GAUTAM CHAND JAIN (HUF),SECUNDERABAD. vs. DCIT., CIRCLE - 6(1), HYDERABAD.

The assessee filed its return of income for the year under consideration on 11.11.2020, declaring total income of Rs.63,80,980/- and claiming refund of Rs.17,22,040/-. The case of the assessee was selected for scrutiny under CASS. The assessment was completed u/s 143(3) r.w.s. 144B of the Act on 31.08.2022, whereby, the AO has accepted the returned income. Thereafter, on verification of the assessment record, the Ld.PCIT noted that the assessee has claimed long term capital loss of Rs.1,39,14,122/- to be carried forward arising from cancellation deed dated 31.08.2019, whereby, sale deed dated 23.04.2009 stand cancelled and the assessee received refund of the sale consideration as well as the compensation of Rs.1,48,30,500/- on the said cancellation transaction. The Ld.PCIT observed that it is only a cancellation of the earlier sale deed and therefore not a transaction of transfer of capital asset resulting in long term capital gain/loss. Therefore, the compensation received by the assessee in the view of the Ld.PCIT is not a capital gain, but an income to be brought to tax under the head “income from other sources”. The AO allowed carry forward capital loss of Rs.1,39,14,122/-, instead of bringing the amount of Rs.1,48,30,500/- to tax under the head “income from other sources”, resulting in short assessment of income. The Ld.PCIT issued a show cause notice u/s 263 of the Act dated 02.12.2024 and thereafter passed the impugned order, whereby the order passed the AO was held to be erroneous, in so far as it is prejudicial to the interest of the revenue on the issue of long term capital loss and claim of carry forward of the same, instead of assessing the income on account of compensation received by the assessee of Rs.1,48,30,500/- under the head “income from other sources”. Accordingly, the order of the AO was set aside and the AO was directed to frame the same afresh.

Aggrieved by the impugned order of the Ld.PCIT, the assessee has filed the present appeal.

Before the Tribunal, the Ld.AR of the assessee has submitted that the assessee purchased the land bearing Plot No.119, admeasuring 2329.97 sq.yds in the project “CASA ESTEBANA” in Dulapally Village, Quthbullapur Mandal, Ranga Reddy District for a consideration of Rs.2,51,63,676/- vide sale deed dated 23.04.2009. This project was to be developed by the developer, M/s Omega Shelters Private Limited as per the Development Agreement cum GPA dated 09.08.2005 in favour of M/s Platinum Properties Private Limited. Thereafter, the assessee approached the owners and developer for purchase of the said plot in the project and the sale deed was executed on 23.04.2009. Subsequently, due to non-payment of the balance sale consideration as well as no development activity carried out by the developer, the parties agreed to cancel the earlier sale deed dated 23.04.2009 vide cancellation deed dated 31.08.2019. The assessee received a sum of Rs.4,00,00,000/- on account of reimbursement of the sale consideration paid as well as the compensation. The assessee has declared the said amount in the return of income and computed the long-term capital loss by taking benefit of indexation cost. During the course of scrutiny assessment, the AO duly examined this issue of long-term capital loss declared by the assessee and also claim of carry forward of the same by issuing show cause notice u/s 142(1) dated 05.11.2021 along with questionnaire. He has referred to the questionnaire(B) of the show cause notice, whereby, the AO asked the assessee to submit various details including asset transferred during the year, situs of the asset, whether within prescribed municipal limit, documentary evidence in respect of purchase cost of the asset transferred, documentary evidence of cost of improvement, documentary evidence of sale consideration received from transfer of the asset, detailed calculation of the capital gain etc. The assessee duly replied to the show cause notice and furnished all the requisite details. The AO was satisfied with the reply of the assessee and accepted the claim of the assessee of long-term capital loss. Thus, the Ld.AR has submitted that the AO has taken a possible view while passing the assessment order and therefore, the PCIT is not permitted to invoke the provisions of section 263 of the Act merely, because he does not agree with the view taken by the AO. He has further submitted that when the AO has conducted an enquiry and taken a view, which is a possible view, then the order passed by the Ld.PCIT u/s 263 of the Act is not sustainable in law and liable to be quashed. In support of his contention, he relied upon the judgement of Hon’ble High Court of Karnataka in the case of CIT Vs. H.Anil Kumar[2012] 20 taxmann.com 430 (Karnataka) and submitted that the Hon’ble High Court has held that “…the right to obtain a conveyance of immovable property falls within the expression ‘property of any kind’ used in s.2(14) of the Act and consequently it is a capital asset.”. Further, it was held that “ ‘extinguishment of any rights thereto’, the giving up of a right of specific performance by the assessee to get conveyance of the immovable property in lieu of receiving consideration results in the extinguishment of the right in property, thereby attracting the rigor of s.2(14) r.w.s.2(47)”. The Ld.AR has thus submitted that the extinguishment of right in the immovable property is transfer of the capital asset and therefore, the consideration received by the assessee would constitute capital gain exigible to tax. He has relied upon the decision of Bangalore Tribunal in the case of Chandrashekar Naganagouda Patil Vs. DCIT [2020] 183 ITD 457 and submitted that the Tribunal has held that the right acquired under the agreement by the assessee has to be regarded as capital asset and extinguishment of the said right in the property also amounts to transfer of the capital asset within the meaning of section 2(47) of the Act. In support of this proposition, the Ld.AR has also relied upon the decision of the ITAT Hyderabad in the case of ACIT Vs. Lycos Internet Ltd. vide ITA No.1550/Hyd/2017. Thus, he has submitted that once the AO has taken a possible view or rather a plausible view, then the order passed by the Ld.PCIT, not agreeing with the view of the AO is not sustainable in law.

On the other hand, the Ld.DR has submitted that the basic ingredient of the transaction was missed out by the AO, while passing the assessment order. He has submitted that the AO has not taken into consideration an important aspect of the matter that the transaction in question is not a transfer of capital asset, but it is only a cancellation of the earlier sale deed and therefore, the compensation received by the assessee over and above the refund of the purchase consideration paid at the time of sale deed cannot be assessed as long term capital gain, but it is exigible to tax under the head “income from other sources”. He has referred to the impugned order of the Ld.PCIT and submitted that the assessee along with other co-owners have entered into a development agreement with the developer and thereafter, the assessee along with co-owners has executed the sale deed dated 23.04.2009, which is nothing but a transaction of purchase and sale with himself. The developer was given the property only for development and not transfer of any title or ownership of the property and therefore, the power of attorney given to the developer does not amount to transfer of the land in question and hence, the transfer of the land vide sale deed dated 23.04.2009 is a transaction with himself. Further, the sale deed was cancelled vide cancellation deed dated 31.08.2019 after 10 years, which is nothing but declaring the earlier sale deed as null and void. The AO has not conducted any enquiry on this point of the matter and hence, there is a complete lack of enquiry on the part of the AO, while passing the assessment order. He has relied upon the impugned order of the Ld.PCIT.

We have considered the rival submissions as well as the material available on record. The AO has passed the assessment order as under :

The AO has asked certain details from the assessee regarding the assets transferred during the year, documentary evidence of purchase cost and improvement cost as well as sale consideration received, calculation of the fair market value of the asset transferred, details of calculation of capital gain etc. Thus, the query raised by the AO was confined to the computation of the capital gain/loss, which is claimed as carry forward by the assessee. The AO has not doubted the transaction of transfer of capital asset in the show cause notice issued u/s 142(1) of the Act. Therefore, this issue of nature of transaction was completely out of enquiry conducted by the AO on this matter. The assessee produced relevant details, including sale deed as well as cancellation deed. It is pertinent to note that the sale deed dated 23.04.2009 was executed between seven parties, out of which the assessee was also one of the sellers as well as the purchaser. Relevant part of the sale deed dated 23.04.2009 is as under :

So, the cancellation deed was also signed by the same parties, the assessee being one of the sellers as well as the purchaser. Thus, it is manifest from the sale deed as well as the cancellation deed that the transactions were in the name of Shri Gautam Chand Jain, an individual and not as a Karta/HUF. The assessee has shown these transactions in the return of income filed by the HUF, which is accepted by the AO. The Ld.PCIT has raised certain issues while invoking the provisions of section 263 of the Act and one of the crucial aspect, which is taken up by the Ld.PCIT is nature of transaction vide cancellation deed dated 31.08.2019 is not a transaction of transfer of any capital asset, but, it is considered as a cancellation of the earlier sale deed dated 23.04.2009. Without going into the issue, whether this cancellation deed amounts to transfer of capital asset or not, what is evident from the record and particularly the assessment order as well as the show cause notice issued by the AO is that this aspect of the matter was never taken up for any enquiry by the AO. Therefore, it is a case of lack of enquiry on the part of the AO to examine the nature of transaction vide cancellation deed dated 31.08.2019. It is not a normal case of purchase of capital asset by the assessee from a third party and thereafter cancellation of the same, but it is a case of execution of sale deed by the assessee as a seller as well as purchaser and the builder was only a party, because of the Development cum GPA executed by the owners, including the assessee individual in favour of the developer. Another crucial aspect of the matter is that when all the parties are joint owners of the land then, the cancellation after 10 years on the ground of non-payment of the balance consideration as well as no development activity carried out by the developer is also a very strange reason for cancellation. Therefore, this issue requires a proper verification and examination. The Ld.PCIT has given his finding in para 11 to 14 as under :

Thus, in the facts and circumstances of the case, when the transaction itself is not free from doubts and the AO has not touched the crucial aspects of the matter, then we do not find any error or illegality in the order of the Ld.PCIT and the same is upheld.

In the result, appeal of the assessee is dismissed.