GOVARDHAN G VANANI,MUMBAI vs. DCIT (OSD-1) CEN RG-7, MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member):

2 Govardhan G. Vanani “1.Taxing the long term capital gain at Rs.4,51,95,233/- as against ‘NIL’as claimed in the revised computation. 2. Not allowing the claimed long term loss of Rs.3,70,50,000/- in respect of investment in shares of Niru Jewels Pvt. Ltd. of which he was a shareholder.”

4.1. During the course of hearing, it has been argued by the Ld. Counsel that the assessee has in the original return shown ‘long term capital gain’ of Rs.4,53,22,995/-, accrued to the assessee on account of sale of agricultural land. But subsequently, this transaction was cancelled and cancellation deed was also registered with the concerned authorities, and assessee had refunded the entire amount, and thus, no ‘income of capital gain’ was actually earned by the assessee, and therefore, in these circumstances assessee filed revised

3 Govardhan G. Vanani computation sheet wherein the income from ‘capital gain’ was shown as ‘nil’, which was not accepted by the AO on the ground that once transaction had taken place, then the amount of ‘capital gain’ earned becomes taxable in the year of transfer itself. He has drawn our attention on various pages of the paper book showing cancellation deed which was registered with the concerned authorities and also showing that entire amount was refunded by the assessee to concerned parties. It was further submitted by him that the transfer was void ab initio as per law. Since the transfer was illegal since inception. In fact, no transfer had actually taken place, and therefore no ‘capital gain’ income was earned by the assessee. He drew our attention to section 63 of the Gujarat Tenancy & Agricultural Land Act, 1948 wherein it has been provided that the transfer of agricultural land to non-agriculturists was barred under the law. He relied, in support of his view, upon the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Vithalbhai P. Patel [236 ITR 1001] and a judgment of Hon’ble Supreme Court in the case of Ramanlal Bhailal Patel & Ors. Vs. State of Gujarat (2008) 5 SCC 499, wherein it has been held that any transfer in violation of section 63 of the Gujarat Tenancy & Agricultural Land Act, 1948 shall be void in the eyes of law.

4.2. It was further submitted by Ld. Counsel that the assesse had filed revised computation of income which has not been rejected by the AO, and thus particulars of income shown therein have been accepted in the assessment order. Lastly, it

4 Govardhan G. Vanani was submitted by him that in any case and in any view of the matter, real income theory should be followed and assessment should be done only for the income actually earned by the assessee, and that, it shall be unjustified and unfair if the assessee is made to pay taxes on the income which has not been actually earned by it.

4.3. On the other hand, the Ld. DR has read before us the orders of the lower authorities and contended that it has been rightly held that since the transfer had taken place during the year, therefore, provisions of assessment of capital gain shall be attracted and assessee can claim the benefit in the later year, if and when, any transfer is cancelled. He requested for upholding the order of the lower authorities.

4.4. We have gone through the submissions made by both the sides, order of the lower authorities, material placed before us for our consideration as well as judgments relied upon before us. The facts of the case, as per the assessment order and the details filed during the course of appellate proceedings before the Ld CIT(A), are that in the computation of total income filed along with the return of income, the assessee had shown long term capital gain of Rs. 4,53,22,995/- on sale of land. Against the same, the assessee made set off of loss of Rs. 3,70,50,000/- on account of loss in the investments in the company Niru Jewels Pvt. Ltd. Further, the assessee also made set off of the long term capital loss brought forward from A.Y. 2009-10 amounting to Rs. 82,72,995/- (to the extent long term capital gain was available). Thus, as per the computation

5 Govardhan G. Vanani of total income, no capital gain was shown as chargeable to tax. During the course of assessment proceedings, the assessee filed a revised computation of total income, wherein the ‘long term capital gain’ on sale of land was not included, stating that the transfer made during the year was void as the assessee had no right to sell the property, and, therefore, the sale agreement was cancelled and the land was repurchased and thus, no ‘capital gain’ arose.

4.5. But the AO did not accept the assessee’s claim that no capital gain arose during the year, and ignored the revised computation filed by the assessee, holding that during the impugned year, an effective transfer had taken place, giving rise to accrual of taxable amount of ‘capital gains’. Accordingly, the AO brought to tax the ‘long term capital gains’ on sale of land.

4.6. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) wherein the assessee submitted that the original sale deed was in fact void, as he had no right to sell the property. The property has been mortgaged to lender bank and while making the sale deed, no confirmation from the bankers had been obtained. Accordingly, a cancellation deed dated 27.11.2011 was drawn subsequently and the consideration received was also paid back. Therefore, in law and equity, no sale could be deemed to have taken place. The assessee also stated that both, the sale deed as well as cancellation deed, were registered and copies of the same were furnished to the AO. But Ld. CIT(A) did not accept the 6 Govardhan G. Vanani submissions of the assessee, and it was held by him that the cancellation took place on 28.11.2011 which fell in A.Y. 2012- 13, and thus, in the year under consideration the transfer had already taken place, and hence, ‘long term capital gain’ has rightly been taxed by the AO in the impugned year.

4.7. Ld. Counsel of the assessee has challenged the actions of the lower authorities in view of the submission which have been mentioned in the above Para.

4.8. We have very carefully analysed all these facts and submissions. We agree with the view of the AO to extent that as per law, the ‘capital gains’ shall be charged to tax in the year in which transfer has taken place. But, in our considered view, if the assessee is able to demonstrate that the subsequent events led to a situation to nullify the legal effect of the transfer in such a way, as if the transfer was a nullity since inception, then in such circumstances, the Assessee cannot be compelled to pay tax on the ‘capital gain’ on a ‘transfer’ which actually never existed in the eyes of law. For analysing the facts of this case and legal position in this regard, we first refer to section 63 of the Gujarat Tenancy & Agricultural Land Act 1948, which provides that the transfer of an Agricultural land to non-agriculturists shall be barred in certain situations, as provided in the said section. It provides that no such transfer shall be valid in favour of a person who is not an agriculturist.

7 Govardhan G. Vanani 4.9. It is to be noted that the impugned agricultural land is situated in the State of Gujarat and therefore provisions applicable in the State of Gujarat shall be applicable on this case. Ld. Counsel has drawn our attention on the cancellation deed dated 28th November, 2011 available at page no. 115 onwards of the paper book, which has been entered between the assessee and the parties with whom the impugned land was intended to be transferred. The relevant portion of the said deed reads as under:

‘On today I the party of the second part hereby execute the cancellation of sale deed agreement in your favour i.e. in favour of the party of the first part on 01.01.2010 in respect of cancellation of registered sale deed no. 84 which is as follows.

The property described in the said sale deed which is situated at District Surat Sub District City Surat Village Singapor, Block/R.S. No.139 T.P.S. no. is 26, original Plot No. 69F. Plot No.105/1 and the area of the final plot is 8950 sq. mtrs. and the said land and inside and outside all rights, titles and interest is purchased by the party of the second part from the party of the first part vide registered sale deed dated 01.01.2010 bearing sale deed no.84 for an amount of Rs.4,57,00,000/-. And the said sale deed was registered with the office of the Hon’ble Sub Registrar Surat 4 Kataragam on 01.01.2010 at Sr. No. 84 in book no.1 and in this way from the state of the said sale deed the said lands is agricultural land and I the 8 Govardhan G. Vanani party of the second part is not a farmer and hence I cannot hold the said land. And at present under section 63 of the Calculation Act the permission is also not received from the Gujarat State. And it is also impossible to obtain permission under section 65 of the Revenue Act in respect of the said property due to some reason. Hence due to the above mentioned reason I don’t want to keep the said land with me which is mentioned and described in the following Annexure and I want to hand over the said land to you i.e. the party of the first part. And hence both the parties have decided to cancel the sale deed executed by and between both the parties. We i.e. the party of the second part hereby refund the amount of Rs.4,57,00,000/- (Rupees four crores fifty seven lakhs only) to you i.e. to the party of the first part in the following manner and the same is accepted. Hence the party of the first part is not in arrears to the party of the second part and in this connection I will not raise any objection and if made so then in that event the same will be cancelled vide this agreement.” (Emphasis supplied)

4.10. It is further noted from the facts narrated before us that entire amount of sale consideration was refunded and original documents with respect to this property were also received back by the assessee. The perusal of the above clearly shows that transfer was illegal in the eyes of law from the very beginning and therefore, it can be clearly said that the transfer was void ab initio. It is also noted by us that all these

9 Govardhan G. Vanani documentary evidences were provided by the assessee to the lower authorities, and nothing wrong has been found therein and these have not been controverted or rejected. Thus, impliedly, the AO as well as Ld. CIT(A) have accepted the fact of cancellation of the transaction. The revised computation sheet of income filed by the assessee has also not been rejected by the Ld. AO. However, the AO refused to give effect to the claim made by the assessee therein, on the ground that provisions regarding taxability of capital gains got triggered the moment transfer took place, and subsequent developments would not erase the original transaction executed in the impugned year.

4.11. In these facts, we examined the legal effect of the impugned sale deed that was executed by the assessee during the year giving rise to impugned amount of ‘capital gain’, and perused the same along with the aforesaid cancellation deed, reversing the effect of aforesaid sale deed. In the given factual situation, with a view, to appreciate the correct legal position, we refer to the judgment of Hon’ble Supreme Court in the case of Ramanlal Bhailal Patel (supra) wherein it has been held by their lordships that in view of provisions of section 63 of the Gujarat Tenancy & Agricultural Land Act, 1948, sale of an agricultural land to non-agriculturists will not be valid under the law, and ownership of any such land purchased by the non-agriculturists may have to vest in the State Government subject to, provisions of section 84C of the said Act. We further refer to the judgment of Hon’ble Gujarat High

10 Govardhan G. Vanani Court in the case of CIT vs. Vithalbhai P. Patel (supra), wherein it was held that if the sale was ‘null and void’ under the law, then there was no sale transaction in the eyes of law, and therefore, there would be no ‘capital gain’ arising out of a ‘null and void’ transfer of such land. It was accordingly held by the Hon’ble High Court that no capital gain had accrued to the assessee.

4.12. Thus, in the given facts of this case and position of law as discussed above it can be said that no legal rights had accrued to the parties on execution of sale deed, as the same was void ab initio in the eyes of law.

4.13. It is further noted by us that similar view has been taken by Hon’ble Bombay High Court in the case of CIT vs. Lok Housing & Constructions Ltd. 232 Taxmann 159/58 taxmann.com 179 (Bombay). In this case the facts were that agreement to sale entered into by this assessee was cancelled. Subsequently, the said company filed revised return declaring nil income and claimed that income declared in original return in respect of sale of land/FSI stood withdrawn due to cancellation of sale agreement. But the AO did not accept the revise return and held that capital gain was taxable. In view of these facts Hon’ble High Court has held as under:

11 Govardhan G. Vanani were sham and not real, then it has to bring in satisfactory material. The Tribunal found in paras 37 to 40 of the impugned order that the income which was earlier disclosed was not as such because the Agreements were terminable or could have been cancelled. Once they were cancelled, the properties have reverted back to the assessee. They are duly reflected in the balance sheet and as assets of the assessee. There were revised accounts and which were also scrutinized. They were found to be in order and meeting the accounting practice adopted. Therefore, the accounting policy also could not have been faulted. In para 42 of the impugned order, the Tribunal held that income could not have really accrued because of the fact that these Agreements were cancelled. Then the issue of their cancellation has been gone into, and in extensive details. The correct legal principles were applied and a finding of fact is arrived at in para 48, that no income could be said to have really accrued to the assessee as a result of the five transactions in the immovable properties and which income was chargeable to tax in the year under consideration. Once income had not accrued to the assessee in the real sense, then the original return represents wrong statement which was corrected by the assessee by filing a revised return. Therefore, no hypothetical income of the assessee could have been brought to tax.

12 Govardhan G. Vanani 4.14. Thus, in view of the facts of the case and position of law as discussed above, it can be held that, in fact, no transfer of the impugned land had taken place, and therefore, no amount of ‘capital gain’ was taxable as per law. We have examined this situation from another angle also. When the technical considerations are pitted against the substantive justice, then the latter must prevail. The objective of the income tax proceedings is to determine amount of income taxable as per law in the hands of assessee and tax payable thereon. The objective is not at all to nail down an assessee in one way or the other, and to recover the maximum tax by using force of law. The revenue authorities should never forget that as per clear mandate of Article 265 of Constitution of India, no tax can be collected without the authority of law. Therefore, under the given facts, we should keep in mind the concept of ‘Real Income’ theory. According to this theory, an assessee can be made to pay tax only and to the extent of income actually earned by him, and not beyond that. In the facts before us, the accepted factual and legal position is that no valid transfer (of the impugned land) had taken place as per law, and therefore, no question can arise of earning of ‘capital gain’ and taxing the same under the income tax law. It is further noted by us that it is settled law that an assessee can resile from its return if it is found at any later stage that the income offered therein was not taxable in accordance with law. Immediate reference can be made on the judgment of Hon’ble Delhi High Court in the case of Bharat General Reinsurance 81 ITR 303 (Del), which was subsequently approved by Hon’ble Supreme Court in the 13 Govardhan G. Vanani case of Rampur Distillery and Chemical Co Ltd vs CIT 187 ITR 561 (SC) . Thus, taking into account all the facts and circumstances of the case, and law applicable thereon, we hold that the addition made by the AO on account of capital gain for an amount of Rs.4,51,95,233/- was not taxable under the law, and therefore, the same is directed to be deleted. Accordingly, ground no.1 is allowed.

5.1. During the course of hearing, it has been submitted by the Ld. Counsel that the assessee made a claim of loss for declining value of the shares of the above said company but the same has not been allowed to the assessee by the lower authorities. It has been submitted that this claim has been made as value of the shares of the said company had become zero, the assets of the said company were seized by its creditors, who had taken possession of its assets including factory premises which were mortgaged by the said company with the State Bank of India.

5.2. It was further submitted by him that this loss was claimed by the assessee in the books of account in compliance to Accounting Standard (AS-13) being Investment Accounting Standard, issued by the Institute of Chartered Accountants of 14 Govardhan G. Vanani India, New Delhi, as per which, when there is a permanent decline in the value of long term investments, the resultant reduction is to be charged to the profit and loss statement.

5.3. On the other hand, Ld. DR has vehemently supported the order of lower authorities and submitted that assessee had neither sold these shares nor transferred to any person during the year. This loss has been provided in the books and claim in the return of income of notional basis, and therefore, the claim of the assessee was without the authority of the law, and therefore same has been rightly rejected by both the lower authorities.

5.4 We have gone through the submissions made by both the sides as well as orders of the lower authorities. The brief facts are that the assessee made a claim of loss for the said amount on account of investments in the said company. During the course of assessment proceedings, the assessee was not in a position to give any details with regard to sale or transfer of these shares, and accordingly it was added by the AO. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A), wherein it was submitted that the assesee was having an investment for the aforesaid amount in share capital of the aforesaid company. The said company suffered losses and its capital got sunk and the lender bank took possession of the land of the company along with property and debts. The debts value more than the value of property, and therefore, nothing was left and that is how the assessee claimed long term capital

15 Govardhan G. Vanani loss. It was also submitted that it should be treated as a case of deemed transfer. But the Ld. CIT(A) did not accept the claim of the assessee on the ground that in fact, no transfer of shares took place during the year, and therefore, there was no question of incurring of any loss or gain on the said shares and therefore, it was rightly rejected by the AO.

5.5 We have examined all the these facts very carefully and agree with the view taken by the lower authorities that a loss or gain can arise u/s 45 of the Income Tax Act 1961 only from “transfer” of a capital asset, effected in the previous year. Since, no transfer of the aforesaid shares was effected during the previous year, therefore, no claim of loss could have been allowed to the assessee, as per law. The contention of the Ld. Counsel that provision for decline in value of investment has been made because of mandatory requirement of Accounting Standard-13, is also not sustainable for the reason that accounting entries are not determinative for the taxability or otherwise of the transactions of the assessee. It is settled law that taxability of the transactions of the assessee has to be determined in view of the provisions of the Income Tax Act, and not on the basis of entries made in the books of accounts by the assessee. Therefore, keeping in view all the facts and circumstances of the case, we find that the said loss was not allowable, under the law and therefore, the claim of the assessee was rightly rejected, and therefore, no interference is called for in the order of Ld. CIT(A) and the same is upheld. Thus, Ground No. 2 is rejected.

16 Govardhan G. Vanani

Order pronounced in the open court on 4th December, 2015.

Sd/- Sd/- (Saktijit Dey ) (Ashwani Taneja) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated : 04/12/2015 ctàxÄ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai