THE issue before the Bench is - Whether when two of the most important ingredients of sale/ transfer viz., receipt of sale consideration and delivery of possession are missing, there cannot be a transfer of capital asset either under the Transfer of Property Act or under section 2(47) of the IT Act. And the verdict goes in favour of the assessee.
Facts of the case
1) Survey was conducted on assessee, his wife, and other family members. During the survey operation, assessee admitted that his family sold to MDPL land for a consideration of Rs.4.5 crore per acre in the FYs 2007-08 and 2008-09. AO observed that as the lands are located in close proximity to nearest municipality, they cannot be treated as agricultural land as defined u/s 2(14). Further, part of the transactions entered into through agreement to sale-cum-GPA with MDPL was subsequently cancelled as part of the transaction did not materialize. AO, however, observed that the transaction in fact has taken place in terms with the agreement of sale-cum-GPA and there is transfer of capital asset within the meaning of section 2(47) as possession over land also passed during the previous year. AO observed that as all ingredients of transfer as defined in section 2(47) as well as section 45 are satisfied capital gain accrued. AO contended that assessee tried to change the entire character of transaction by entering into cancellation of agreement of sale-cum-GPA just after survey operation to avoid payment of tax arising from the sale of lands. AO observed assessee invested the sale consideration in construction of a commercial building which was given on lease to an educational institution as well as other properties being lands and building etc. AO held that when the entire sale consideration was paid by way of cheque as noted in the agreement of sale-cum-GPA and when the possession has also been handed over the transfer is complete in all respects. Thus, AO computed capital gain from sale of land. Before the CIT (A), assessee contended that as per the agreement of sale-cum-GPA, the proposal was for sale of land to MDPL. As differences cropped up between the assessee and MDPL, assessee did not handover the possession of land to MDPL and ultimately, the agreement of sale-cum-GPA was cancelled. The said cancellation deed clearly mentioned that the consideration was never paid by the purchaser and the seller did not deliver the possession of land. There was no transfer of land during the year. Referring to section 54 of TP Act, assessee submitted that transfer can only take place when there is money consideration. Even though all these facts were brought to the notice of AO, AO without taking cognizance of them, has arbitrarily concluded that there is sale of land by assessee to MDPL. So far as the observation of AO that assessee has invested in construction of commercial building and other assets out of the sale consideration received it was submitted by assessee that such investments were out of the sale proceeds of land in preceding financial year. Thus, none of the ingredients of transfer as envisaged u/s 2(47) having been satisfied no capital gain accrues to assessee. CIT (A) allowed the claim of assessee observing the submission made by the assessee.
2) AO observed that assessee sold land but had not shown capital gain by claiming it as agricultural land. AO observed that assessee has not furnished any evidence with regard to distance from the municipality as well as cost of acquisition treated the entire sale consideration as capital gain of the assessee.
Assessee contended that the said land was acquired by the outer ring road authorities under the Land Acquisition Act. Not only the land was classified as an agricultural land in the records maintained by the State Govt. but assessee was also carrying on agricultural operation therein. The land acquired by the State Govt. was also beyond eight kilometers from the limits of nearest municipality notified by the central govt. Patancheru Mandal where the lands were situated became part of Greater Hyderabad Municipal Corporation vide notification dated 16/04/2007. Prior to that Patancheru was an independent municipality but not notified by the central govt. Though the land was located outside the municipal limit even assuming that it is part of Patancheru municipality, it cannot be treated as capital asset as it is not a notified municipality by the central govt.
The CIT (A) observed that the land in question cannot be considered to be coming under the category of capital assets as not only because they are classified as agricultural land and also it is situated beyond eight kilometers from a notified municipality. Not only the certificate issued by the land acquisition officer classify the land as agricultural land but the assessee was actually carrying on agricultural operation on such land which is evident from the agricultural income shown by assessee. Thus, there will be no capital gain on transfer of such land as it is not a capital asset.
3) AO observed that assessee admitted capital gain after claiming exemption u/s 54F. Assessee invested the amount in construction of a residential building. In support of such claim, assessee submitted a report from a registered valuer and copy of the municipal assessment/notice towards arrear and current tax. AO observed that though assessee had stated that the construction of new residential house was made between March 2007 to June 2008, but, the assessee has not provided any other information to substantiate such claim. AO concluded that assessee has not utilized the sale consideration of the original asset for construction of the new asset. Accordingly, he concluded that assessee is not entitled for exemption u/s 54F of the Act.
The CIT (A) allowed the appeal of assessee observing that investments in new house were made before the sale of original asset is merely on presumption without having any basis. Even the municipal receipt relied upon by AO relate to the old structure standing on the existing plot which was subsequently demolished by assessee before starting construction of new house. As the assessee has invested the gain from the sale of original asset in construction of a new residential house within the prescribed time limit, assessee will be eligible for claim u/s 54F.
4) AO rejected the claim of deduction u/s 54F by the assessee in respect of sales of land. AO rejected the claim of assessee stating that the property where the reinvestment of capital gains was made, cannot be considered as residential property since the same has been put to use for the purpose of other than residential i.e. as hostel accommodation, as such the property so constructed is not falling under category of the property termed as ‘residential' in common usage.
Before CIT (A), assessee contended that the term ‘residential house' is not defined in the Act. Hence, it is to be understood, in the parlance of common usage. Generally a dwelling unit is a place where a person can stay and carry on his day today activities like sleeping, cooking, dining etc. The property in question/investment in which claimed as deduction u/s 54F is a residential house let out to College for use as a hostel where activities like sleeping, cooking etc. is carried out. A commercial space would not have normal facilities for sleeping, cooking, dining etc. and cannot be used as a dwelling unit. For claiming exemption u/s 54F, the two conditions which are required to be fulfilled are, 1) the building must be a residential one not only at the time of construction but also subsequent to the construction. 2) It is not at all necessary to what use ultimately the building is put to till the nature and character of the building remains as residential.
CIT (A) observed that as the building was used for a hostel of a college as dwelling unit for students, it can be considered as a residential property, but, certainly cannot be a commercial property. CIT(A) observed that as the property in question can neither be considered as a residential property or a commercial property as per the records of the municipal authorities, since no permissions were obtained by assessee, the test for treating the same as residential property can be decided by its usage alone. The building constructed by assessee has four floors with a pent house and each of the floor comprised of living rooms, provision for cots to the students along with provisions for dining, bathing, etc. which are the normal facilities required for a residential building whereas a commercial building will not have all these facilities. Only because the building is used as hostel by some educational institute benefit u/s 54F cannot be denied to assessee solely on that ground. Thus, the building constructed by assessee being used as a dwelling unit even though it may not have constructed as residential house as per the norms of the municipal authorities it cannot be considered as a commercial property and as such it has to be treated as residential property for the purpose of claiming deduction u/s 54F.
5) Assessee disclosed certain agricultural income. AO held that assessee has shown the income from agriculture on the higher side and restricted the income from agriculture to Rs.20,000 per acre and in this process while allowing part of the agricultural income shown by assessee treated the other part as ‘income from other sources'. CIT (A) confirmed the order of AO.
After hearing both the parties, the ITAT held that,
1) ++ AO has come to a conclusion that there is transfer of capital asset by assessee to MDPL by solely relying upon the agreement of sale-cum-GPA. However, from the facts and materials on record, it becomes absolutely clear that though assessee had entered into agreement of sale-cum-GPA but it never received the consideration as mentioned in the agreement of sale-cum-GPA. Nothing has been brought on record by AO during the assessment proceeding or even by the DR before us to controvert the fact that the cheque as mentioned in the agreement was never handed over to assessee nor encashed by assessee. Further as per agreement, until registration of a regular sale deed in favour of vendee, the vendor shall take care of the outgoings of the scheduled property by way of property tax, ground rent, land revenue, etc., this clearly shows that until registration of sale deed the vendor will be in possession of the property. Reading of the agreement of sale-cum-GPA as a whole, nowhere indicates that the possession of the property was handed over to the vendee i.e. MPDL. Therefore, when two of the most important ingredients of sale/ transfer viz., receipt of sale consideration and delivery of possession are missing, there cannot be a transfer of capital asset either under the TP Act or under section 2(47) of the IT Act. When the existence of agreement of sale-cum-GPA has been obliterated by the parties through the cancellation deed, which is also a registered document, it cannot be said that there is transfer of capital in terms with the agreement of sale-cum-GPA. There is no other documentary evidence brought on record which could conclusively prove that the property in question stands transferred to the vendee during the relevant PY. Accordingly, the order of CIT(A) on this issue is confirmed;
2) ++ CIT (A) has given a categorical finding that not only the land is classified as agricultural land but it is beyond eight kilometers from the limits of nearest notified municipality. Though Patancheru municipality became part of GHMC vide notification dated 16/04/2007 but the subject land was acquired prior to that date and even GHMC was not a notified municipality. However, on perusal of GOM No.14 dated 18/12/2006 it is not clear whether land of assessee was actually acquired on that date or subsequently. Nothing has been brought on record to indicate the actual date of acquisition of land. In case land was acquired after 16/04/2007 i.e. formation of GHMC, then, CIT(A)'s finding to the effect that acquisition of land was prior to GHMC will become erroneous. No material has been brought either by the assessee or by the department to indicate the exact distance of land from the limits of a nearest notified municipality. Without ascertaining these facts it cannot be decided whether the land acquired is a capital asset as defined u/s 2(14) of the Act. If the subject land was acquired prior to formation of GHMC or if on verification it is found that land is classified as an agricultural land and is situated beyond eight kilometers of notified municipality on the date of transfer, it cannot be considered as a capital asset so as to attract capital gain;
3) ++ it is apparent that AO has denied claim of exemption u/s 54F for two reasons i.e., construction of the new property was prior to the date of sale of original asset and secondly, the sale consideration received by assessee was not utilized for construction of the new asset. From the aforesaid finding of the AO, it is clear that he has no dispute with regard to the nature of the new asset i.e. a residential house. Assessee has not only claimed that the construction of the new residential house was started in March 2007 and continued up to June 2008 but has also submitted a report from registered valuer in support of such claim. The bank statement also indicate the fact that not only the sale consideration of the original asset was deposited in bank account but there are substantial withdrawals from the bank account thereafter which gives credence to the assessee's claim that the sale consideration was utilized for construction of the new asset. Therefore, in absence of any evidence brought on record by AO to contradict assessee's claim of investment in construction of new house by utilizing the sale proceeds of the original asset the addition made on the basis of presumptions and surmises cannot be sustained;
4) ++ neither AO nor CIT(A) have examined the primary facts before coming to their conclusion. AO was not justified in rejecting assessee's claim by simply observing that as the building is used as a hostel it is commercial property. Only because the property is let out to a educational institution for being used as a students hostel that by itself will not be a reason to hold that it is not a residential building. Similarly, the finding of CIT(A) is also conflicting and contradictory. While in one breath, CIT(A) observes that dual test for use of the property at the time of construction as well as subsequent period cannot be applied, however, in the same breath he observes that as the property can neither be taken as residential or commercial user test has to be applied. The nature of a property whether residential or commercial cannot be determined by solely applying the user test. No attempt has been made either by AO or by CIT(A) to ascertain the true nature of the property by examining the construction plan or approval given by municipal authorities, or through physical verification. In absence of these basic facts, the exact nature of property constructed and assessee's eligibility to section 54F cannot be decided conclusively on presumptions. Thus, the said matter is restored to AO;
5) ++ AO does not dispute the fact that assessees have substantial agricultural land holding. On comparative analysis of the agricultural income shown in the preceding assessment years with the agricultural income shown in the impugned assessment years it appears there is no abnormal increase in the agricultural income shown by assessees. There is absolutely no basis for estimating the agricultural income at Rs.20,000 per acre. AO has not given any reasons how he has adopted this figure. It is therefore directed to AO to accept the agricultural income shown by assessees in the respective assessment years.
No comments:
Post a Comment