DHARAMPAL SAGHERA,CHANDIGARH vs. INCOME TAX OFFICER, WARD-1(4), CHANDIGARH , CHANDIGARH

In the present case, the assessee had declared the amount of ₹1.75 crore received from Sh. Uday Partap Singh Kairon in the course of a family settlement regarding House No. 55, Sector 9-A, Chandigarh, as long-term capital gain, claimed deductions under Sections 54 and 54EC of the Act. The amount was received in lieu of relinquishment of her long-standing possessory and beneficial rights in the property which she had occupied since the 1960s.

The assessee, along with her sister Mrs. Manpreet Singh Saghera, had filed a civil suit asserting rights in the said property. After prolonged litigation, a compromise was reached wherein ₹1.75 crore and ₹0.25 crore were paid respectively to the assessee and her sister for handing over vacant possession and relinquishing rights. The buyer purchased the property only after resolving these claims. The assessee claimed deduction under Section 54 for reinvestment in a residential property and under Section 54EC through investment in NHAI bonds.

During the reassessment, the AO held that since the assessee lacked legal ownership, the amount could not be treated as consideration for the transfer of a capital asset. The AO treated it the same as a gift under Section 56(2) and assessed it as “income from other sources”.

Before us, the Ld. AR submitted that the assessee had been living in the property since the 1960s, a fact reflected in her ITRs filed from the same address up to AY 2012–13. Civil litigation was initiated asserting her share, and the compromise was reached only on her agreeing to vacate the premises. She was compensated for extinguishing her long-standing possessory and beneficial interest, which is a capital asset within the meaning of Section 2(14), and the relinquishment is a “transfer” as per Section 2(47) of the Act.

The AR relied upon multiple judicial precedents to establish that possession and beneficial interest are recognized as capital assets:

The AR further pointed out that in the same transaction, the Revenue has accepted the capital gain treatment for the assessee’s sister, Mrs. Manpreet Singh Saghera, who received ₹25 lakhs under identical facts and was allowed benefit under Section 54. Copy of her assessment order was also placed in the record.

Per contra, the ld. DR relied upon the order passed by the lower authorities. It was submitted that the assessee was not the owner of the property and therefore was not entitled to claim long term capital gain on the amount received by her.

We have considered the rival contentions and perused the material on record. The facts indicate that the assessee was in settled possession of the property for decades, and the receipt was not gratuitous but for relinquishing that possession and claim, which were acknowledged in the civil suit and agreement.

The possession and beneficial interest held by the assessee over a prolonged period, her assertion of rights through legal proceedings, and the receipt of consideration under a family settlement fall within the definition of "capital asset" under Section 2(14), and the act of relinquishment is a "transfer" under Section 2(47). The compensation received therefrom is liable to be assessed under the head "Capital Gains" and not "Income from Other Sources". The Hon'ble High Court in Sarfaraz S furniturewala (supra) approving the decision in the case of Ajay Parasmal Kothari (supra) held as under: -

In view of the above, we are of the considered opinion that the assessee is entitled to the relief claim. The assessee has rightly claimed deduction under Sections 54 and 54EC, supported by investment documents. The AO and CIT(A) erred in treating the receipt as income from other sources in the absence of legal title, disregarding settled law that ownership for tax purposes includes possessory and beneficial rights.

In view of the above discussion and supported by consistent judicial precedents, we hold that the receipt of ₹1.75 crore constitutes long-term capital gain and is eligible for deduction under Sections 54 and 54EC. The reassessment and addition made by the AO are not sustainable in law.

Even otherwise, if the matter is examined from a different perspective, it becomes evident that the consideration was received by the registered owner, being the legal heirs of the deceased brother, towards the sale of the property. This consideration included amounts attributable to the betterment of title and possession. A portion of the total sale consideration was paid directly by the purchaser to the relatives of the seller, who were in possession of the property and were litigating before the court, where an injunction was also operating against the seller( legal heirs of the deceased ). The central issue that arises is whether the amount so paid for obtaining a better title constitutes an application of income by the registered owner, or whether it forms part of the sale consideration, and if so, whether it can be regarded as taxable income in the hands of either the recipients or the registered owner.

In our considered view, at best, the transaction reflects an application of income by the registered owner in favour of the possessors—her relatives—to perfect title and securing possession. Alternatively, the facts indicate that the purchaser himself paid the said amount to these possessors to obtain vacant possession and a clear title. In either scenario, the payment made does not constitute taxable income in the hands of the assessee. It either partakes the nature of a capital receipt received by the assessee for handing over the possession or was like a gratuitous transfer between close relatives—namely, the Bhabhi and Nanad (sisters-in-law)—which is exempt under the provisions of the Act.

It is now a well-settled proposition of law that where one close relative transfers an amount to another without consideration, such a transfer assumes the character of a gift. Consequently, the provisions of section 56(2)(x) of the Income Tax Act, 1961, would not be attracted in such circumstances. Therefore, even from this alternate perspective, we consider that the amount in question is not liable to be taxed in the hands of the assessee or the recipients.

It is, however, observed that the assessee has declared the entire consideration received as long-term capital gains in her income return. Based on her acceptance of possession and title, this voluntary declaration cannot now be dislodged and the assessee cannot withdraw the admitted income. In light of the factual matrix and her consistent stand before us, we find merit in the claim of the assessee. Accordingly, the appeal of the assessee is allowed, and the capital gains declared in the return are directed to be accepted.