Advocate Sameer Bhatia has dealt with the interplay between sections 2(47) and 45 of the Income-tax Act, 1961 and the provisions of the Transfer of Property Act, 1882 and the Registration Act, 1908. He has also dealt with the controversial question whether a “transfer” is complete on the date of the agreement to sell or on the date of physical possession/registration of documents. All the relevant judgements as well as Circulars of the CBDT have been referred to by the Ld. Author
Introduction
Income Tax Act, 1961 provides a comprehensive machinery to deal with the computation of incomewhich in turn has principally been divided into five main heads. The expression `Transfer’ by itself is used at varied places in law amongst the computational heads and specifically been dealt with by the provisions of section 2(47). The expression `Transfer’ as is so defined by provisions of section 2(47) and as it stands today is the outcome of its substitution by the Taxation Laws (Amendment) Act, 1984 with effect from 01st April, 1985. Part E of Chapter IV of the Income Tax Act deals with the computational head `Capital Gains’ which by itself contains exhaustive propositions dealing with the expression denoted as `Transfer’ which is at various times the area of conflict between the department and the assessee. Section 45(1) inserted by the Finance Act, 1964 with effect from 01st April, 1964 provides the methodology of working out the capital gains arising from transfer of capital assets. Any profit or gain arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D,54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income tax under the head `Capital Gain’ and shall be deemed to be the income of the previous year in which the transfer took place.
The basic question that arises for consideration is whether section 45 of the Income Tax Act, 1961 can be read in isolation and seclusion to the provisions of ancillary laws regulating the very mechanism of transfers. Hon’ble Income Tax Appellate Tribunal Delhi `E’ Bench in the case of Smt. Madhu Gangwani vs. Assistant Commissioner of Income Tax, Circle – 30(1), New Delhi (2019) 179 ITD 673 / 111 taxmann.com 30 (Delhi – Trib) adjudicated in its wisdom the issue as to when the purported transfer takes place in context of the provisions of the Income Tax Act 1961,Transfer of Property Act of 1882 and the Registration Act of 1908.
Facts
The assessee filed her return of income on 14th September, 2010 for the previous year ending 31st March, 2010 declaring income of Rs.43,41,970/- which was further revised to Rs.41,72,080/-. The said return was picked up for assessment under section148 of the Income Tax Act. The reason attributable for action under section 148 was the information received from Additional Director of Income Tax Investigation that in the course of investigation of suspicious transaction report of Sh. Ranish Karki, it came to light that assessee had signed a sale agreement with RK for sale of property in New Delhi for a sum of Rs.3,25,00,000/-. In the course of investigation, it came to light that the assessee, Smt. Madhu Gangwani had 50% ownership in the impugned property and remaining 50% was held by i.e. Sh. Roop Chand. On 07th August, 2008, Sh. Roop Chand released the ownership of his 50% share in favour of assessee for Rs.29,00,000/- thereby making the assessee absolute and complete owner of the impugned property. The said property was transferred to Sh. Ranish Karkion 31st March, 2009for a consideration of Rs.3.25/- crores. The transfer of property was registered on 01stApril, 2009 through registered sale deed. The assessee did not project her income attributable to capital gains in the previous year ended 31st March, 2009but projected the same in previous year ended 31st March, 2010 and claimed deduction under section 54 of the Income Tax Act, 1961 amounting to Rs.2,17,12,940/-.
The assessee in the course of proceedings was confronted as to why the benefit of indexation should not be restricted to the land and building purchased during the financial year ended 31st March, 2006 as 50% share in the property has been purchased during the financial year 2008-09. The assessee furnished details as asked for in the course of proceedings initiated and agreed with the view of the department in so far as the issue touching upon the classification of long term and short term capital gain was concerned. The capital gain of 50% share in the property was treated as long term capital gain and remaining 50% was treated as short term capital gain, the computation of which was accordingly noted in the order by disregarding the computation made by the assessee in her return. It was further noticed from the calculation of short term capital gain that she deducted an amount of Rs.60,00,000/- under the head `Furniture & Fittings’ in support of which an agreement was filed with the department. On scrutiny, it was found that expenditure was related to the period prior to the acquisition of property which was divided into two parts i.e. 30 lakhs in 2006 and Rs.30 lakhs in 2008. Show cause notice was issued to the assessee on the pretext that expenditure incurred on furniture & fittings was not allowable as a deduction. The assessing officer accordingly in light of the circumstances made addition of Rs.30 lakhs apart from making some addition towards expenses incurred prior to the date of acquisition for which a sum of Rs.3,58,067/- was disallowed. The assessee contested the matter before the learned Commissioner (Appeals) but failing to find favour on the issue, ultimately knocked the doors of final authority on facts i.e. the tribunal. The principal argument of the assessee before the tribunal was reopening of assessment was bad in law as no transfer took place pertaining to the financial year ended 31st March, 2010 relevant to assessment year 2010-11 therefore the proceedings of re-assessment by itself is non-estand void ab-initio.
Findings/Reasoning of the Hon’ble Bench
The Hon’ble Bench took note of the provisions pertaining to sections2(47)(v)/ 45 of the Income Tax Act, 1961, section 53A of the Transfer of Property Act, 1882 and section 47 of the Registration Act of 1908 in order to adjudicate the dispute under reference. Section 45 of the Income Tax Act, 1961 undisputedly provides that any profit or gains arising from transfer of a capital asset save as otherwise provided in section 54 etc. be chargeable to income tax under the head `Capital Gains’ and shall be deemed to be the income of the previous year in which transfer took place. Section 2(47)(v) of the Income Tax Act which dealt with the expression transfer provided that any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act 1882. The Hon’ble Bench took note of the fact in view of the copy of registered agreement to sell filed by the assessee which was dated 16th January, 2009 and which fully corroborated the stance of the assessee to sell the impugned property subject to part payment and allowing of part possession to the buyer thereof. The said agreement was registered with the Sub-Registrar, thus thereby satisfying the conditions of section 2(47)(v) of the Income Tax Act when read in conjunction with the provisions of section 53A of the Transfer of Property Act, 1882.The remaining conditions attributable to completion of sale were satisfied by handing over the entire possession of the property subject to payment of remaining amount due in the event of execution of sale deed dated 31st March, 2009.The Hon’ble Bench was satisfied as to the credentials of transaction leading to the undisputed proposition that transfer took place in the financial year ended 31st March, 2009 which was however disputed by the revenue on the pretext that since the sale deed was executed on 31st March, 2009, it was registered on 01st April, 2009 therefore the transfer took place in the previous year ended 31st March, 2010 i.e. the year under appeal.
The Hon’ble Bench in further introspection of the matter took cognizance of the provisions of the Registration Act of 1908 in particular section 47 which undisputedly provided that a registered document shall operate from the time from which it would have commenced to operate if no registration therefore had been required or made and not from the time of registration. The form and substance of the provisions pertaining to section 47 of the Registration Act of 1908 undisputedly provided that a registered document will be operative in law from the date of its execution and not from the date of registration. It also took note of the pronouncement of the Hon’ble Supreme Court in CIT vs. Balbir Singh Maini ’s case (2017) 251 Taxman 202 / 398 ITR 531wherein it was observed that object of section 2(47)(vi)appears to be to bring within the tax net a de facto transfer of any immovable property.The expression "enabling the enjoyment of" takes color from the earlier expression "transferring", so that it was clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof, the maxim "noscitur a sociis" has been repeatedly applied by Supreme Court. A recent application of the maxim is contained in Coastal Paper Limited v. Commissioner of Central Excise, Visakhapatnam, (2015) 10 SCC 664 at 677, para 25. This maxim is best explained as birds of a feather flocking together. The maxim only means that a word is to be judged by the company it keeps. The idea was to bring within the tax net, transactions, where, though title may not be transferred in law, there was, in substance, a transfer of title in fact.’The Hon’ble Bench videPara No.5.2 of its pronouncement settled as under:-
`5.2Considering the facts of the case in the light of above discussion, it is clear that agreement to sell was executed and registered on 16.01.2009 whereby the part possession of the property in question have been handed over to the purchaser subjected to part payment. Therefore, transfer of capital asset completes in preceding A.Y. 2009-2010. This fact is further strengthened by the fact that registered sale deed was executed between the parties on 31.03.2009 whereby the entire terms and conditions are satisfied. The full sale consideration have been paid and possession of the property have been handed over to the purchaser. This fact is further strengthened by Section 47 of the Registration Act whereby it is provided that registered document shall operate from the date of its execution. In these circumstances, we hold that transfer of capital asset had taken place in preceding A.Y. 2009-2010. Therefore, capital gain tax would not be chargeable in assessment year under appeal i.e., 2010-2011. The initiation of re-assessment proceedings are illegal and beyond jurisdiction of A.O. We, therefore, set aside the Orders of the authorities below and delete the entire addition. In this view of the matter, there is no need to decide the other issues involved in the present appeal. Before parting with the Order, we would like to make it clear that since assessee has declared capital gain in the return of income filed for assessment year under appeal and paid self assessment taxes, therefore, assessee would not be entitled to retract from the statement so made in the return of income. In this view of the matter, we allow the appeal of assessee.’
The Hon’ble Bench in its wisdom and on the strength of documents produced settled that on a perusal of the facts, an agreement to sell was registered on 16th January, 2009wherein part possession of the property was handed over to the buyer subject to satisfaction of the part payment. This aspect by itself proves that transfer took place in the previous year ended 31st March, 2009 i.e. AY 2009-10. In furtherance, the sale deed was executed on 31st March, 2009 which in turn was registered on 01st April, 2009 by itself proves when read in conjunction with the provisions of section 47 of the Registration Act that a registered document operates from the date of its execution which in the present case falls on 31st March, 2009. Therefore, the transfer undisputedly fell for consideration touching upon the capital gains for the previous year ended 31st March, 2009 relevant to assessment year 2009-10 and not as contended by the department i.e. previous year ended 31st March, 2010 relevant to assessment year 2010-11. It was settled that in light of the facts, the reopening of assessment was wholly illegal and beyond jurisdiction of the assessing officer and was resultantly set-aside and the entire addition made was deleted.
Author’s analysis of the proposition
The courts including the various benches of Income Tax Appellate Tribunal have categorically settled from time to time that in the event of transfer, it is the date of agreement to sell which further translates into actual sale is important and not the date of physical possession/registration of documents. In yet another pronouncement of the Hon’ble Income Tax Appellate Tribunal Mumbai `G’ Bench titled Shankala Realtors Pvt Ltd vs. Income Tax Officer, Mumbai (2019) 179 ITD 835 / 111 taxmann.com 96 (Mumbai – Trib), it was settled that in case of transfer of immovable property, date of execution of registered document is relevant and not the date of delivery of possession or date of registration of document. The Hon’ble Bench in Shankala Relaltors case (supra) relied upon the pronouncement of the Hon’ble Supreme Court in Alapati Venkataramiah vs. CIT (1965) 57 ITR 185 (SC) reversing the decision of the Hon’ble Andhra Pradesh High Court in Commissioner of Income Tax vs. Alpati Venkataramiah(1962) 46 ITR 623 to settle that in the event the transfer materializes, the same would relate back to the date of execution of its registered documents and not the date of physical possession or date of registration of document. It was settled in the under-noted terms:-
`The question which arose was whether any sale or transfer took place before 1-4-1948. Up to that date, apart from the agreement to sell, three events had taken place. First, the assessee as managing agents had written on 11-3-1948,i.e.,before the agreement was signed, to the Government regarding loan. Secondly, on 17-3-1948, the possession of the land and the buildings and machinery had been given to the company. Thirdly, on 20-3-1948, the assessee had been credited with the price in the books of the company and he had also made appropriate entries in his own account books.
The agreement dated 17-3-1948, was urged to be an agreement to sell and not a sale deed. It that agreement dated 17-3-1948 was a conditional agreement to sell and before it could ripen into a contract between the company and the assessee, it had to be adopted by the company.
Even if the agreement was accepted by the company in 1949, the question still remained whether any sale or transfer of assets took place before April, 1948. Sale or transfer of an asset could take place, as it did in respect of the site, even before the agreement was accepted. The assets comprised of two items of immovable property, viz., plant and machinery and site and buildings. It was clear that title to those assets could not pass to the company till the conveyance was executed and registered. No such conveyance was executed before 1-4-1948. It was only on 22-11-1948, that a sale deed was executed and registered in respect of the site. Therefore, it was clear that the title to those assets did not pass to the company till after 1-4-1948, and consequently, no sale took place of these assets before 1-4-1948.
Before section 12B of the 1922 Act, can be attracted, title must pass to the company by any of the modes mentioned in section 12B, of the 1922 Acti.e.,sale, exchange or transfer. It is true that the word ‘transfer’ is used in addition to the word ‘sale’ but even so, in the context transfer must mean effective conveyance of the capital asset to the transferee. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.
The High Court has relied on the entries made in the account books of the assessee and the company on 20-3-1948, but the date of sale or transfer according to section 12B of the 1922 Act, is the date when the sale or transfer takes place, and it seems that the entries in the account books are irrelevant for the purpose of determining such a date.
In the result, it was held that the following assets were not sold or transferred before 1-4-1948: