Ratio:

In a recent decision of Bombay High Court in PR. CIT Vs M/s. Talwalkars Fitness Club, Income Tax Appeal No. 589 of 2016, Order dated 29/10/2018 the Bombay High Court has held that the mere fact that an agreement for sale of property is registered does not make it a conveyance, if such agreements is conditional and possession is not transferred to purchaser.

Facts of the case:

The Assessee was the owner of the gymnasium (the “property”) wherein it entered into two agreements for sale of the said property with the purchaser on 14.02.2011 (AY 2011-12). As per the said agreements, the two property had been agreed to be sold for a consideration of Rs.2,20,00,000/- each. Only a token amount of Rs.20,00,000/- was received as advance by the assessee and the balance consideration was agreed to be paid by purchasers by 26.05.11 (AY 2012-13). The possession of the property was not handed over to the purchaser in AY 2011-12. In respect to clause 3(ii) of the agreement, it was provided that the purchaser would pay the balance consideration of Rs.2 crores to the assessee on or before 26.05.11 which was subject to the conditions that the assessee would make out their title and all other rights and interest in the said property as clear, marketable and free from all encumbrances, within 30 days from the date of execution of the agreement. Vide clause No.13 of the agreement, it was agreed that the purchaser would be able to take the possession of the property only on payment of the balance consideration. The AO held that the premises stood transferred on 14.02.2011 (AY 2011-12) itself due to registered sale agreements both executed on that date. The AO held that the agreement for sale in question was not revocable. On the issue of possession it was held that handing over of the possession of the property on a future date was a mere formality and hence short term capital gains earned by the assessee from the sale of the property were to be taxed in the A.Y. 2011-12 and not when actual possession was given in AY 2012-13. Aggrieved by the said order, the assessee filed an appeal before CIT (A).

Issue before CIT (A):

Whether capital gains arising from the sale of the said property would be liable to be assessed in the A.Y. 2011-12?

Submission by Assessee before CIT (A):

The assessee submitted that though the agreements to sale were executed during the financial year relevant to assessment year in AY 2011-12, however, the actual sale took place in the subsequent AY i.e 2012-13 and the capital gains were accordingly offered in AY 2012-13. In AY 2012-13 also the department has accepted the capital gain. The assessee further explained that the assessee had not parted with the possession of the property in question during the year under consideration.

CIT (A) Verdict:

The CIT (A) did not find favour with the assess’s contention and upheld the findings of the AO that the transfer of the property took place on the date of execution of agreement in AY 2011-12. Tthus the capital gains were liable to be assessed during the year under consideration i.e AY 2011-12. Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before ITAT. 

Issue before ITAT:

Whether the capital gains earned by the assessee from the sale of the immovable property were to be taxed in the assessment year under consideration i.e. A.Y. 2011-12 as against offered by the assessee in the subsequent A.Y. 2012-13? 

ITAT’s Verdict:

The hon’ble ITAT while going through the entire document along with the accompanied agreement, on which the stamp duty was paid, made the following observation:

1. The document executed on 14.02.11 was an “agreement for sale” and not a sale deed. The assessee continued to be the owners and in possession of the property till the handing over of the possession of the said property to the purchasers on receipt of balance consideration on 16.06.11 i.e AY 2012-13.
2. At the time of handing over of the possession, it had been conveyed that the assessee’s were the sole and absolute owner of the said property all have paid all the statutory taxes etc. relatable to the said property till the handing over of the possession on 16.06.11.
3. The assessee had offered the due taxes in the AY 2012-13 relevant to the financial year in which the possession was handed over to the purchasers, which has been accepted by the department and thus held that the assessee was not liable to pay any capital gain tax relating to the premises in question for the year under consideration .i.e. AY 2011-12
   

Bombay High Court Verdict:

Upon Revenue’s appeal the Hon’ble High Court upheld the decision of the Tribunal.  It held that the appeal of Revenue is devoid of merits and dismissed the same on the following grounds:

1. Merely because the “agreement for sale” dated 14.02.2011 for the said property is executed and registered it does not partake the character of a conveyance or a sale deed automatically. The said agreement is conditional in nature and only upon payment of balance consideration the transfer would take place.
2. The possession was not handed over but was to be handed over on compliance with certain obligations by the Assessee and thus it is evident that the Assessee was in possession of the property from February to June 2011. It was carrying on its business from the property up to April 2011.
   

Analysis:

1. The mere fact that an agreement for sale of property is registered does not make it a conveyance. There is no doubt that the execution and a registered “Agreement for sale” creates certain enforceable right in the purchaser, however it does not transfer the sellers title to purchaser. Such Agreements are conditional in nature and only upon fulfillment of conditions backed by possession the property can be said to be sold.
2. Section 2(47) of the Act defines the term “transfer”. Though the said term is extensive in nature and covers not only actual transfer but also deemed transfer, yet conditional agreements, the transaction in which have not culminated in law, are not covered. Even U/s. 2(47) clause (v) and (vi) which are deemed transfer for purpose of Income Tax Act, transfer of possession, is an essential ingredient.
3. The Apex Court has in the case of CIT vs. Sanjiv Lal (365 ITR 389) held that an agreement for sale gives certain right in rem to the purchaser. One such right is the right to obtain specific performance of contract of sale of property. However, the said right is available from the purchasers perspective and cannot be treated as “actual transfer” from sellers perspective. On the other hand Section 2(47) defining the term “transfer” from the sellers perspective. Such transfer of said Section 2(47) of the Act kicks in only upon fulfillment of conditions as provided in Clause (i) to (vi). Thus a mere “agreement for sale” would though give certain rights to purchaser, it would not be a “transfer” U/s 2(47) for the sellers Income Tax assessment.