PRADEEP KAR,BANGALORE vs. ACIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEOERGE, ACCOUNTANT MEMBER

ITA No.596/Bang/2014 Assessment year : 2006-07

Shri Pradeep Kar, Vs. The Assistant Commissioner of No.862C, 13th Main, Income Tax, 3rd Block, Koramangala, Circle 12(1), Bangalore – 560 052. Bangalore. PAN: AAVPK 2566J APPELLANT RESPONDENT

Appellant by : Shri K.R. Pradeep, CA Respondent by : Dr. P.K. Srihari, Addl. CIT(DR)

Date of hearing : 02.05.2016 Date of Pronouncement : 11.05.2016 O R D E R Per Sunil Kumar Yadav, Judicial Member

This appeal is preferred by the assessee against the order dated 19.02.2014 of the CIT(Appeals)-III, Bangalore inter alia on various grounds, which are as under:-

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Officer did not accept the contention of the assessee and held it to be short

term capital gain, having observed that assessee has acquired the property

on 22.2.2003 and was sold on 19.1.2006. Therefore assessee retained the

capital asset with him for a period less than 36 months and is eligible only

for short term capital gain.

CIT(Appeals), but did not find favour with him.

acquiring share for one flat in the Co-operative Group Housing Society, the

assessee got certain rights in the capital asset on the very day of allotment

of share. It was further contended that after acquisition of shares from the

society, the assessee had made different payments to the Co-operative

Group Housing Society on their demand and accordingly the flat was

constructed and possession of the same was given to the assessee on

22.2.2003. He also placed reliance upon the judgment of the Hon’ble High Court of Karnataka in the case of CIT v. H. Anil Kumar, 242 CTR 537, in

which it has been held that compensation received for giving up the right to

specific agreement of an agreement to sell constitutes, capital gain

chargeable to tax; however deduction is allowable as per section 48 of the

Income-tax Act, 1961 [hereinafter referred to as “the Act”]. Heavy reliance

was placed upon the judgment of Hon’ble Gujarat High Court in the case of CIT v. Jindas Panchand Gandhi, 200 CTR 473, in which it has been held

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that the assessee having sold the flat allotted to him by a co-operative

housing society after a period of 36 months from the date of allotment,

capital gain arising to him was long term capital gain, despite the fact that

physical possession of the flat was given to the assessee much later and

therefore, he was entitled to deduction from such gains as per law.

Reliance was also placed upon the order of Delhi Bench of the Tribunal in the case of DCIT v. Smt Sita Devi Wadhwa in ITA No.239(Del)2010, copy

of the same has been placed on record.

assessee acquires the right in the immovable property from the date of

allotment of shares in his favour, the period of holding the capital asset

should be counted from the date of allotment of shares and not from the

date of allotment of flat to him.

has invited our attention to the judgment of Hon’ble High Court of Karnataka in the case of CIT V. Dr. V.V. Modi, 218 ITR 1, in which it has

been held that the assessee having acquired a site under lease-cum-sale

agreement and sold it a few months after becoming absolute owner

thereof, the capital gains arising therefrom were short-term capital gains,

though assessee held the property for 10 years before conveyance was

secured by him upon payment of entire sale consideration in respect of

lease-cum-sale agreement.

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the rival submissions, we find that undisputedly assessee has acquired the

shares for allotment of a flat by the society on 5.8.1993. Thereafter, he

made various payments to the society towards construction of Co-operative

Group Housing Society building and finally the constructed flat was allotted

to the assessee on 22.2.2003, which was sold on 19.1.2006. The

assessee offered the capital gain accrued on its sale as long term capital

gain, whereas the AO treated it to be short term capital gain. Now the

issue before us is the nature of capital gain accrued to the assessee on

transfer of capital asset.

rights for acquisition of a flat in the society building from the co-operative

society, having been allotted share certificate in his favour from the society.

So long as the assessee held the shares of the society of the flat, it would

be allotted to the assessee, it cannot be transfer or allotted to anyone, until

and unless the assessee surrenders the share certificate to the society;

meaning thereby, by simple acquisition of share certificate on certain

payment to the society, assessee acquired certain rights in the immovable

asset. In the instant case, after acquisition of share certificate, the

assessee had made payments towards construction of the flat in the

society, which was later on allotted to the assessee. Thus, on transfer of

right in the flat, assessee acquires a capital gain. The right in the flat is

acquired on allotment of share by the society. In respect of this proposition

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of law, we have examined the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. H. Anil Kumar, 242 CTR 537, in which Their Lordships have held that the word “capital asset” means property of any kind held by the assessee, which does not necessarily be confined to an immovable property. Similarly, when the word “transfer” in relation to a capital asset, though includes sale, exchange or relinquishment of the asset, the said asset need not necessarily be an immovable property. The right to obtain conveyance of immovable property falls within the expression “property of any kind” used in section 2(14) and consequently it is a capital asset. The relevant findings of the Hon'ble jurisdictional High Court are extracted hereunder for the sake of reference:-

“The word 'capital asset' means property of any kind held by the assessee which does not necessarily be confined to an immovable property. Similarly, when the word 'transfer' in relation to a capital asset though includes sale, exchange or relinquishment of the asset, the said asset need not necessarily be an immovable property. The right to obtain a conveyance of immovable property falls within the expression 'property of any kind' used in s. 2(14) and consequently it is a capital asset. It is because the expression 'property of any kind' is of wide import. When this expression is read along with the expression defined in s. 2(47)(ii) i.e., 'extinguishment of any rights therein', the giving up of a right of specific performance by the assessee to get conveyance of 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). Giving up of a right to claim specific-performance by conveyance in respect to an immovable property, amounts to relinquishment of the capital asset. Therefore, there was a transfer of capital asset within the meaning of the Act. The payment of consideration under the agreement of sale, for transfer of a capital asset, is the cost of acquisition of the capital asset. Therefore, in lieu of giving

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up the said right, any amount received, constitutes capital gain and it is exigible to tax. However, as is clear from s. 48, before the income chargeable under the head capital gains is computed, the deductions set out in s. 48 has to be given to the assessee. It is only the amount thus arrived at, after such deductions under s. 48, would be the income chargeable under the heading capital gains. In the instant case both the assessees entered into an agreement to purchase the immovable property and paid Rs. 1,00,000 as advance amount. It is the cost of acquisition. They filed a suit for specific performance of the agreement of sale. It is thereafter under an agreement entered into between them and the purchasers, they gave up their right to sue for specific performance in lieu of a payment of Rs. 7,50,000. Therefore, the amount received by them for giving up the right of specific performance i.e., to give up their right in a capital asset constitutes capital gains. However, they are entitled to deductions as per s. 48, both regarding the investment made as well as the expenditure incurred and only after such deduction the amount arrived at would be exigible to capital gains tax.”

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which the dispute was raised with regard to nature of capital gain and in

that case, the assessee was allotted a site by Town Planning Authority

under lease-cum-sale agreement. He could secure conveyance in his

favour after 10 years upon payment of entire sale consideration. Sale deed

accordingly executed in his favour on 29.3.1982. Same brought about a

merger of interest of lesser interest held by him in the bigger estate

acquired by him under the sale deed upon acquiring the title. The Hon’ble

High Court further held that the question of assessee intending to keep the

two capacities, one of leasehold rights and the other of ownership,

separately does not arise. He became absolute owner on 29.3.1982 and

thereafter sold the site on 27.11.1982. What he transferred was a right

held by him from the date of sale in his favour and not what he held earlier

to that. The Hon’ble High Court accordingly held capital gain arising from

transfer could only give rise to short term capital gains.

flat in the society on the allotment of share certificate in his favour. Later

on, he has also made the payments to the Co-operative Group Housing

Society on their demand, meaning thereby that since the assessee has

acquired some right in the capital asset on the allotment of share certificate

in his favour, the flat which has been allotted to the assessee on

completion of the project cannot be transferred or allotted to any other

person, without the consent of the assessee. The issue with regard to

nature of capital gain on such transfer of right has been adjudicated by the

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Lucknow Bench of the Tribunal in the case of Karunesh Agarwal v. DCIT in ITA No.182/Lkw/2015 in which the Tribunal has held that the assessee acquired the right in the property as soon as the agreement for sale is executed, though sale deed is executed after a considerable time. The relevant observation of the Tribunal is extracted as under:-

“26. The ld. Counsel for the assessee has also invited our attention to the judgment of the Apex Court in the case of M/s Sanjeev Lal Etc. Etc. Vs. CIT in Civil Appeal No. 5899 & 5900 of 2014 arising out of SLP No. 16958 -59 of 2013 in which the issue was raised whether the agreement to sale which has been executed on 27th December 2002 can be considered day on which the property i.e. residential house has been transferred. Having examined the various aspect and the provisions of law the Hon’ble Apex Court has categorically held that the principles with regard to the interpretation of statute pertaining to the tax laws, one can very well interpret the provision of section 54 r.w.s. 2(47) of the Act i.e. “definition of transfer” which would enable the assessee to get the benefit u/s 54 of the Act. The relevant observation of the Apex Court are extracted as under: “17. Upon plain reading of Section 54 of the Act, it is very clear that so as to avail the benefit under Section 54 of the Act, one must purchase a residential house/new asset within one year prior or two years after the date on which transfer of the residential house in respect of which the long term capital gain had arisen, has taken place. 18. In the instant case, the following three dates are not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24th September, 2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27th December, 2002 and out of the total consideration of Rs.1.32 crores, Rs. 15 lakhs had been received by the appellants by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30th April, 2003. It is also not in dispute that there was a litigation wherein the Will of late Shri Amrit Lal had been challenged by

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his son and the appellants had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004 and therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27th September, 2002. 19. If one considers the date on which it was decided to sell the property, i.e. 27th December, 2002 as the date of transfer or sale, it cannot be disputed that the appellants would be entitled to the benefit under the provisions of Section 54 of the Act because long term capital gain earned by the appellants had been used for purchase of a new asset/residential house on 30th April, 2003 i.e. well within one year from the date of transfer of the house which resulted into long term capital gain. 20. The question to be considered by this Court is whether the agreement to sell which had been executed on 27th December, 2002 can be considered as a date on which the property i.e. the residential house had been transferred. In normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in personam is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the agreement to sell some right is given by the vendor to the vendee. The question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of Section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred. Relevant portion of Section 2(47), defining the word “transfer” is as under: “2(47) “transfer”, in relation to a capital asset, includes,- (i)…………….

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(ii) the extinguishment of any rights therein; or ………………………………” 21. Now in the light of definition of “transfer” as defined under Section 2(47) of the Act, it is clear that when any right in respect of any capital asset is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset. In the light of the aforestated definition, let us look at the facts of the present case where an agreement to sell in respect of a capital asset had been executed on 27th December, 2002 for transferring the residential house/original asset in question and a sum of Rs. 15 lakhs had been received by way of earnest money. It is also not in dispute that the sale deed could not be executed because of pendency of the litigation between Shri Ranjeet Lal on one hand and the appellants on the other as Shri Ranjeet Lal had challenged the validity of the Will under which the property had devolved upon the appellants. By virtue of an order passed in the suit filed by Shri Ranjeet Lal, the appellants were restrained from dealing with the said residential house and a law-abiding citizen cannot be expected to violate the direction of a court by executing a sale deed in favour of a third party while being restrained from doing so. In the circumstances, for a justifiable reason, which was not within the control of the appellants, they could not execute the sale deed and the sale deed had been registered only on 24th September, 2004, after the suit filed by Shri Ranjeet Lal, challenging the validity of the Will, had been dismissed. In the light of the aforestated facts and in view of the definition of the term “transfer”, one can come to a conclusion that some right in respect of the capital asset in question had been transferred in favour of the vendee and therefore, some right which the appellants had, in respect of the capital asset in question, had been extinguished because after execution of the agreement to sell it was not open to the appellants to sell the property to someone else in accordance with law. A right in personam had been created in favour of the vendee, in whose favour the agreement to sell had been executed and who had also paid Rs.15 lakhs by way of earnest money. No doubt, such contractual right can be surrendered or neutralized by the parties through subsequent contract or conduct leading to no transfer of the property to the proposed vendee but that is not the case at hand.

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get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the appellants had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed. 24. Thus, a right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendee/transferee on 27th December, 2002. The sale deed could not be executed for the reason that the appellants had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated. 25. In view of the aforestated peculiar facts of the case and looking at the definition of the term ‘transfer” as defined under Section 2(47) of the Act, we are of the view that the appellants were entitled to relief under Section 54 of the Act in respect of the long term capital gain which they had earned in pursuance of transfer of their residential property being House No. 267, Sector 9-C, situated in Chandigarh and used for purchase of a new asset/residential house.” 27. In light of the aforesaid judgment of Hon’ble Apex Court, we find force in the contention of the assessee that the residential house was acquired through agreement to sell which was latter on converted into sale deed and the agreement to sell was executed within a period of two years, therefore, the assessee is entitled for deduction u/s 54 of the Act. We accordingly, set aside the order of the ld. CIT(A) and held that assessee is entitled for deduction under section 54 of the Act in respect of the capital gain accrued on conversion of residential house and land appurtenant thereto into stock in trade on 21.8.2004. Since the lower authorities have not computed the capital gain in terms of provisions of section 45(2) of the Act and has not allowed deduction to the assessee u/s 54 of the Act, we direct the AO to recompute the capital gain in terms of provisions of section 45(2) of the Act and allow deduction u/s 54 of the Act in respect to the residential house purchased by the assessee. 28. Ground No. 3 & 4 relate to disallowance of expenditure paid under the head commission to different commission agents. In this regard on perusal of the orders of the lower authorities we find that the assessee has debited commission expenses of Rs.47,94,000/- the P & L a/c on

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sale of 13 flats. The commission claimed to be paid to 25 persons remained outstanding as on 31.3.2010. It was claimed that flats were sold through the employee of the companies and their relatives. The AO was not convinced with the explanation of the assessee and accordingly he disallowed the entire payment of commission. 29. Assessee preferred an appeal before the ld. CIT(A) but ld. CIT(A) did not find favour with the ld. CIT(A). 30. Now the assessee is in appeal before the Tribunal and during the course of hearing it was contended on behalf of the assessee that the commission agents have filed the confirmation letters in response to the notices issued by the AO. The copy of return of all the commission agents were also filed before the AO in which the assessee has offered the receipt of commission as income and the same was also accepted by the Revenue authorities. 31. The copy of notices issued by the AO to commission agents, reply accepting the receipt of commission, bank statement of commission agents, return of commission agents and computation of income of commission agents are placed as page no. 199 to 440 of the compilation of the assessee. The ld. Counsel for the assessee further contended since the commission agents have accepted the receipt of commission and offered it to tax which were also accepted by the Revenue, the Revenue has no right to disallow the claim of the expenditure in the hands of payer. Therefore, the claim of payment of commission to commission agents should be allowed. 32. The ld. DR simply placed reliance on the order of the ld. CIT(A). 33. Having carefully examined the order of lower authorities and the documents available on record, we find that the assessee has claimed the payment of commission on sale of flats to various commission agents and during the course of assessment proceedings the AO raised queries from the commission agents and asked them to file confirmation letters etc. In response thereto the confirmation letters alongwith bank statement and copy of return of income alongwith computation of income were filed. The said evidence is also find before us and available at page no. 199 to 440 of the compilation of the assessee. Having carefully perused, we find that in response to notices issued by the AO the commission agents have accepted the receipt on commission from the assessee. The commission agents have also paid the tax on receipt commission and the same was accepted by the

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Revenue. So once the receipt of commission has accepted in the hands of the recipient, the payment of the same cannot be disallowed in the hands of the payer. The Revenue authorities cannot doubt the payment of commission in the hands of the assessee, where the same commission is taxed in the hands of the recipient. Once the receipt of the commission is taxed in the hands of the recipient the deduction of same cannot be disallowed. We therefore, did not find ourselves in agreement with the order of the ld. CIT(A). We accordingly, set aside his order and delete the addition made in this regard.”

Pronounced in the open court on this 11th day of May, 2016.

Sd/- Sd/- ( ABRAHAM P. GEORGE ) (SUNIL KUMAR YADAV ) Accountant Member Judicial Member

Bangalore, Dated, the 11th May, 2016. /D S/

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Copy to:

By order

Assistant Registrar, ITAT, Bangalore.