51 of the order of the coordinate bench. it has been held that the payment made to the holding company is obligated the in diversion of income by overriding title. The coordinate bench also after considering the contribution made by the holding company and keeping in view the amounts that have been already offered for taxation in the hands by the respective entities the above expenditure is allowable in the hands of the company. The relevant paragraphs as cited above that the revenue sharing agreement entered with the holding company by the assessee is a diversion of income by overriding title, we allow ground number one of the appeal following the reasoning given by the coordinate bench. Shroff Eye Centre vs. ACIT (ITAT Delhi) The Id. AR relied upon the number of decisions in this connection. In CIT Vs Sitaladas Tirathdas, (1961) 41 ITR 367, Hon'ble Apex court while referring to decisions in Raja B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of the assessee Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge on obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied Accordingly, Hon'ble High Court held that there was an absolute obligation imposed on the continuing partners to hand over the commission to the retired partners and the income was diverted by overriding title. In a similar situation, in V. N. V Devarajulu Chetty and Co. v. CIT [1950] 18 ITR 357, Hon'ble Madras High Court held that that where a new firm which merely collected the money on behalf of the old firm and bank the same to the new firm (sic), the new firm could not be assessed. In CIT v. Sunil J. Kinariwala [2003] 259 ITR 10, Hon'ble Apex court, after referring to the decisions of the Privy Council in the cases of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 and P.C Mul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the continuing firm/partners, apparently, there would be a diversion of income by overriding title. Indisputably, a similar claim has already been accepted by the AO in the AY 2004-05 2006-07. In view of the foregoing, we have no alternative hut to allow ground no.2 in the appeal. Concluding the above, it is, therefore, submitted that on the facts and in the circumstances of the case, documents/evidences submitted in respect of the transactions it is evident that there is Diversion of Income by Overriding Title hence the assessee is not exigible to tax under the Income Tax Act. 2. The Ld. CIT (Appeals) mis applied the ratio dicidendi of CITY. Attilli N. Rag 252 ITR 880 (SC) and T.S. Hajce Moosa Co Vs. ACIT (ITAT Chennai) in the Appeal Number: ITA No. 2686/CHNY/2018 which is squarely not applicable to the instant case. The Ld. CIT (Appeal) heavily relied on the judgements of CIT v. Attilli N. Rao 252 ITR 880 (SC) and T.S. Hajee Moosa Co Vs. ACIT (ITAT Chennai). However, relevant extracts of the judgements stated in the order are stated below; A. In the case of CIT v. Attilli N. Rao 252 ITR 880 (SC), wherein, the Hon'ble Supreme Court has observed and held as under: 4. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat was created in favour of the State by reason of the mortgage 8. We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefore belonged to the assessee. From out of that price, the State deducted its dues towards kist and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed. 9. In these premises, the first question is answered in the negative and in favour of the Revenue The other questions do not arise for consideration. B. Similarly, in the case of T.S. Hajee Moosa Co Vs. ACIT (ITAT Chennai). the operative part of the judgement is stated below, 5. The next is in connection with the additional ground. It is submitted that the assessee firm had given guarantee / security for the borrowals made by other entities. The assessee did not receive any benefit or accrue any benefits from the transfer and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. RELIEF Wherefore in the light of facts presented, issues raised, arguments advanced and authorities cited, the Counsels on behalf of the Appellants humbly pray before this Hon'ble Tribunal that it may be pleased to adjudge and declare that 1. The appeal is allowed 2. The decision of the Ld. CIT (Appeal) to be set aside. Or pass any other order that the court may deem fit in the light of equity, justice and good conscience and for this Act of kindness of Your Lordships the Appellants shall ax duty bound ever pray. 4. In reply, ld Sr DR submitted that the assessee has transferred the immovable properties as per the sale deed. In the sale deed, consideration is said to have been received by the assessee before the presence of Sub- Registrar. The sale deed having been executed by SREI Equipment Finance ltd., and the sale deed mentioning the consideration and as per the sale deed consideration has passed, the capital gains is liable to be taxed. It was the further submission that the ld CIT(A) has considered the fact that the immovable properties of the assessee nor the sale consideration has been used for settling any of the loans and, therefore, there is no question of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted leading failure on the part of the company to repay the loans on 31.3.2015 i.e. practically after giving loan within the same financial year, the properties which were held as guarantee was taken over by the lender. For better understanding, copy of the sale deed in its entirety is as follows: 12. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantor 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 the Hon ble Supreme Court in the case of CIT vs Attili N Rao (2001) 252 ITR 880 (SC). The decision relied upon by ld AR in the case of ACIT vs Glad Investments Pvt Ltd., (2006) 102 ITD 227 (Del) would not apply insofar as in the said case, first; the guarantor was third party whereas in assessee s case, it is the Director and h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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