Delhi High Court

S.M. Wahi vs Director Of Income Tax & Anr. on 17 May, 2010

Author: A.K.Sikri

                                     REPORTABLE

*              IN THE HIGH COURT OF DELHI AT NEW DELHI

                                 ITA No.1000 of 2009

                                            Judgment Reserved On: 23rd April, 2010
%                                           Judgment Delivered On: 17th May, 2010

       S.M. WAHI                                                         . . . Appellant

                              through :              Mr. O.S. Bajpai, Sr. Advocate with
                                                     Mr. V.N. Jha, Advocate

                                      VERSUS

       DIRECTOR OF INCOME TAX & ANR.                                  . . .Respondents

                              through:               Mr. Sanjeev Sabharwal, Advocate



CORAM :-
    THE HON'BLE MR. JUSTICE A.K. SIKRI
    THE HON'BLE MR. JUSTICE AJIT BHARIHOKE

       1.      Whether Reporters of Local newspapers may be allowed
               to see the Judgment?
       2.      To be referred to the Reporter or not?
       3.      Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. Though this appeal was admitted on a limited question formulated

by the appellant as Question of Law No. (d), in order to appreciate

that question, some broad factual narration would be needed.

2. The appellant is a Non- Resident Indian and Swiss National. He is

the uncle of one Ms. Reeta Wahi. The property bearing No.13,

Kautilaya Marg, Chanakyapuri, New Delhi (hereinafter referred to as

„the subject property) was purchased in March 1994 in the name of

Reeta Wahi for a consideration of Rs.1.49 crores. The entire amount

for purchase of this property was advanced by M/s. Vaishali

International and Management Resources Ltd. (hereinafter referred to

as the „VIMAR‟) to Reeta Wahi. This company, VIMAR, is

substantially owned by the appellant, who was holding 97% shares

therein and 3% share holding was with Reeta Wahi.

3. The appellant made gifts certain amounts from time to time totaling

Rs.1,44,62,500/- to Reeta Wahi. These moneys received by Reeta

Wahi in the form of gift from the appellant were utilized for

repayment of loan to M/s. VIMAR.

4. On 11.06.2004, Reeta Wahi entered into collaboration agreement for

development of the subject property and thereafter entered into

another agreement to sell qua this property with M/s. Dear Farms

(Pvt.) Ltd., which was the company of the builder who had entered

into the collaboration agreement with Reeta Wahi. On entering into

this agreement, dispute between the appellant and Reeta Wahi started

and series of litigations ensued in the form of various suits. The

appellant was in possession of the subject property. When he was

asked to vacate the same, he alongwith his wife (since deceased) filed

a suit bearing CS (OS) No.690 of 2009 on the Original Side of this

Court praying for decree of declaration stating that the plaintiffs were

the owners of the subject property. They also made a prayer for

permanent injunction seeking to restrain Reeta Wahi from leasing out

portions of property belonging to the appellant or dispossessing the

plaintiffs from the subject property. They also sought decree seeking

cancellation of sale deed vide which property was purchased in the

name of Reeta Wahi on the ground that the plaintiffs were the real

owner. In this Suit, the plaintiffs also moved an application for

interim injunction.

5. Reeta Wahi took the plea that she was the real owner and in any case

prayer made by the appellant that plaintiffs were the owners of the

property was barred by the Benami Transaction (Prohibition) Act,

1986. Number of issues were framed on the pleadings of the party.

On the aforesaid objection taken by the defendants including Reeta

Wahi, following two issues were framed:

1. Whether the suit is barred by the provisions of Benami Transaction (Prohibition) Act, 1986, as alleged in the written statement? If so, to what effect?

13. Whether the suit of the Plaintiff is barred under the provisions of Benami Transaction (Prohibition) Act, 1988 and the plaint is liable to be reject under Order 7 Rule 11 of the CPC?

6. We may also point out that interim injunction was earlier granted by

the Court in favour of the plaintiffs against their dispossession. These

were treated as preliminary issues and arguments were heard by the

learned Single Judge on these issues. Learned Single Judge vide his

order dated 01.05.2006 decided the aforesaid preliminary issues in

favour of the appellant. The court accepted the submission of the

appellant that in fact money was paid by the appellant for purchase

of the subject property and Reeta Wahi who was his niece held the

property in fiduciary capacity. Such a transaction was saved by the

provisions of Section 4(3)(b) of the Benami Transaction (Prohibition)

Act, 1988. Detailed reasons were given by the Court in support of its

view as to how there was fiduciary capacity between the appellant

and Reeta Wahi and Reeta Wahi held the property on behalf of the

appellant in a fiduciary capacity. On this basis, issued No. 1 was

decided in favour of the appellant and it was also held that the plaint

could not rejected under Order VII Rule 11 of the Code of Civil

Procedure.

7. After this decision of the learned Single Judge of this Court, the

parties settled the disputes. Settlement Deed dated 25.11.2006 was

signed between the appellant, Reeta Wahi and Sanjit Bakshi, the

developer. It was agreed that out of a total consideration of

Rs.15,76,05,316/- payable by the developer qua that property, Rs.4

Crores would be given to the appellant and remaining amount was to

be paid to Reeta Wahi. Suit was decided by the Court in terms of the

aforesaid settlement and other suits/appeals between the parties also

stood settled.

8. Two aspects clearly emerge from the aforesaid factual matrix:

a) This Court in its orders dated 01.05.2006 had accepted the

plea of the appellant that he was the owner of the property,

which was held and purchased in the name of Reeta Wahi,

who was holding the same as fiduciary of the appellant.

b) Settlement dated 25.11.2006 entered into between the

parties, as per which the appellant was ultimately paid Rs.4

Crores qua this property, was accepted by this Court.

9. Receipt of this amount was treated as capital gain by the Assessing

Officer (AO). The appellant resisted this move of the AO contending

that he was not the owner of the property nor had any tenancy rights

therein. He was only staying in the said property for the last more

than 45 years and sum of Rs.4 crores was received by the appellant

for handing over the vacant possession of the property in question in

terms of Settlement Deed dated 25.11.2006. Therefore, this amount

was not received against transfer of any capital asset as defined under

Section 2(14) of the Income Tax Act (hereinafter referred to as „the

Act‟) and was thus not taxable as capital gain. The AO rejected this

contention taking note of the facts narrated above. The appeals

preferred by the appellant before the CIT (Appeals) as well as Income

Tax Appellant Tribunal (hereinafter referred to as „the Tribunal‟) also

failed on this aspect. This Court also refused to entertain this appeal

under Section 260A in respect of this aspect in view of the concurrent

findings of fact of the three authorities below. More particularly

when the case of the appellant himself in the Suit filed by him in this

Court was that he was the actual owner of the property and Reeta

Wahi was only Benami owner as property was purchased out of the

funds given by him and Reeta Wahi was holding the same only in

fiduciary capacity being her niece and this stand of the appellant was

accepted by this Court. Thus, settlement was arrived at only after the

aforesaid orders were passed in his favour, which prompted Reeta

Wahi as well as developer to settle the matter with the appellant. The

amount of Rs.4 Crores was, therefore, rightly treated as capital gain.

10. So far so good. However, the appellant had also raised another issue

before the AO, viz., exact amount which was to be deducted from the

aforesaid receipt of Rs.4 crores to arrive at actual capital gain. The

contention of the appellant was that cost of acquisition of the

aforesaid property was to be deducted. Property was purchased at

Rs.1.49 crore, indexed cost of acquisition as per formula under the Act

was Rs.2,25,00,731/-. The appellant wanted entire amount of

acquisition, viz., Rs.2.25 Crores to be deducted from Rs.4 Crores

received by him to make him liable to pay him capital gain on the net

amount arrived in the aforesaid manner. The AO, however, did not

accept this plea of the appellant and held that since total

consideration was Rs.15.76 crores, the appellant would be entitled to

only proportionate deduction. In this manner, he allowed deduction

of Rs.57.10 lakhs and held that capital gain would be Rs.3,42,89,377/-.

Calculation arrived at by the AO in his aspect is as under:

"Capital Gain in respect of the property in question "Total Sale consideration 15,76,05,316 Less: Indexed cost of acquisition 2,25,00,731 13,51,04,545

Income under the head Capital Gains from the property in question attributable to the assessee is worked out to follow:

               Sale consideration                                  4,00,00,000
               Deduct proportionate cost of acquisition              57,10,623
               Capital Gains                                        3,42,89,377"

11. Thus, the dispute is as to whether the appellant is to be allowed

deduction on entire 2.25 Crores or he is entitled to only proportionate

deduction. Even this question has been decided by the Tribunal

against the appellant. Finding it to be a substantial question of law,

the appeal was admitted qua this question of law, which reads as

under:

"(d) Whether on the facts and circumstance of the case and in law, the Tribunal committed a mistake in not giving the set off of the entire cost of acquisition (Index Cost of the acquisition of Rs.2.25 Crores) to the Appellant against the Receipt of Rs.4 Crores in respect of the property in question while computing the capital gain?"

12. The order of the AO reveals that after holding that the appellant was,

in fact, the real owner of the property, while allowing proportionate

deduction only, he did not give any specific reasons, and rested his

order with the aforesaid calculations alone.

13. The Tribunal while holding that AO rightly determined the capital

gain by allowing proportionate deduction of the cost of acquisition

has made following observations:

"15. As far as the next alternative contention of the assessee that benefit of cost of acquisition should be granted only to the assessee are concerned, the learned Assessing Officer has rightly computed the total capital gain arisen on the sale of the property because the capital gain has arisen on transfer of a capital assets. He has set off the cost of acquisition against the sale consideration and thereafter determine the total capital gain arisen on transfer of the property. Since the dispute of ownership was involved in this case and the parties have compromised by bifurcating the sale proceeds, in the same ratio Assessing Officer has computed the gain arisen to each individual/entity. The steps taken by the Assessing Officer in determining the capital gain is a reasonable one and, therefore, no interference is called for in the computation also. In this way, we do not find any merit in ground No. 1 to 7 of the appeals raised by the assessee."

14. We feel that the approach of the Tribunal in this behalf is self-

contradictory. The appellant is treated as the absolute owner of the

property while holding that the amount of Rs.4 crores received by the

appellant is exigible to tax as capital gain and this was not capital

receipt. For this purpose, the authorities below heavily relied upon

the judgment dated 18.14.2006 of this Court in CS (OS) No.690 of 2004

holding that the entire sale consideration was given by the appellant

while purchasing the property in the name of Reeta Wahi, who held

the same in fiduciary capacity. Thus, when entire sale consideration

is treated to have been treated capital gain, it defies common sense as

to how the appellant would be given only proportionate deduction

and not the entire cost of acquisition when the entire money was

spent by the appellant and on that basis he was treated as the real

owner of the property in question.

15. Section 45 of the Act makes income from capital gains exigible to tax.

Section 48 thereof stipulates the „Mode of Computation‟. It reads as

under:

"Section 48

MODE OF COMPUTATION.

The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) Expenditure incurred wholly and exclusively in connection with such transfer;

(ii) The cost of acquisition of the asset and the cost of any improvement thereto :

Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the

same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :

Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted.

Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government.

Explanation : For the purposes of this section, - (i) "Foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973);

(ii) The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;

(iii) "Indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

(iv) "Indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;

(v) "Cost Inflation Index" for any year means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non- manual employees for that year, by notification in the Official Gazette, specify 759 in this behalf."

As per this Section cost of acquisition of asset and cost of any

improvement is to be deducted from the consideration received as a

result of transfer of the capital asset. It is held by the Bombay High

Court in the case of Commissioner of Income Tax Vs. Shakuntala

Kantilal [(1991) 190 ITR 56] that the expression used in Section 48 of

the Act, viz., "expenditure incurred wholly and exclusively in

connection with such transfer" has wider connotation than the

expression, "for the transfer". This view has been accepted by the

Madras High Court in the case of Commissioner of Income Tax Vs.

Bradford Trading Co. P. Ltd. [261 ITR 222]. We are in agreement with

the aforesaid interpretation given to Section 48 of the Act.

16. Another aspect of the matter (though not taken note of by the