Ajai Kumar Sah Jagati vs Income-Tax Officer.
1995 Latest Caselaw 257 Del

ORDER

Per Vimal Gandhi, J. M. - This appeal by the assessee for the assessment year 1989-90 is directed against order of CIT (A) confirming addition of Rs. 4,45,000 under the head long term capital gain.

2. The facts of the case are that assessee entered into an agreement to sell 7,000 sq. meters of vacant land to M/s. Kumaon Constructions, Nainital for a total sum of Rs. 25,00,000. The agreement was registered with Sub-Registrar, Nainital on 26-4-1988 and a sum of Rs. 2,00,000 was received as advance. In the period relevant to assessment year under consideration, assessee transferred 24 plots to different persons (which according to the Assessing Officer were nominees of M/s. Kumaon Construction company) for total consideration of Rs. 15,20,900 (inclusive of Rs. 2 lacs received as advance). The assessee did not return any capital gain as a sum of Rs. 15,00,000 out of sale consideration was invested in IDBI Bonds. There is no dispute on this investment of Rs. 15,00,000 and the exemption of this amount for computation of capital gain.

3. The Assessing Officer was, however, of the view that in view of amended definition of term "transfer" as per section 2(47) (v) of the Income-tax Act, the assessee was to pay capital gain on entire consideration of Rs. 25,00,000. The transfer now included delivery possession of any immovable property taken in part performance of the contract of the nature referred to under section 53A of the Transfer of Property Act, 1882. He, therefore, asked the assessee to show cause why capital gain be not assessed with reference to total consideration fixed in the agreement of sale. The assessee, vide reply dated 8-2-1992, contended that he had sold only part of the land and possession of only those plots had been given to the transferees. He has not given possession of the land not transferred and, therefore, provisions of section 2(47) (v) of the Income-tax Act were not applicable.

4. The Assessing Officer did not agree with above contention of the assessee. He computed capital gain at Rs. 4,45,000 in the hands of the assessee with following observations :

"The transaction done by the assessee in pursuance of the contract with M/s Kumaon Constructions Nainital appears to be covered squarely by above definition of Transfer. More than 1/2 the land has been transferred to the nominees of the second party. Thus, the agreement has been performed in part. The contention of the assessee that he is the owner of the remaining piece of land is not entirely correct as so long as the agreement with M/s Kumaon Constructions stands the assessee is only a restrictive owner of that piece of land. Otherwise, his rights to transfer this piece of land to any person other than M/s Kumaon Constructions Company or its nominee remain curtailed so long as the agreement to sale is in existence. The assessee has thus earned capital gain as under :-

Rs.

Total sale consideration

25,00,000

Less : Cost of acquisition as per wealth-tax records

1,00,000

24,00,000

The assessee has invested Rs. 15,00,000 in IDBI Bonds. Then the amount not chargeable under section 45 is Rs. 15,00,000 (24,00,000 X 15/24). The balance amount of Rs. 9,00,000 is the capital gain chargeable under section 45 and is entitled to deduction under section 48 of the I.T. Act as under :-

Rs.

9,00,000

Under section 48(2)(b)

10,000

8,90,000

Under section 2(B) 50% of the above

4,45,000

4,45,000."

5. The assessee impugned above addition in appeal before CIT (A) and reiterated his submissions. The learned CIT (A) took into account provisions of section 2(47) (v) of Income-tax Act along with section 53A of Transfer of Property Act and concluded that transaction in form of agreement of sale entered by the assessee with Kumaon Constructions amounted to "transfer". From the terms and conditions of the agreement to sell, it was evident that part of land i.e., 3,700 sq. yards out of 7,000 sq. meters had already been taken possession of (by the transferee) and this fact was undisputed. Similarly, 570 Sq. meters of land was utilised for roads and parks during the year under appeal. The learned CIT (A) accordingly concluded that possession of major part of land under agreement had already been passed on to the transferees or its nominees. Thus in his view, part of the contract was performed and case was fully covered by what was envisaged in section 53A of Transfer of Property Act. He was influenced by the expression, "the transferee has taken possession of the property or part thereof" used in section 53A of the Transfer of Property Act. He held that it was not necessary that possession of whole of the property should be taken by the transferee. The CIT (A) confirmed the order of the Assessing Officer. The assessee has brought the issue in appeal before Appellate Tribunal.

6. We have heard both the parties at length and examined relevant material produced before us. Shri C. S. Aggarwal, learned counsel for the assessee submitted that possession of land was not given to the transferee in pursuance of agreement of sale. He drew our attention to para 2 of the agreement wherein it is specifically provided as under :-

"The possession of said vacant land will only be given after the entire payment of Rs. 25,00,000 (Rs. twenty-five lacs) has been made as above and till such the second party shall have no right on any part of the said land in any manner whatsoever except the ploting, dermarkation, etc. of the said land."

Shri Aggarwal further contended that even 3,700 sq. meters sold in the period under consideration were not sold in pursuance to the agreement dated 25th April, 1988. The assessee had lesser land than agreed to be sold. Therefore, with mutual consent, above agreement was subsequently cancelled by writing a fresh agreement on 22nd day of October, 1990. Shri Aggarwal challenged finding of learned revenue authorities that possession was delivered to the transferees as contrary to facts. When possession was not given, the question of application of section 53A of the Transfer of Property Act would not arise. In support of his argument, Shri Aggarwal relied upon commentary of Shri Mishra on Transfer of Property Act (4th Edition) page 354. He contended that an agreement which is cancelled, abandoned or amended cannot be relied upon. In fact, CIT (A) in the impugned order had admitted that original agreement was abandoned. There was thus no question of giving effect to said agreement to hold that it was partly performed to attract application of section 2(47) (v) of the Act. Shri Aggarwal also cited and

relied upon decision of Honble Punjab and Haryana High Court in the case of Hira Lal Ram Dayal v. CIT [1980] 122 ITR 461.

7. Smt. Sinha, learned D. R. opposed above submissions. She vehemently contested claim of the assessee that property was not transferred in pursuance of agreement of sale dated April 25, 1988. She drew our attention to letter dated 8th February, 1992 filed by the assessee before the Assessing Officer where in respect of sale transactions it was admitted that "these sales have been transferred by virtue of sale agreement but possession of only those plots has been given for which sale deeds have been executed".

It was clear from above that transactions were made in pursuance of agreement of sale dated 25-4-1988. Smt. Sinha also drew our attention to observations at page 542 of learned Author Shri H. S. Gaur on the Transfer of Property Act (8th Edition). The learned author has discussed as to what are the essentials of "part performance of contract" under section 53A. Smt. Sinha also drew our attention to the portion of section 53A providing, "the transferee has, in part performance of the contract, taken possession of the property or any part thereof".

According to Smt. Sinha, the italicised portion showed that even where transferee has taken possession of part of the property intended to be sold, the provisions of this section would be attracted. She accordingly supported impugned order of the Assessing Officer and of CIT (A).

8. We have given careful thought to the rival submissions of the parties. By amending section 2(47) (v) of the Income-tax Act through the Finance Act, 1987 w.e.f. 1-4-1988, the Legislature has given extended meaning to the word "transfer". It would now include in relation to a capital asset, the following transactions also :

"Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882);"

A bare reading of provision makes it clear that possession of immovable property allowed to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act. In other words, taking or retention of possession of immovable property is sine qua non for application of this clause.

Section 53A of Transfer of Property Act provides as under :-

"53A. Part performance. - Where any person contracts to transfer for consideration of any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done same act in furtherance of the contract, and the transferee had performed or is willing to perform his part of the contract, then not withstanding that the contract, though required to be registered, has not been registered, or where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred for enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract."

9. The necessary conditions for application of the section are the following :-

"1. That there should be a contract to transfer for consideration of immovable property;

2. That the contract should be in writing and its terms can be ascertained with reasonable certainty;

3. That the transferee in part performance of the contract has taken possession of the property or any part thereof or if he is already in possession, he continues in possession in part performance of the contract;

4. That the transferee has done some act in furtherance of the contract; and

5. That the transferee had performed or is willing to perform his part of the contract."

10. On a combined reading of two sections, it emerges that agreement of sale, which does not create any right, title or interest and therefore cannot be held to be a transfer of property, may be treated as transfer under certain conditions. Such conditions are that possession of the property is taken or retained under such an agreement.

11. The learned lower authorities in this case held the transaction to be covered under section 53A of the Transfer of Property Act as assessee transferred 3700 sq. meters out of 7000 sq. meters agreed to be sold under the agreement. As contract was performed in respect of 3700 sq. meters, they took that it was partly performed and therefore provisions of section 53A were applicable. They took the agreement as a transfer and substituted consideration of Rs. 25,00,000 in place of Rs. 15,20,900 received by the assessee.

12. In our considered opinion, the approach adopted by revenue authorities is erroneous and unjustified being based upon misconception of legal principles involved in statutory provisions. The part performance of a contract has been taken in the little sense to mean performance of any part to contract i.e. sale of a part of property agreed to be sold, has been taken as part performance. This with respect has been in total disregard of express language of statutory provisions and the well-settled law. Any and every type of performance is no relevant to attract application of provision of section 53A of the Transfer of Property Act and/or section 2(47) of the Income-tax Act. It is by now well-settled that equitable doctrine of part performance was given statutory recognition in section 53A and was designed only to protect possession of a transferee when the transfer falls short of requirements laid down by the law. The plea of part performance can be taken only as a shield in defense and not as a sword. The most important ingredient of doctrine enshrined in section 53 is the change of possession. The transferee, in order to take benefit of the provision, must prove that he has obtained possession or if already in possession, continued to be in possession in part performance of the contract.

In Sita Ram v. Smt. Kanta Devi 1981 SCC 239, their Lordships of Supreme Court held that a person seeking protection or doctrine of part performance "as enunciated in section 53A of the Transfer of Property Act has thus to plead and prove inter alia that he has in part performance of the contract taken possession of the property or any part thereof and in case he was already in possession, he continues to be in such possession in part performance of the contract and has done some act in furtherance of the contract. In addition he has also to allege and prove that he has performed or is willing to perform his part of this contract".

Even as per clause (v) of section 2 (47), the transactions which are deemed to be transferred must involve, "the allowing of the possession of any immovable property to be taken or retained in part performance of a contract". Thus it is the possession of immovable property which is allowed to be taken or retained which is deemed to be a transfer. In other words, the provision has to be applied to the immovable property whose possession was given or allowed to be retained without completing legal formalities of a transfer as envisaged under General Law applicable to immovable property.

13. It is more than clear from the order of the Assessing Officer that he recorded no finding that possession of property other than 3700 sq. meters admittedly transferred was delivered by the assessee. His reasoning for holding that provisions of section 2(47) (v) were applicable, has already been noted and discussed. The Assessing Officer made no attempt to record any finding that possession of balance property was delivered to M/s Kumaon Constructions or their nominee. On appeal, CIT (A) fully concurred with and supported the reasoning given by the Assessing Officer in holding that provisions of section 53A read with section 2(47) (v) of Income-tax Act were applicable to the agreement which was partly performed. The learned CIT (A) in para 2.9 of the impugned order further observed that M/s Kumaon Constructions did have constructive possession of entire land. Unless M/s Kumaon Constructions were in effective possession, it was not feasible for them to deal physically with property and develop it according to their own choice. We are unable to endorse above observation of learned CIT (A) based on assumption and surmises. The terms of the agreement between the assessee and M/s Kumaon Constructions reproduced in para 6 above specifically provided that possession of vacant land will be given only after receipt of entire consideration of Rs. 25,00,000. The learned CIT (A) totally ignored above clause while observing that Kumaon Constructions were in constructive possession of the land. It is one of the conditions for application of section 53A that possession of immovable property should be obtained under the contract which is claimed to be partly performed. Thus possession must be obtained under the contract. In such a situation finding of constructive possession has no meaning. It is, therefore, not possible for us to hold that assessee delivered possession of any land other than 3700 sq. meters sold in the year under consideration. As already noted, there is absolutely no material on record to justify even finding of constructive possession. As the possession of property other than sold was neither given nor allowed to be retained, provision of section 53A of TPA read with section 2(47) (v) of Income-tax Act has no application in this case. On the total consideration received in the relevant period, the assessee returned capital gain which was treated as exempt in view of investment in IDBI Bonds. The assessee has further shown capital gain on sales effected in succeeding year and same has accordingly been assessed. For the reasons given above no further addition under the head capital gain could be made in the year under reference. Therefore we direct the Assessing Officer to accept the capital gain as returned by the assessee. The addition made is directed to be deleted.

14. In the result, assessees appeal is allowed.