DCIT, NCC - 2 (1),, CHENNAI vs. SHRI KEEZHAYUR SOWRIRAJAN SREENIVASAN,, CHENNAI

PER G.MANJUNATHA, AM:

This appeal filed by the Revenue and cross objection filed

by the assessee are directed against order passed by the

learned Commissioner of Income Tax (Appeals)-2, Chennai,

dated 05.07.2019 and pertains to assessment year 2016-17.

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return of income for the assessment year 2016-17 on

06.08.2017. During the course of assessment proceedings, the

Assessing Officer noticed that the assessee has computed

long term capital gain towards compensation received for

relinquishment of his right in a property in favour of

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M/s.Landmark Construction (M/s. Land Housing Projects

Chennai Pvt.Ltd.) and claimed deduction u/s.54F of the

Income Tax Act, 1961. The Assessing Officer has called upon

the assessee to explain with necessary evidences transactions

give rise to long term capital gain and consequent deduction

claimed u/s.54F of the Income Tax Act, 1961. In response, the

assessee submitted that he had entered into Memorandum of

Understanding with M/s. Landmark Construction, a proprietary

concern, on 28.11.2006 for purchase of 20,000 sq.ft of

saleable area together with proportionate undivided share at

pre-launch price of Rs.3000/- per sq.ft and has also paid

Rs.1,00,000/- advance in cash. It was further submitted that

due to delay in implementation of project, the assessee has

relinquished his right in the property to be constructed by M/s.

Landmark Construction and received compensation of Rs.5

crores in cheque after deducting necessary TDS applicable as

per law.

with the explanation furnished by the assessee and according

to A.O., except MOU, no other reliable document was

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submitted in support of his claim. Further, the MOU between

the parties dated 28.11.2006 is an unregistered and there is no

witness signature on the document. Although, the assessee

claims to have paid Rs.10,25,000/- on various dates, but could

not substantiate his claim with necessary evidences.

Therefore, the Assessing Officer has rejected claim of the

assessee and assessed compensation received by the

assessee in lieu of surrender of his rights in property under the

head ‘income from other sources’. The relevant findings of the

Assessing Officer are as under:-

“During the course of assessment proceedings, after the perusal of the documents submitted by the assesse, the following observations are made:

Apart from the MOU submitted, no other reliable documents were submitted by the assessee in support of his claim. The MOU submitted on 29.11.2018, is an unregistered one and there are no witnesses signature on it. However, when the assessee’s representative was asked about it, he submitted another copy on 12.12.2018 which is also not registered, wherein the signature of the witnesses were there. So, there arises a question of reliability on the MOU submitted.

Assessee has claimed deduction of Rs.10,25,000/- paid towards advance for the above deal was not supported by any documents / proofs. However, on 24.12.2018, in response to show cause the assessee has submitted a letter dated 03.042012 issued by M/s. Landmark Construction, stating that Rs.10,25,000/- has been received as advance. For an MOU entered on 28.11.2006 by the assessee the other party has

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given a receipt by way of letter dated 0304.2012, stating that Rs.10,25,000/- has been received as advance towards the saleable area of 20,000 sq. ft. This casts a shadow of doubt on the transaction.

The MOU speaks about completion of project within three years of time from the MOU execution date. However, as per the details submitted, assesse had never made any efforts to question the delay until 26.12.2014 i.e more than 8 years from the date of agreement of MOU. However, on being show caused as to why the Capital Gain should be considered, the assessee vide letter dated 24.12.2018, has enclosed letters of correspondences with M/s. Landmark Construction regarding the progress of the project like NOC, and status. But, the letters looks like an afterthought arrangement as they are not supported evidently by any acknowledgement proof for having served it on M/s. Landmark Construction. The so called correspondences of M/s. Landmark Construction with the assessee does not contain any enclosures of the things which could have convinced the assessee that there is some sort of progress in the MOU agreement. So, on this ground also the assessee’s claim does not hold good.

The assessee is stating that he had extinguished / relinquished the so called capital right does not hold good, on the ground that when an MOU is in vogue and the relinquishment is done based on a letter. The amount that has been paid as compensation is not a small amount which could be done other than by a cancellation agreement of the MOU. As the assessee could have claimed the right again after some year by showing the proof of the MOU copy. It is also further seen that the project has not never came into existence and hence, that also casts a shadow of doubt on the entire transaction. On this point also the assessee’s contention that it is a relinquishment of capital right does not hold good.

It is also not convincing that somebody would go for a lower rate than the one that was agreed upon 9 years before on an immovable property. Because technically any investment I agreement in connection with immovable property is expected to appraise or in the worst case scenario it may be at the same

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price. However, it is seen in the assessee’s case that he has agreed upon a price, where he has nearly lost Rs.1 00,00,000/- based on price agreed on 2006, without considering the inflation in the real estate market that had happened in these years. The question arises is that will anyone sell their right at a lower rate especially in a immovable property, when the market rates have grown manifold. Further, it can be mentioned here that the assessee has not even explored the possibility of arbitration mentioned in the MOU. Neither, he has submitted any proof of document for having availed / taken steps towards the arbitration process. So, on this point also the assessee’s claim of capital right falls flat.

Even if we buy the argument of the assessee that the project was not taking off and there was no sign of any progression on the MOU, the assessee did not submit any proof towards going ahead with the distress sale of capital rights.

So, from the above observations, it would be clear that the entire transaction is a sham, just to give the colour of Long Term Capital Gain transaction. Hence, the assessee was show caused as to why the entire transaction should be treated as Capital Gain, but the assessee could not substantiate with any concrete material to convince the undersigned to treat the above transaction as relinquishment of capital right, and accept the assessee’s claim to treat the transaction as LTCG and allow the deduction under 54F.

Hence, based on the above discussions the assessment is completed u/s 143(3) as per Income-tax Act, 1961, treating the entire amount of Rs.4,84,75,000/- [4,95,00,000 — 10,25,000 (Though assessee has not substantiated how the advance was paid, the same is considered as deduction)], as income from Other Sources as detailed below.”

preferred an appeal before the learned CIT(A). Before the

learned CIT(A), the assessee has reiterated his arguments

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made before the Assessing Officer and contended that

relinquishment of right in property is transfer within definition of

section 2(47) of the Income Tax Act, 1961, and thus, the

assessee has rightly computed long term capital gain derived

from transfer of property and consequently, deduction claimed

u/s.54F of the Act should be allowed. The learned CIT(A), after

considering relevant submissions of the assessee and also

taken note of certain judicial precedents, including decision of

the Hon’ble High Court of Madras in the case of K.R.Srinath Vs

ACIT (2004) 268 ITR 436 (Mad) held that the Assessing

Officer has rejected claim of the assessee on the basis of

certain assumptions and doubts about MOU between the

parties, however, failed to give any valid reason for not

considering transaction of the assessee within the meaning of

section 2(47) of the Income Tax Act, 1961. The learned CIT(A)

further observed that except making certain allegations on the

MOU regarding non-registration of document and absence of

witnesses, the Assessing Officer has failed to make out a case

that transaction between the assessee and builder is sham

transaction and has arranged to claim benefit of deduction

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u/s.54F of the Income Tax Act, 1961. Therefore, the learned

CIT(A) allowed claim of the assessee towards deduction

u/s.54F of the Income Tax Act, 1961, and directed the

Assessing Officer to delete additions made towards

compensation received from builder in terms of MOU under the

head ‘income from other sources’. The relevant findings of the

learned CIT(A) are as under:-

“4.2 To resolve the issue on hand it is pertinent here to refer to the decision of the Hon’ble High Court of Madras in the case of K.R. Srinath Vs ACIT [2004] 268 ITR 436 (Mad). In that case the assessee had entered into an agreement to purchase a property and paid Rs. 40,000 as an advance to the owner. Both parties had reserved the right to specific performance of the agreement. After four years, another agreement was entered into between the parties by which the assessee agreed for termination of the earlier agreement and allowed the owner to sell the said property to any person and at any price of his choice and in consideration of the same the assessee received a sum of Rs. 6 lakhs along with the amount advanced to the owner. The assessee filed return for the relevant assessment year declaring n total income including capital gains. The Tribunal confirmed the view taken by the Commissioner of Income-tax, who held that the sum of Rs. 6,00,000 received by the assessee was subject to capital gains tax. On appeal, jurisdictional High Court declared as follows:

ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

The assessee had a right 10 insist on specific performance, gave up the right readily and received a sum in question. By termination of the earlier agreement and by allowing the vendor to sell the said property to any person at any price, the assessee had given up or relinquished his right of specific performance and as consideration for relinquishing that right the assessee was paid the sum in question. The right, title and interest acquired under the agreement of sale dearly fell within the definition of Capital asset Instead of assigning the right to third party/ parties, the assessee relinquished those rights. The definition of ‘transfer’ in section 2(47) is wide enough to include relinquishment of an asset. At the time of agreement of sale the assessee paid a sum as advance. That payment was made pursuant to the agreement Only by paying the said amount the assessee acquired the right to get the sale deed executed In his favour. Since, the assessee advanced a sum for acquiring the right to acquire the sale deed the contention of the assessee that there was no cost of acquisition and so there could be no assessment of capital gain on the transfer of the capital asset fell to the ground On the basis of the above discussion, there were no merits In the appeal and the same was liable to be dismissed It is also relevant here to refer to the decision of Hon’ble High Court of Bombay in the case of CIT vs Tata services Limited (122 ITR 594)(Bom) wherein it was declared as follows:

The word property’ used in section 2(14) was a word of widest amplitude and the definition of this was re-emphasised by the use of the words ‘of any kind’. Thus, any right which could be called property would be Included In the definition of capital asset A contract for sale of land was capable of specific

ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

performance and was also assignable and, therefore, a right to obtain conveyance of Immovable property was dearly a property as contemplated by section 2(14).

Thus, it is settled law that the right to obtain conveyance of immovable property is a property as contemplated by section 2(14). Consequently, any Long Term Capital Gains arising therein is eligible for further relief as per the provisions of the Income Tax Act.

4.3 As regards the case on hand, the location of the Land on which the property was proposed to have come up was situated at No.88, Thiruneermalai Road, Pammal Village, TambaramTaluk, Kancheepurarn District, comprised in various paimash nos. 841/4, 841/5, 854, 855/1, 858, 844, 848, 856, 857, 858 (part) and 859 bearing Old Survey Nos. 184/1, 184/2, 184/3, 185/2, present Survey Nos. 184/2A, 184/2B and 185/4 of a total extent of 5 acres and 2 cents (exclusive of 10% deduction with respect to OSR thereby measuring to 4 acres and 52 cents). To further buttress his argument with regard to the delay in approval process for converting the land in question from industrial to residential use furnished a letter from CMDA Letter No.C3(S)/16897/2018 dated 06.05.2019 letter addressed to Principal Secretary, Housing and Urban Development, Tamil Nadu, wherein it is noted as follows:

Thiru. T. Udayakumar has applied the Planning Permission Application for the proposed construction of Multistoried Group Development Building comprises of Block -1: Stilt Floor + First floor + Second floor (pt) to 91 floor (pt) (Tower A to Tower G)

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Residential building with 440 dwelling units and Block -2: Club house — Ground floor + 2 floors and Swimming pool in Old S.No.184/l, 184/2, 184/3, 185/2, New S.No.184/2A, 18412B, 185/4 of Pammal village, Thiruneermalai Main Road, Pallavaram Taluk, Pammal Municipal Limit, Kancheepuram District (As per the revised plan FST area: 411 18.84 Sq.m.).

The subject was placed before the Special Sanction Committee meeting held on 13.11.2018 and the Committee noted that the site under reference was reclassified from Special & Hazardous Industrial use Zone to produce pre-cast concrete slabs/ beams manufacturing.

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Further the Committee deliberated the subject in detail and noted that the subject was earlier placed before the Authority thrice and in A.R. No. 61/2018 the Authority had decided to place the subject (Permitting (Commercial use in Industrial use) in the Special Sanction Committee for Suitable decision by observing that any lower order use in Industrial use zone could be placed for special Sanction. The committee also considered the developments in the surrounding areas and took cognizance of the earlier consent to establish” letter awarded by TNPCB for group development and the pros and cons of the proposed residential development at the site and decided to permit the residential activity in the site zoned for Industrial Use Zone. Hence the proposed residential development is permissible in the Industrial use zone. Thus, it is clearly seen that the said project could not be launched due to reasons including inordinate delays in statutory approvals from various authorities — especially for conversion of land for residential purposes. I also find considerable force in the argument of the appellant that since more than eight years have elapsed from the date of the MOU, and since the property prices had shot up, the appellant gave an ultimatum to the developer and managed to get a good bargain for himself.

4.4 As regards the objections raised by the Assessing Officer I find that many of them are based on mere doubts and assumptions. There is no requirement under law that the MOU between the builder and the appellant need to be registered nor that an MOU needs to be cancelled by another MOU. As regards the doubt expressed by the Assessing Officer in connection with date of the receipt given by the builder for the

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advance of Rs.10,25,000/- being 03.04.2012 the appellant explains that the advance was not given as a lump sum amount but on multiple occasions. The Assessing Officer does not support by any concrete evidence his view that the transaction could be an afterthought. Last but not least, the observations of the Assessing Officer that the appellant has gone for a lower rate of compensation than that was agreed upon 9 years earlier, in fact, supports the argument of the appellant in my opinion. Therefore, I agree with the appellant’s contention that the Assessing Officer drew conclusions based on mere surmises and denied the benefit of Section 54F to the appellant unfairly. In view of the above, I hold that the Assessing Officer erred in denying the benefit of Section 54F to the appellant and bringing an amount of Rs.4,84,75,000/- as ‘income from other sources’. Therefore, the addition of Rs.4,84,75,000/- made by the Assessing Officer is deleted. The appellant succeeds on this ground.”

erred in not appreciating fact that stamp paper on which MOU

between the parties was entered is not having any serial

number, therefore, genuineness of MOU is in doubt. The

learned CIT(A) has failed to appreciate the fact that except

MOU, the assessee could not produce any other evidence to

prove that he had right in the property and such right has been

relinquished in favour of other party. The learned DR further

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submitted that the assessee has entered into transaction to

claim benefit of section 54F of the Act, however, failed to prove

transaction with necessary evidences in light of various reasons

given by the Assessing Officer to term arrangement between

the parties is not a genuine transaction.

supporting order of the learned CIT(A) submitted that the

Assessing Officer has never doubted transaction between the

parties, however, rejected claim of the assessee only on the

basis of certain defects in MOU, including authenticity of

stamp paper issued by the Stamps & Registration Department

and absence of witness in the document. The learned A.R for

the assessee further submitted that if at all, any defect in the

document, said error is rectifiable defect under the provisions

of Stamp duty Act, however, same does not invalidate

transaction between the parties. The learned AR further

submitted that as per provisions of section 2(47) of the Income

Tax Act, 1961, term ‘transfer’ includes relinquishment of any

right in asset or extinguishment of any right therein. Therefore,

extinguishment of any right in relation to capital asset would be

15 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

treated as transfer and thus, when the assessee has

extinguished his right by MOU, same cannot be questioned

merely for the reason that stamp paper authenticity is not

proved. In this case, the assessee has acquired right in the

property by way of MOU dated 28.11.2006 and such right has

been extinguished in favour of the builder and got

compensation. Since, extinguishment of right in property

amounts to transfer within the meaning of section 2(47) of the

Income Tax Act, 1961, the assessee has rightly computed

capital gain and has rightly claimed deduction u/s.54F of the

Act. The learned CIT(A), after considering relevant facts has

rightly deleted additions made by the Assessing Officer and

their order should be upheld.

available on record and gone through orders of the authorities

below. The facts borne out from records indicate that the

assessee has entered into MoU with M/s. Landmark

Construction on 28.11.2006 for purchase of 20,000 sq.ft of

saleable area together with proportionate undivided share. As

per said MoU, the assessee should get rights over the property

16 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

to be constructed by M/s. Landmark Construction. Further, the

builder M/s. Landmark Construction could not take up project

for various reasons, including delay in getting approval from

CMDA. Therefore, the assessee had extinguished his right in

the property in favour of the builder by entering into MOU

dated 28.11.2006 and has received compensation of Rs.5

crores in lieu of surrender of his right in the property. The

builder has paid compensation in cheque after deducting TDS

applicable as per law. The assessee claims that since he had

acquired right in property by virtue of MOU dated 28.11.2006,

extinguishment of right in property by another MOU amounts

to transfer within the meaning of section 2(47) of the Income

Tax Act, 1961.

reasons given by the Assessing Officer to assess

compensation received by the assessee on extinguishment of

his right in property in favour of third party under the head

‘income from other sources’ in light of various arguments

advanced by the learned AR for the assessee and we do not

ourselves subscribe to the reasons given by the Assessing

17 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

Officer for simple reason that there is no dispute with regard to

fact that the assessee had entered into MOU for acquiring

20,000 sq.ft of saleable area in a property to be developed by

M/s. Landmark Construction. It is also not in dispute that said

right has been extinguished by surrender of his right in

proposed property in favour of the builder. Therefore, the

issue needs to be examined in the given facts and

circumstances of the case is whether extinguishment of any

right in property or asset amounts to transfer within the

definition of transfer as defined u/s.2(47) of the Income Tax

Act, 1961, or profit from a contract which is assessable under

the head ‘income from other sources’. The definition of term

‘transfer’ has been defined u/s.2(47), as per which, transfer in

relation to capital asset includes sale, exchange or

relinquishment of asset or extinguishment of any rights therein.

As per the said definition, even extinguishment of any rights in

a property would also cover under the definition of transfer.

Therefore, once extinguishment of any right in a property

comes under definition of ‘transfer’, as defined u/s.2(47) of

the Act, then consequential consideration received for transfer

18 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

of property would come under the provisions of section 45 of

the Income Tax Act, 1961, and thus, the assessee has rightly

computed capital gains towards consideration received for

extinguishment of his right in the property.

property and said right has been extinguished in favour of the

builder and received compensation. The builder has paid

compensation through proper banking channel after deducting

necessary TDS as per law. The parties have confirmed

transactions. The Assessing Officer has never disputed these

facts, however, denied benefit of long term capital gain only

for reason that authenticity of stamp paper purchased by the

assessee to enter into MOU is doubtful. In our considered

view, reasons given by the Assessing Officer to reject claim of

the assessee on the basis of authenticity of stamp paper is

not correct, because if at all, the Assessing Officer is having

any doubt on authenticity of stamp paper, the A.O. should have

conducted necessary inquiries to ascertain facts whether

stamp paper purchased by the assessee is genuine or fake

19 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

one. In absence of any inquiry, the Assessing Officer cannot

come to a conclusion that stamp paper purchased is not

genuine one and consequently, on that basis the transaction

between the parties cannot be questioned, more particularly,

when other evidences filed by the assessee, including

confirmation from buyer reveals that transaction took place

between the parties.

property comes under definition of transfer or not has been

considered by various High Courts, including Hon’ble Bombay

High Court in the case of TATA Tele Services Ltd. (1980) 122

ITR 594 (Bom). The Hon’ble Bombay High Court in the said

case had considered the issue and held that word ‘property’

used in section 2(14) was a word of widest amplitude and the

definition of this was re-emphasized by the use of words ‘of

any kind’ and thus, any right which could be called property

would be included in the definition of ‘capital asset’. The

contract for sale of land was capable of specific performance

and was also assignable and therefore, a right to obtain

conveyance of immovable property was clearly a property as

20 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

contemplated by section 2(14) of the Act. A similar issue had

been considered by the Hon'ble Jurisdictional High Court of

Madras in the case of K.R Srinath Vs. ACIT (2004) 268 ITR

436, where the Hon’ble Court, after considering relevant facts

held that when the assessee had right to insist on specific

performance and such right has been given up readily and

received a sum in question, same would come within definition

of capital asset and consequently, consideration is assessable

under the head ‘capital gains’. The ITAT., Mumbai Benches in

the case of ACIT Vs. Ashwin S.Balekar in ITA

No.6822/Mum/2016 has also dealt with similar issue of

allotment of land to the assessee by builder and subsequent

cancellation of allotment and after considering relevant facts,

held that compensation received by the assesseein lieu of

surrender of right is assessable under the head ‘capital

gains’. The Hon’ble Kerala High Court in the case of CIT Vs.

Grace Collis (2001) 248 ITR 323 has held that extinguishment

of any rights therein, include extinguishment of rights in capital

asset independent of or otherwise, then on account of

transfer. The sum and substance of ratios laid down by various

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courts are that extinguishment of rights therein also includes

within definition of capital asset and consequently, comes

under transfer as defined u/s.2(47) of the Income Tax Act,

1961.

circumstances of the case and also by following ratios laid

down by various Hon’ble High Courts, we are of the

considered view that what was received by the assessee by

virtue of MOU is consideration received for transfer of rights

in property and thus, same is assessable under the head

‘income from capital gains’. The learned CIT(A), after

considering relevant facts has rightly held that the Assessing

Officer has erred in assessing compensation under the head

‘income from other sources’. Hence, we are inclined to uphold

findings of the learned CIT(A) and dismiss appeal filed by the

Revenue.

Cross Objection No.98/Chny/2019:-

order of the learned CIT(A) and argued that findings recorded

by the learned CIT(A) to delete additions made by the

22 ITA No. 2369/Chny/2019 & C.O. No.98/Chny/2019

Assessing Officer towards compensation received for transfer

of property under the head ‘income from other sources’ is not

in accordance with law. Since, we have dismissed appeal filed

by the Revenue, the cross objection filed by the assessee in

support of the order of the learned CIT(A) becomes infructuous

and thus, cross objection filed by the assessee is dismissed.

and cross objection filed by the assessee is also dismissed as

infructuous. Order pronounced in the open court on 15th June, 2022

Sd/- Sd/- (जी. मंजुनाथ) (अ"नकेश बनज%) (Anikesh Banerjee) (G.Manjunatha) #या�यक सद%य /Judicial Member लेखा सद%य / Accountant Member चे#नई/Chennai, (दनांक/Dated 15th June, 2022 DS

आदेश क� ��त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A) 4. आयकर आयु-त/CIT 5. +वभागीय ��त�न1ध/DR 6. गाड� फाईल/GF.