Delhi Tribunal rules secured lender taking possession of mortgaged assets under SARFAESI Act does not result in “transfer”

This Tax Alert summarizes a recent ruling of the Delhi Tribunal (ITAT) in the case of Rajasthan Petro Synthetics Ltd. (Taxpayer) on the issue whether taking over physical possession of assets by secured lender under the SARFAESI Act amounts to transfer in the hands of the borrower.

The Tribunal held that right to assume possession of borrower’s secured assets in the event of default in repayment of loan was merely a special right granted by SARFAESI Act to the secured lender as a step towards realization of dues from borrower. Such “possession” does not grant ownership right to the lender. The borrower can regain possession by discharge of dues before the sale of assets by the lender. Hence, taking over of “possession”does not pass on ownership rights at any stage to the lenders and consequently, there is no “transfer” in terms of the provisions of the Indian Tax Laws (ITL).

The present Tribunal ruling provides guidance that mere takeover of possession of secured assets by lenders by exercising rights vested in them under SARFESI Act does not result in“transfer” and consequently, does not trigger capital gains taxation in the hands of the borrower. The secured lender does not acquire ownership right over the asset and right of possession is granted to facilitate eventual sale of the assets for recovery of dues. Capital gains get triggered when the secured lender