Whether transfer for purpose of Sec 50C stands consummated and provisions of 48 come into play as soon as agreement to sale is executed and part consideration is received - YES: HC

THE issue is - Whether transfer for purpose of Sec 50C stands consummated and provisions of 48 come into play as soon as agreement to sale is executed and part consideration is received. YES is the verdict.

Facts of the case

The assessees are co-owners of a land situated at Agra. The said land was mortgaged with SBI, Agra, for the loan taken by the firm M/s Mehra Off Set Press in which the assessees were partners. On account of the non-payment of the outstanding dues, the Bank filed a civil suit for recovery of the amount and pendente lite interest. The suit was subsequently transferred to the DRT. During the pendency of proceedings, one time settlement was arrived at, on the basis of which, the assessees negotiated and entered into an agreement with subsequent purchaser to sell the land at Rs. 34,71,750/- per hectare. In furtherance of the said agreement, the assessees received part consideration through which the liabilities of the SBI were cleared and upon receiving the payment, the Bank lifted the encumbrances and released the mortgaged property. The sale deed was eventually executed. Thereafter, all the assessees filed their separate return, which was processed u/s 143(1). Subsequently, the assessees received a notice u/s 148 to show cause as to why the assessment should not be reopened and why capital gains should not be assessed as per provisions of Section 50C. The AO thereafter reassessed the income computing the long term capital gains on the basis of Section 50C taking the value assessed by the local authority. On appeal, the CIT(A) deleted the amount of capital gains assessed, by holding that the provisions of Section 50C was not applicable.

Having heard the parties, the High Court held that,

++ it is found that Section 45 provides that any profit or gains arising from a transfer of capital asset would be chargeable to income tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer takes place. When would the transfer takes place has not been specified u/s 45 or u/s 50C for the purpose of computing the income chargeable under the head capital gains u/s 48. According to the AO, the transfer took place in April, 2003 when the sale deed was executed, whereas according to the CIT(A), the transfer takes place when the agreement of sale was executed in April, 2001. It is seen that Section 2(47)(ii) states that the transfer, in relation to a capital asset, includes the extinguishment of any rights therein. In Sanjeev Lal and another Vs. Commissiioner of Income-Tax And Another, the Supreme Court considered the question as to whether the date on which the agreement for sale was executed could be considered as the date on which the property was transferred. The Supreme Court held that when an agreement to sell in respect of immovable property is executed, a right in personam is created in favour of the vendee and 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 gets a legitimate right to enforce a specific performance of the agreement. The Supreme Court, while considering the provisions of Section 2(47)(ii), held that if a right in respect of any capital asset is extinguished and that right is transferred to someone else, it would amount to transfer of a capital asset. The Supreme Court held that once an agreement to sell is executed in favour of some person, the said person gets a right to get the property transferred in his favour and, consequently, some right of the vendor is extinguished;

++ it is also to be noted that Explanation 2 to Section 2(47) was added by Finance Act, 2012 with retrospective effect on 1.4.1962 and, consequently, the said provision would be applicable. The said explanation clearly provides that transfer of an asset includes disposing of or parting with an asset by way of an agreement. In the light of the aforesaid provision, it is apparently clear that the moment an agreement to sell is executed between the parties and part consideration is received, the transfer for the purpose of Section 50C takes places and computation u/s 48 will start accordingly, for the purpose of calculating the capital gains u/s 45. From the aforesaid, it is apparently clear that the transfer of the property took place in the year 2001 when the provision of Section 50C was not in existence. Consequently, the AO was not justified in making the reassessment and computing the capital gains by invoking the provision of Section 50C, which was clearly not applicable in the assessees' case.