K T DONGRE & CO. P.LTD,MUMBAI vs. ITO RG 10(2)(1), MUMBAI

This appeal filed by the assessee is directed against the order of the CIT(A)-21, Mumbai dated 25.03.2013 and it relates to A.Y. 2008-09.

The grounds raised

During the course of hearing the learned A.R. drawn our attention to letter dated 22,07.2017 wherein the assessee has requested for admission of additional evidence. In the said letter the assessee has submitted that the assessee wanted to raise an additional ground of appeal thereby challenging the action of the AO in making addition on account of long term capital gain by invoking section 50C of the Act without referring the case to Valuation Officer under Section 50C of the Act. It was also submitted that the additional ground was raised by the assessee as legal ground, therefore the same may be admitted. On the other hand, the learned D.R. contested the said request and submitted that the alleged ground was never raised by the assessee before the lower authorities, therefore the request of the assessee deserves to be rejected.

By ground No. 1 assessee is challenging the order of the learned CIT(A) in confirming the order of the AO in making addition on account of long term capital gain of `2,90,67,850/-.

The learned A.R. reiterated the same arguments as were raised by him before the learned CIT(A). It was submitted that the CIT(A) has erred in confirming the order of the AO in making addition on account of long term capital gain of `2,90,67,850/- based on agreement for sale dated 12.10.2007 entered into with Ms. Nensee Construction Pvt. Ltd. in spite of the fact that there is no performance on the part of concerned parties in relation to such agreement. It was also submitted that there is no transfer or deemed transfer within the meaning of provisions of Income Tax Act, 1961. Therefore the question of taxing such capital gain which had not been accrued or deemed to have been accrued does not arise. It was also submitted that the said long term capital gain has been worked out by considering the sale consideration of `5,34,02,500/- as against agreement price of `1,80,00,000/- by invoking the provisions of Section 50C of the Act M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) in utter disregard to the pending litigation. The learned A.R. further submitted that a company petition No. 809 of 2003 was filed by the alleged creditor for winding up of the assessee company and also there was a cloud in the title due to false mutation entry but ignoring these facts the AO had made addition by taking into consideration that the property has been transferred by the assessee whereas there was no actual transfer and therefore no capital gain could have been charged by the Revenue. The learned A.R. also submitted that the assessee is a private limited company engaged in the business of manufacturing but since the year 2003 the manufacturing activity was not carried out and therefore the net income return for the impugned assessment year was nil. It was also submitted that although the initially it was agreed by the assessee to sell the land but later on the said deal was not materialised and no transfer of the property took place. It was submitted that the assessee had also filed a paper book consisting of 130 pages which also shows the Balance Sheet, which at serial No. 2, in which it is clearly reflected that the land and building is still part of gross block as fixed assets in Schedule D and the amount received by the assessee from the alleged buyer, i.e. Nensee Construction Pvt. Ltd. is shown as advance in Schedule F of the current liabilities and provisions. It was submitted that although the assessee has entered into an agreement to transfer the land pursuant to the order dated 20.09.2007 of the Hon'ble High Court but because of the litigation against the assessee, the agreement dated 12.10.2007 was cancelled by the Deed of Cancellation dated 30.12.2007. It was further submitted that as per clause No. 5 of the cancellation deed it is clearly mentioned that the sale agreement dated 12.10.2007 was aborted, therefore the advanced paid by the purchaser to the assessee will be treated as loan and the loan was subsequently repaid to the said Nensee Construction Pvt. Ltd. It was submitted that the litigation against the assessee came to an end vide Hon'ble Bombay High Court order dated 24.12.2014 on the basis of consent terms and after the above mentioned order the assessee has taken appropriate steps to bring the assessee’s name on the Revenue records and the possession of the said land all through this period continued with the M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) assessee and it continues with the assessee even till today. The property card and other Revenue records also reflect the name of the assessee. It was submitted that the AO had made additions by taking into account the provisions of Section 53A of the Transfer of Property Act and also considering that the property has already been transferred in favour of the purchaser by virtue of the terms of provision 2(47)(v) of the Act. In this connection it was submitted that although the agreement dated 12.10.2007 was executed but the property could not be transferred because of the litigation and the possession was never delivered to the purchase. Therefore ultimately on 30.12.2011 the said agreement dated 12.10.2007 stood cancelled and thus in this was there was no transfer of asset under section 53A of the Transfer of Property Act or under section 2(47)(v) of the Act. It was submitted that the AO had made additions by relying upon the ruling of the Authority of Advance Ruling in the assessee of Jasbir Singh Sarkarial (2007) 294 ITR 196.

On the other hand, the learned D.R. relied upon the orders passed by the Revenue Authorities. We have considered the rival submissions and perused the written submissions and judgement submitted by the respective parties and the material placed on record as well as orders passed by the Revenue authorities. From the record we find that the assessee filed the return of income at Nil income because as per the assessee, he was not carrying out manufacturing activities. The AO, on account of public notice published in Time of India on 23.03.2011 issued notice under section 148 of the Act and levied capital gain tax on the assessee by holding that the assessee has transferred the land and building vide agreement to sell dated 12.10.2007. The said additions were also upheld by the learned CIT(A). Now the only issue for consideration before us pertains to levy of capital gain tax. After hearing the parties at length we find that the agreement dated 12.10.2007 was entered by the plaintiff to transfer the land in favour of the vendor/purchaser, i.e. M/s. Nensee Construction Pvt. Ltd. in pursuant to the order dated 20.09.2007 of the Hon'ble Bombay High Court. The possession of the said land was M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) never transferred to the vendor/purchaser and the same remained with the assessee and as per the Balance Sheet, the land and building is still shown as part of gross block as fixed assets in Schedule D on page 7 f the paper book and the amount received by the assessee was shown as advance in Schedule F of Current Liabilities and Provisions. It is important to mention here that at running pages 16 to 18 in clauses 9 to 13 the details pertaining to the dispute regarding impugned assets among the Directors of the assessee company are mentioned and at pages 19 to 23, clauses 16 to 31, provided the details of dispute pending with the Hon'ble High Court. From the records we also noticed that the agreement to sell dated 12.10.2007 was cancelled by Deed of Cancellation dated 30.12.2011 and the said Deed of Cancellation is placed on record at pages 99 to 115 of the Paper Book and the reasons for cancellation are accordingly mentioned in clauses (f) to (j), which are at pages 103 to 105 of the Paper Book and the same was reproduced for the sake of convenience:- “f) As per direction of the Hon'ble High Court M/s. K.T Dongre & Co. Pvt. Ltd. had caused to issue irrevocable bank Guarantee in favour of Prothonotary & Senior Master Hon'ble High Court. M/s. Nensee Construction Private Limited was under bonafide belief that on execution of the Bank Guarantee the Company Petition bearing No. 809 of 2003 which was pending for winding up the Company would be finally disposed off. However, the alleged creditor Mr. S.V.Dongre vehemently opposed the disposal of the said winding up Petition on the grounds that his alleged dues are not fully settled and his grievances are not fully redressed. g) M/s. K.T Dongre & Co. Pvt. Ltd had agreed vide the said Agreement for sale dated 12.10.2007 that they would execute the Deed of Conveyance in favour of M/s. Nensee Construction Private Limited, however, possession of the said property and also execution of Deed of Conveyance was not possible as name of the past Director Mr.S.V. Dongre was mutated on the Property Register Card of the said property, the same was done at the time a Debenture Trust was formed of which Mr.S.V.Dongre was one of the Trustee, the said Debenture Trust came to an end on expiry of its Period and/or its liability/Charge being discharged. However, the said Mr.S.V.Dongre is not ready and willing to co- operate to have the said Mutation entry corrected/amended and/or deleted and infact he is a Petitioner at whose instance the Company Petition No. 809 of 2003 for winding up of the Company was filed and till date he is pursuing the same.

As per clause 5 of the Cancellation Deed at page 5, which clearly mention that since the transaction of sale under the agreement dated 12.10.2007 has already been aborted, therefore the advance paid by the purchaser to the assessee will be treated as loan. However, the said loan was also subsequently repaid as per details provided by the assessee which are reproduced below: - Payment received from Nensee Repayment made to Nensee Date Amount Date Amount 16.10.2007 30,00,000/- 15.02.2016 15,00,000/- 16.10.2007 30,00,000/- 18.02.2016 15,00,000/- 16.10.2007 30,00,000/- 23.02.2016 15,00,000/- 16.10.2007 30,00,000/- 29.02.2016 15,00,000/- 22.10.2007 30,00,000/- 01.03.2016 15,00,000/- 02.03.2016 15,00,000/- 03.03.2016 15,00,000/- 07.03.2016 15,00,000-- 09.03.2016 15,00,000/- 10.03.2016 15,00,000/- Total 1,50,00,000/- Total 1,50,00,000/- M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) In this way the agreement dated 12.10.2007 was never materialised and the possession also remained throughout with the assessee. The Revenue, while relying upon the provisions of Section 53A of the Transfer of Property Act has held that the transfer according to the Income Tax Act as provided under section 2(47)(v) has already been completed. At this stage it is necessary to consider provisions of Section 53A of the Transfer of Property Act, which is reproduced below: - “[53A. Part performance.—Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that 2[***] where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.]” From the above provisions of Section 53A of the Transfer of Property Act we find that to comply with the said provisions, there has to be the following ingredients: - i) There must be a contract for consideration ii) It should be in writing iii) It should be signed by the transferor iv) It should be pertaining to transfer of immovable property v) The transferor should have taken possession of the property vi) Transferee should be ready and willing to perform the contract From the above we notice that as per the facts, provisions of Section 53A are not attracted because possession was never delivered to the purchaser M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) and the said fact is clearly mentioned in the agreement date d 12.10.2007. However, the Revenue relied upon the photographs to reach the conclusion that possession was handed over by the vendor to the vendee. At this stage we would like to mention that on the basis of photographs possession cannot be established whereas as per the factual position, for the purpose of sale of the land and building, agreement to sell dated 12.10.2007 was executed, which was signed and registered in which it was clearly mentioned that possession was never delivered to the purchaser and the same remained throughout with the assessee. Therefore in such circumstance only on the basis of photographs possession cannot be held with the purchaser. For this proposition we rely upon Section 92 of the Indian Evidence Act, 1982 wherein it was categorically mentioned that when the terms of any such contract, grantor other disposition of property has been reduced to the form of a document, then in that eventuality no evidence of any oral statement shall be admitted, as between parties to any such instrument or their representatives in interest, for purpose of contradicting, varying, adding to, or subtracting from, its terms as contained in the written agreement. Therefore, considering the specific provisions of Section 92 of the Indian Evidence Act, 1872 no oral evidence, i.e. in the shape of photograph cannot be taken into consideration for the purpose of ascertaining possession when the same is provided in the written contract dated 12.10.2010 and executed between the parties specifically mention that possession of the property has not been delivered to the purchaser. Hence in such situation the Revenue fall in error while relying upon the photographs reaching to the conclusion that possession has been delivered to the purchaser whereas in Revenue records, which are in Marathi, translation of the same are at pages 163 & 181, which clearly shows that the possession is in the name of vendor, i.e. the assessee and it was never transferred in the name of the purchaser. Even the public notice dated 23.03.2011, which appeared in the Times of India also did not speak about transfer of the possession to the purchaser. The Revenue relied upon the orders of the Authority for Advance Ruling in the case of Jasbir Singh Sarkarial (2007) 294 ITR 196 but the same is M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) distinguishable. In that case the ascertained question is not pertaining to litigation. However in the instant case, the agreement could not be acted upon during the previous year relevant to the assessment year. The public notice dated 23.03.2011 is a testimony to that effect. The Authority of Advance Ruling at page 219 had observed as under: - "39. we have to advert to one aspect which has caused some concern to us. What will happen if during the year following the one in which the deemed transfer took place, the proposed venture collapses for reasons such as refusal of permissions, the developer facing financial crunch etc. By that time, the owner would have received only a part of the agreed consideration, but he is obliged to file the return showing the entire capital gain based on the full sale price whether or not received during the year of deemed transfer. In such an eventuality, hardship may be caused to the owner who would have paid full tax. No doubt, such a situation could be avoided if the contention of the applicant is accepted. On deep consideration, however, we find that the construction of the relevant provision should not be controlled by giving undue importance to such hypothetical situations. Normally, the owner executes a power of attorney or does similar act to let the transferee take possession only after the basic permissions are granted and he is satisfied about the ability of transferee/developer to fulfil the contract. In spite of that, if such rare situations take place, the owner/transferor will not be without remedy. He can file a revised return and make out a case of exclusion or reeducation of income. However, if the time-limit for filing a revised return expires, the difficulty will arise. It is for parliament or the Central Government to provide a remedy to the assessee in such cases. Moreover, the other side of the picture as depicted in paragraph 27(supra) should also be kept in view.” Therefore considering the above facts we find that the facts of the ruling are distinguishable and not applicable to the present case. The Hon'ble Supreme Court in the case of CIT vs. Balbir Singh Maini (2017) 398 ITR 531 observed as under: - “The 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 is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact. A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) stage purported to transfer rights akin to the ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction.” The Coordinate Bench of the Tribunal in case of Javed K. Khan vs. Income Tax Officer in dated 22.07.2016 has observed as under: - “7. 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 7 ITA No. 98/MUM/2015 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 M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) 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 8 under consideration and we direct the AO accordingly. This disposes of ground No. 1, 2 & 3 set, out in the Revised Grounds of Appeal

For the reasons set out above, we are unable to uphold the objections so strenuously argued by the learned Departmental Representative. Even as we do so, we make it clear that whether or not complete control or right to control over the property has passed to developer in the relevant previous year essentially depends on the facts of each case and on, inter alia, the rights which have accrued to the developer under the agreement which, in turn, would also depend upon the extent to which developer has discharged his obligations under the contract. This question is thus to be decided on the totality of facts of each case and in the light of the guidance by the binding precedents. With these observations, and in the light of the above discussions, we confirm the conclusions arrived at by the CIT(A) and decline to interfere in the matter.”

On the other hand, the learned D.R. has relied upon the decision of the Hon'ble Bombay High Court n the case of Chaturbhuj Dwarkadas Kapaida vs. CIT 260 ITR 491 wherein after considering the same we find that the pari materia contained in the said judgement is different from the pari materia contained in the present case. From the cumulative facts taken together we once against reach to the conclusion by holding that the agreement dated 12.10.2007 was entered into between the parties and possession was remained with the assessee and the assessee remained the owner of the said property which was under litigation. The same has also been acknowledged in company petition 809. Even otherwise the agreement dated 12.10.2007 was cancelled by Cancellation Deed dated 20.12.2011 and as per the property card/documents and other record the property still stand in the name of the assessee and the payment made by the purchaser have also been returned back by the assessee and apart from that which have also been detailed above and the asset is still duly reflected in the Balance Sheet of the assessee. It is also made clear that the Coordinate Bench of the Tribunal in in the case of Javed Khan (supra) have also distinguished the judgement relied upon by the Revenue Chaturbhuj Dwarkadas Kapaida vs. CIT (supra) and the Hyderabad Bench of the Tribunal in the case of Suresh Kumar D. Shah vs. CIT 73 taxmann.com 26 has also held that where under development M/s. K.T. Dongre & Co. P. Ltd./Income Tax Officer-10(2)(1) agreement, land was to be handed over to the developer, but in fact, physical possession was continuously enjoyed by the assessee and by virtue of Arbitral Tribunal’s decree, said agreement was cancelled in the later year, it could not be said that any transfer took place with regard to the land. Moreover, ITAT Mumbai Benches in the case of ACIT vs. Jawaharlal L. Agicha (2016) 75 taxmann.com 121 has categorically held that where assessee entered into a joint development agreement with developer but did not transfer land owned by it in terms of Section 2(47)(v) and there was no intendment to transfer, there could have been no capital gain taxation. Therefore keeping in view the above facts and also to the subsequent event of Cancellation Deed dated 30.12.2011 whereby the agreement to sell was aborted and the amount received has been refunded to the purchaser, we are of the view that the no addition on account of capital gain tax could made. Therefore we direct to delete the addition.

Since we have already decided the appeal on merit, here is no need to dealt with the additional ground.

In the result, the appeal filed by the assessee is allowed.