Capital gains - Whether when assessee transfers agricultural land to an AOP, such transfer is valid only if there is an agreement between the assessee and AOP - YES: HC

THE issue before the Bench is - Whether when the assessee transfers its agricultural land to an AOP, such transfer is valid only if there is an agreement between the assessee and the AOP. And the verdict goes in favour of the Revenue.

Facts of the case

The assessee's case was selected for scrutiny on the basis of information received that the assessee had sold an immovable property for Rs 39 lakh. The assessee contended that he had an agricultural land which land and land situated in the vicinity were declared as industrial

estate. Assessee contended that he and other land owners having agricultural land within that declared industrial estate formed an AOP, transferred the agricultural land to AOP, whereupon AOP applied for conversion of land use and the same having been granted, the industrial land was ultimately sold by AOP. It was contended that transfer by him of a piece of agricultural land to AOP does not attract any capital gain. Steps taken to sell the industrial land will attract capital gains in the hands of the AOP. This contention was not accepted by the Assessing Officer, inasmuch as, there was no evidence to suggest transfer of any agricultural land by the appellant to AOP. It was found as a fact that before constitution of AOP, the land was converted from agricultural to industrial, and thereafter, in fact, the industrial land was sold. The entire capital gains tax was fastened upon the appellant.

On appeal, the CIT (Appeals) found that AOP came into existence on 16th June, 2007 and the land in question was sold by AOP on 12th February, 2008. It, accordingly, held that assessing full amount of capital gains in the hands of appellant was not correct since he was only one constituent of AOP. CIT (Appeals) held that when the land vested in the AOP on 16th June, 2007 the land had already been converted from agricultural to industrial. The CIT (Appeals) held that in terms of Section 2 (47) of the Act, the land in question stood transferred on 16th June, 2007 from individual owners to AOP. The CIT (Appeals) directed the Assessing Officer to initiate proceedings under Section 150 read with Section 147/148 of the Act on each individual member/constituent of AOP for assessing the short term capital gains on each one of them on account of transfer of capital asset to AOP on 16th June, 2007. For that purpose, Assessing Officer was directed to consider the price of transfer to AOP on the basis of the circle rate prevailing on 16th June, 2007. The CIT (Appeals) then directed assessment of capital gains in the hands of AOP also when it sold ultimately the land in question to the ultimate purchaser on 12th December, 2008. On appeal, the Tribunal refused to interfere.

On appeal, the HC held that,

++ no doubt that for the purpose of income tax, a capital asset may be transferred to an AOP as is provided in Section 2 (47) of the Act. However, when the capital asset is an immovable property by reason of the provisions contained in the Transfer of Property Act read with the Registration Act, transfer of an immovable property of the nature dealt with herein requires an instrument which is also required to be registered. In accordance with the provisions of the Income Tax Act read with the various instructions issued by CBDT from time to time, transfer will take effect in a situation as provided in Section 53-A of the Transfer of Property Act, namely, when there is an agreement to transfer and, in part performance thereof, the transferee is in possession of the immovable property agreed to be transferred;

++ in the instant case, there is no conveyance by the appellant in favour of AOP, nor there is any agreement between the appellant and the AOP coupled with the contention by the AOP that in pursuance with that agreement and in part performance thereof it is in possession of the property in question. We are, therefore, of the view that there was no just reason by the CIT (Appeals) to interfere with the order of the Assessing Officer and we are also of the view that the Tribunal did not take notice of what may be treated as a transfer from one to the other in terms of the general law as well as in terms of the laws applicable to income tax. However, there being no independent appeal by the Revenue, we refuse to interfere.