ITO 22(1)(4), MUMBAI vs. JAVED K. KHAN, MUMBAI

This appeal, filed by Revenue, being is directed against appellate order dated 22.08.2017 in appeal no. CIT(A)-34/ITO-22(1)(4)/IT-179/2016-17, passed by learned Commissioner of Income Tax (Appeals)-34, Mumbai (hereinafter called “the CIT(A)”), for assessment year (AY) 2011-12, the appellate proceedings had arisen before learned CIT(A) from the penalty order dated 29.03.2016 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 271(1)(c) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2011-12.

The grounds of appeal

The brief facts of the case are that the assessee is an individual having income from business and income from other sources. The case of the assesseee was selected for framing scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act. The assessee had sold an immovable property for consideration of Rs. 70 Lakh having a market value of Rs. 1,15,87,600/- on 06.01.2011. The said property was gifted to the assessee by his father on 29.04.2008. The assessee has invested sale proceeds of the aforesaid property on purchase of a new residential flat for a consideration of Rs. 87,88,500/-. The assessee did not file any income under the head „Income from Capital Gains‟ in the computation of income furnished to the AO. The said sale and purchase of immovable property was captured by Revenue in ITS details of the department. During the course of assessment proceedings conducted by the AO u/s 143(3) read with Section 143(2) of the 1961 Act, the assessee filed copies of gift deed , copy of purchase deed of a new flat purchased and copy of agreement for purchase of flat by father of the assessee before the AO. On perusal of the purchase agreement entered into by the father of the assessee , the AO was of the opinion that the property which is sold was a short term capital asset as it was held by the assessee for not more than 36 months while the assessee was claiming the same to be long term capital asset. The assessee had claimed that he gave the possession of the property on 14th May 2011 vide clause 2(b) of the sale agreement, as against the sale agreement registered on 06.01.2011 which agreement provided for a period of 10/30 days for giving actual possession of flat by the vendor to the purchaser and hence period of holding of the said property was more than 36 months.

The AO as well learned CIT(A) rejected the contentions of the assessee in quantum and the matter finally reached tribunal which granted relief to the assesee in vide appellate order dated 22.07.2016 , wherein the tribunal was pleased to grant relief to the assessee by holding based on facts and circumstances of the case that the gains arising from sale of property were long term capital gains and the assessee is entitled for deduction u/s 54 of the 1961 Act. Further , the tribunal held that the gains were to be brought to tax in AY 2012-13 and not in AY 2011-12, by holding as under:- “ 6. We have heard the rival contentions and gone through the facts and circumstances of the case. The admitted facts are that the assessee’s father Mr. Kamruzzaman Ghasi Khan was a tenant of flat No.9, “B” Wing, 3rd floor of “Annville” for more than last ten years. Assessee’s father converted his tenancy rights in ownership by paying 112 times of the monthly rent to his landlord vide agreement dated 16-4-2008. This flat “B/9” was gifted by assessee‟s father vide registered Gift Deed dated 29-04-2008. Assessee sold this flat on 07-01-2011 for a sum of Rs.70 lakhs (the consideration recorded in the Sale Deed). The stamp valuation as per circle rates as valued by Sub-Registrar was at Rs.1,15,87,600/-. Subsequently, during appellate proceedings before CIT (A), the assessee produced a corrected market value by Sub- Registrar as per circle rate at Rs.81,11,500/- in place of original value at Rs.1,15,87,600/-. According to AO, this property was sold by the assessee within thirty two months which is less than thirty six months, the capital gain earned by the assessee is short term capital gain for the reason that the property by assessee‟s father was purchased by agreement dated 16-04-2008 and assessee sold this property on 07-01-2011. Thereby the holding period is only thirty two months and not thirty six months. The assessee claimed this as long term capital gain and claimed deduction u/s 54F of the Act for the reason that the assessee has purchased a residential house for a sum of Rs.89,22,500/- including stamp duty charges. According to AO this is a short term capital gain and cannot be allowed deduction u/s 54 of the Act. Finally, the CIT (A) also held the transaction as short term capital gain and did not allow deduction u/s 54 of the Act. However, the CIT (A) reduced the fair market value of the property sold by the assessee, as corrected by the Sub Registrar by adopting circle rates, at Rs.81,11,500/-. Now, the assessee before us claimed by way of additional ground that as per agreement for sale dated 07-01-2011 clause 2(b) (copy of which is enclosed at page 82 of the assessee‟s paper book), the possession of the flat was to be given to the purchaser in the next 10/30 days. And finally the possession of the said flat was granted subsequently on 14-05-2011 with the mutual consent. Before us, learned Counsel for the assessee drew our attention to relevant clause 2(b) of the agreement dated 06- 01-2011 and the same reads as under:- “2. The said consideration will be paid by the Purchaser to the Vendor as follows:- (b) The vacant and peaceful possession of the said Flat will be given by the Vendor to the Purchaser in the next 10/30 days because the vendor is himself shifting to another flat where he is to get possession in the next 10/30 days”. The learned Counsel for the assessee also referred to the factum of possession given on 14-05-2011 to the purchaser by the assessee. The relevant possession letter in continuation to the agreement dated 06-01-2011 (copy of which is enclosed in assessee’s paper book at page 111), which reads as under:- “Today, on the 14th day of May 2011 (14/05/2011) (Seller) Mr. Javed Kamruzzama Khan S/o. Mr. Kamruzzama Ghasi Khan has peacefully handed over the possession of Flat No.9, B Wing admeasuring 519 sq. Ft. Carpet area on the 3rd floor of building known as ANNVILLE constructed and lying on plot No.74 of TPS III bearing CTS No.F/769 on village Bandra (W), Taluka Andheri, Bandra Subarban to (Purchaser) Mrs. Nilofar Sameer Shaikh W/o. Mr. Mohmed Sadiq Hamid Shaikh and Mrs. Shehnaz Sultan Mohmed Sadiq Saiyed W/o Mr. Mohmed Sadiq Muhamed Safi Saiyed. The above mentioned property was sold to the purchasers by the seller and agreement registered with the sub-registrar on 07/01/2011 vide BDR-1/257/2011. The seller has not paid any remuneration in any form to the purchasers for the period from 07/01/2011 to 14/05/2011. Till today the seller was responsible for all the Govt. taxes, repair costs, electricity bills etc. From today onwards i.e. 14/05/2011, the purchasers having taken legal possession of the above mentioned property will be responsible for all the expenses and costs related to the above mentioned property. The property has been vacated peacefully and is completely vacant. The purchasers have taken complete possession of the above mentioned property peacefully and become the absolute owners of the said flat and now are free to use the said flat in any manner they like. Mr. Javed Kamruzzama Khan has not left behind any furniture, valuables, documents etc. which he can claim later.” This factum of handing over possession by assessee to the purchaser was before the AO and before the CIT (A) also. There is discussion in the assessment order qua this fact. Now, the question arises whether the handing over of the possession of the property is vital to decide the transfer in term of the provision of Section 2(47) of the Act so as to decide whether the property is held as long term asset or short term asset.

This issue, whether the possession is important for deciding the issue of transfer u/s 2(47) of the Act, has been adjudicated by this Tribunal in the case of Azad Zabarcgabd Bhandari Vs ACIT (2013) 58 SOT 347 (Mumbai Trib.), while considering the decision of the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia Vs. CIT (2003) 260 ITR 491 (Bom.) as under:- 12. Article 265 of the Constitution of India postulates that there cannot be levy of tax without authority of law. It is not in dispute that capital gains tax can be levied only in the year when the transfer of immovable property takes place. If the AO is of the firm view that the transfer had taken place on 16.03.2005, for capital gains tax purpose, then it is mandatory to bring to tax, the said income, in A.Y. 2005-06 in which event he ought to have excluded the income offered to tax in A.Y. 2006-07, having observed that reckoned from the date of transfer the assessee has not invested, within six months, the sale proceeds in the long term specified assets. The first appellate authority, in para 3.5, impliedly accepts that in the instant case the date of agreement is different from the date of possession; in his opinion the moot point is whether the date of agreement, i.e. 16.03.2005 or the date of possession, i.e. 20.09.2005 is the relevant date for computing capital gains tax. It is well settled that in order to bring the sale proceeds to tax under the head "Capital Gains" transfer of the property has to take place in the relevant previous year and in order to come to the conclusion that the transfer has taken place within section 2(47)(v) of Income Tax Act r.w.s. 53A of Transfer of Property Act twin conditions have to be satisfied, i.e. execution of the agreement and handing over of possession. It is not necessary that both conditions should be satisfied in one year but at the same time only upon satisfying the second condition also it would amount to transfer. In this case also there is no dispute that the agreement is dated 16.03.2005 whereas with regard to the date of possession the learned CIT (A) Shri Azad Zabarchand Bhandari assumed that it took place on 20.09.2005, which falls in the financial year relevant to A.Y. 2006-07. In the peculiar nature of this case, if at all the plea of the AO has to be accepted, it would amount to holding that the transfer had not taken place in this year and consequently the sale proceeds cannot be assessed in this year, but the AO having not initiated any proceedings with respect to A.Y. 2005-06 till date the impugned income would escape taxability even in A.Y. 2005-06 and it would really be prejudicial to the interest of the Revenue. Under this peculiar circumstance we have to rationally interpret the findings of the AO as well as the CIT(A) in the backdrop of the clauses in the agreement. As rightly pointed out by the learned counsel for the assessee, the Hon'ble Bombay High Court in the case of Chatrubhuj Dwarkadas Kapadia (supra) has decided the issue by reading the terms of the contract as a whole and by specially taking note of the fact that in the guise of agreement of sale a development agreement was contemplated whereby the developer was held to have taken possession on account of the irrevocable licence granted to him to enter upon the property whereas in the instant case no such finding was given by the tax authorities. In fact the learned CIT(A) opined that the date of handing over of possession in the instant case was 20.09.2005, and based on this factual premise it has to be held that the transfer had taken place in the previous year relevant to A.Y. 2006-07. Reckoned from the date of possession, i.e., 20.09.2005, the assessee having invested the money within six months in long term specified asset, the benefit of exemption under section 54EC deserves to be extended to the assessee in the instant case. In substance, we hold that the assessee is entitled to exemption under section 54EC of the Act in the year under consideration and we direct the AO accordingly. This disposes of ground No. 1, 2 & 3 set, out in the Revised Grounds of Appeal

In view of the facts discussed above that in the case of the assessee, who entered into agreement to sell dated 07- 01-2011 and in this agreement a specifically mentioned Clause 2(b) states that the possession of the flat was to be given to the purchaser in the next 10/30 days and eventually the possession of the said flat was granted on 14-05-2011 with the mutual consent. Reckoned from the date of possession i.e. 14-05-2011 the assessee is entitled for treatment of sale of flat as long term and capital gain will be treated as long term capital gain because the property was acquired by assessee’s father on 16-04-2008 and assessee handed over the possession to the purchaser only on 14-05-2011, it means the holding period is more than thirty six months. The assessee has invested a sum of Rs.89,22,500/- in purchase of new flat, the proceeds out of sale of the flat. In our view the assessee is entitled for deduction u/s 54 of the Act and assessment of this transaction is to be made in assessment year 2012-13 and not in assessment year 2011-12. We direct the AO accordingly. Appeal of the assessee is allowed partly.”

The AO had in the meantime levied penalty of Rs. 24,14,401/- u/s 271(1)(c) for concealment of particulars of income while filing return of income wherein it had been held by the AO that the said gains on sale of property are short term capital gains for AY 2011-12 and the assessee was not eligible for deduction u/s. 54 of the Act, vide penalty order dated 29.03.2016 passed by the AO u/s. 271(1)(c) of the 1961 Act. 5.2 The assessee filed first appeal with learned CIT(A) challenging levying of penalty u/s 271(1)(c) of the 1961 Act for concealment of income , wherein learned CIT(A) was pleased to delete the penalty of Rs. 24,14,401/- as levied by the AO on this issue by following the appellate order dated 22.07.2016 in quantum passed by tribunal in for AY 2011-12 , vide appellate order 22.08.2017 passed by learned CIT(A) by holding as under:- “ 4.3 I have considered the facts of the case and written submissions of the appellant in this regard as 9 against the observations/findings of the AO. The contentions /submissions of the appellant are being discussed and decided as under:- 4.3.1. The facts remains that order of the Hon'ble ITAT in dated 22.07.2016 has been received in this case against the quantum addition confirmed by my predecessor in the year under consideration. It is seen that the disallowance confirmed by the CIT(A) on the issue of claim of deduction u/s.54 has been allowed in favour of the appellant by the Hon'ble Tribunal. In view of the above decision of Hon'ble ITAT wherein the quantum proceedings in the case of the appellant, which is the basis for levy of penalty and subject matter of this appeal has been allowed in favour of the appellant, therefore now there exists no order for assessment and consequently no addition on which penalty could be levied. 4.3.2. The various courts have consistently held that no penalty survives after deletion of additions/disallowances which formed the basis for imposition of penalty. Therefore, in such circumstances, the consequent penalty in respect of addition made in such quantum proceedings would not survive. Once the additions on the basis of which penalty u/s.271(1)(c) imposed has been deleted, the penalty is to be cancelled as held by Rajasthan High Court in the case of CIT vs. Shishpal (2002} 172 CTR 410. The Hon'ble High Court of Rajasthan in the case of CIT v. Shishpal (supra) has held that once the very foundation for imposition of penalty had become non-existent, penalty would not survive. 4.3.3. Thus, when the quantum tax appeal has been upheld in favour of the appellant and the basis for levying penalty being not available, the imposition of penalty is not in accordance with law. The Hon'ble Appellate Tribunal, New Delhi, in the case of ACIT, Central Circle -18, Delhi vs M/s HCL Corporation Ltd in ITA No. 1988/Del/2012 dated 03.07.2012 referred to various judicial decisions on the issue and held as under : "5, We have heard both the parties and gone through the facts of the case. We find that the ITAT vide their decision dated 9.3.12 in ITA no.2003/Del/2009 in quantum appeal restored the aforesaid two issues relating to disallowance in terms of provisions of sec. 94(7) & sec.!4A of the Act to the file of the AO for re-adjudication,. Since the additions, forming the basis of levy of penalty itself have been set aside, penalty imposed u/s 271(1)(c) of the Act does not survive. Hon'ble Supreme Court in the case of K.C.Builders Vs. ACIT,265 ITR 562(SC) held that ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee, has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled. Hon'ble Delhi High Court in the case of C1T Vs. R.Dalmia, (1992) 107 Taxation 107, held that no penalty survives after deletion of additions, forming the basis for the levy of penalty. Similar view was taken in Addl. Commissioner of Income- tax v. Badri Kashi Prasad {1993) 200 ITR 206 (All) and Prabhat Oil Traders v. Income-tax Officer (No. 3) (1996) 218 ITR (A.T.) 39 {ITAT, Ahemdabad),City Dry Fish Company v. Commissioner of Income-tax (1999) 238 ITR 63 (A.P.) , CIT vs. Mohd. BILK Sakat Ali {2004) 265 ITR 326 (Raj) and AC1T vs. VIP Industries (2009) -122 TTJ 289 (Mum). 5.1 Since the very basis upon which the penalty has been imposed on the amount of Rs. 7,22,18,646/- added by the AO, does not exist in view of the aforesaid order dated 9-3-2012 of the ITAT in quantum appeal , we are of the opinion that penalty levied in relation to the said amount does not survive at this stage. Accordingly, the impugned order is, therefore, set aside to that extent." 4.3.4. In view of the decision of the Hon'ble Tribunal, the appellant is entitled for deduction u/s.54 of the Act. Therefore, once the addition on the basis of which penalty u/s.271(1)(c) imposed has been deleted, the imposition of penalty is not in accordance with law. In view of the above facts and discussions, there remains no ground to sustain the penalty on the issue of taxability of capital gains. Accordingly, the penalty levied by the AO on this issue is directed to be deleted.”

The matter has now reached tribunal at the behest of Revenue. The Ld. Counsel for the assessee has at the outset 11 submitted that the tribunal while deciding quantum additions in vide orders dated 22.07.2016 had granted relief to the assessee based on facts and circumstances of the case held that the gains arising from sale of property were long term capital gains and the assessee is entitled for deduction u/s 54 . Further , the tribunal held that the gains were to be brought to tax in AY 2012-13 and not in impugned assessment year i.e. AY 2011-12. It was submitted that in view of the tribunal holding that the gains arising from sale of the property are long term capital gains chargeable to tax in AY 2012-13 and not in the impugned assessment year as well further holding that the assessee is entitled for deduction u/s 54 of the 1961 Act, the penalty levied by the AO u/s 271(1)(c) of the 1961 Act for concealment of income cannot survive. The learned counsel for the assessee submitted that the appellate order passed by learned CIT(A) is a well reasoned order and the same may be confirmed. It was also brought to our notice by learned counsel for the assessee that the Revenue filed an appeal u/s 260A of the 1961 Act challenging order of the tribunal dated 22.07.2016 in ITA no. 98/Mum/2015 for impugned assessment year in quantum with Hon‟ble Bombay High Court. Since the tax effect was lower than Rs. 50 lacs as provided in CBDT circular no. 3 of 2018 dated 11.07.2018, the Hon‟ble Bombay High Court was pleased to dismiss appeal of the Revenue in ITA no. 403 of 2017 as not pressed owing to low tax effect, vide orders dated 27.11.2018, by holding as under:

In the result, appeal of the revenue in AY 2011-12 stand dismissed. Order pronounced in the open court on 20.03.2019. आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 20.03.2019 को की गई Sd/- Sd/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, dated: 20.03.2019 Nishant Verma Sr. Private Secretary copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, 6. Master File // Tue copy// 15