Income Tax Appellate Tribunal - Mumbai
Gripwell Industries Ltd. vs Income-Tax Officer on 30 November, 2005
Equivalent citations: [2006]99ITD368(MUM), [2006]284ITR188(MUM), (2006)102TTJ(MUM)441
ORDER
P. Madhavi Devi, Judicial Member
1. Since the issue in both the appeals is the same, both the appeals are heard and disposed off by this common order.
2. The grounds of appeal raised by the assessee are as under:
1. The learned CIT(A) has erred in law and on facts of the case, by holding that the Capital Gain of Rs. 1,28,12,543 on sale of properties at Vartej plant is taxable in assessment year 1999-2000 and accordingly has erred in confirming the findings given by the Assessing Officer.
1.1 Your Appellant submits that as per provisions of Section 2(47)(v) of the Income-tax Act, 1961, any transaction involving the allowing of possession of any immovable property to be taken or retain in part performance of a contract of the nature referred to in Section 53A of Transfer of Property Act, 1882 is a "transfer" in relation to capital asset and accordingly the provisions of Section 45 of Income-tax Act, 1961 shall apply. Thus, it is submitted that in view of definition of transfer, capital gain is to be levied on sale of property on giving possession of the property though final sale deed is not executed. In the present case, the physical possession of the property was duly given before 31-3-1998 to selwell and therefore, the capital gain arising on sale thereon has been rightly included in the income of assessment year 1998-99.
2. Your appellant therefore, prays to direct the Assessing Officer to tax capital gain of Rs. 1,28,12, 543 on sale of property of Vartej factory on substantive basis.
3. The brief facts of the case are that the assessee is a company carrying on the business of manufacturing of cosmetics. It filed its return of income on 30-11-1998 for the assessment year 1998-99 declaring a loss of Rs. 1,65,645 and on 31-12-1999 for the assessment year 1999-2000 declaring 'nil' income. The case was taken up for scrutiny. It was noticed that the assessee had closed its factory during the year 1998-99 and sold its land and other assets of its factory to M/s. Selwel Fasteners Ltd., a joint venture company between assessee and M/s. Selectus Ltd., U.K. The assessee and M/s. Selectus Ltd., entered into an agreement of sale dated 27-11-1997, according to which assessee would sell and transfer to the new company, the land, building, plant and machinery with good title and free from all encumbrances at a price of Rs. 1,85,00,000 which was receivable in the form of cash and also allotment of NCDs and interest-free deferred payment facilities. Thereafter assessee was paid Rs. 1,00,00,000 in March, 1998 and handed over the physical possession of the factory and its plant and machinery on 31-3-1998 to the vendee who undertook the job of renovating the factory. The assessee had mortgaged the land and building and other assets at the factory at Vartej to Bank of Baroda for the cash credit facilities being availed by the assessee from that Bank. As per the one-time settlement between the assessee and the Bank, the assessee was to pay Rs. 118 lakhs by 30-3-1998. However, it paid the amount on 22-7-1998 and the Bank issued a no-lien letter on 15-10-1998 and the assessee executed the registered sale deed on 30-10-1998. The assessee claimed capital gains in the assessment year 1998-99 since he has already given the physical possession of the premises on 31-3-1998 after receiving the sale consideration of Rs. 1 crore. The Assessing Officer allowed long-term capital gains of Rs. 1,11,219 on sale of land and short-term capital gains of Rs. 16,30,253 on sale of depreciable assets on protective basis on the ground that they were assessable in the assessment year 1999-2000 and not 1998-99, and made substantive assessment of the same in the assessment year 1999-2000. Aggrieved by the same, the assessee filed an appeal before CIT(A) who confirmed the order of Assessing Officer. The assessee is in second appeal before us.
4. The learned Counsel for the assessee submitted that the assessee had received the sale consideration of Rs. 1 crore in March, 1998 and delivered the physical possession of the premises to the vendee on 31-3-1998 and therefore, as per Section 2(47)(v) of the Income-tax Act, there is a transfer of the property and, hence, capital gains have arisen in the assessment year 1998-99.
5. The learned Departmental Representative relied upon the orders of authorities below and submitted that as per the terms of the agreement of sale dated 2 7-11 -1997, the assets should have good title and should be free from all encumbrances before they can be transferred to the vendee. Since the property was mortgaged to Bank of Baroda and payment was made only on 22-7-1998 and no lien letter was issued on 15-10-1998, the assessee cannot be said to have transferred the property to the vendee in the assessment year 1998-99, and the transfer has taken place only in assessment year 1999-2000 as the sale deed was executed on 30-10-1998. He further submitted that the assessee had tried to take the benefit of business loss of over Rs. 1 crore during the year so as to set off the entire capital gains on the sale of assets this year since in assessment year 1999-2000 the assessee has positive taxable income of Rs. 1,02,23,453 and the business loss would not be available to set off the capital gains.
6. Heard both the parties and considered their rival contentions. It is not in dispute that the assessee received the sale consideration of Rs. 1,00,00,000 in cash in March, 1998 and that it has given physical possession on 31 -3-1998 to the purchaser. What is in dispute is whether there was a transfer of property when the bank had a lien on the property ? For proper appreciation of the case, Section 45(1) of Income-tax Act, reads as under :
Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54E, [54EA, 54EB], 54F and 54H 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 took place.
This Section mentions 'transfer' which is defined in Section 2(47). In this case, the relevant Section 2(47)(v) is reproduced here-under:
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
7. As per this section, if the ingredients of Section 53A of Transfer of Property Act are satisfied, there is a transfer of the assets.
The ingredients of Section 53A of transfer of Property Act are :
(a) There is a contract for sale of specific immovable property in writing;
(b) The transferee has, in part performance of the contract, taken possession of the property, or any part thereof; or
(c) The transferee already in possession in part performance of the contract, has done some act in furtherance of the contract; and
(d) The transferee has performed or is willing to perform his part of the contract; then
(e) The transferor or any person claiming under him is debarred from enforcing against the transferee 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 contract.
8. From the above, it is clear that to attract the provisions of the above section, there should be a contract for sale of immovable property, the transferee should be in possession of the same and the transferee should have performed or should be willing to perform his part of the contract, and while in possession should have done some act in furtherance of contract.
9. Coming to the facts of the case on hand, there is an agreement of sale dated 27-11-1997, the transferee has paid sale consideration of Rs, 1 crore in March, 1998, and is willing to fulfil other conditions and has taken over possession of the same on 31-3-1998 and subsequently undertaken renovation of the same. Therefore, the transferee gets the rights over the property and the transferor-assessee can only enforce the rights expressly provided by the terms of the contract. But that has nothing to do with the ownership of the proposed transferor who remains full owner of the lands till they are legally conveyed by a sale deed to the proposed transferor.
10. Another fact to be considered is whether the mortgage of the property with the bank would in any way affect the rights of the transferee. But the mortgage, the bank gets only a right of interest in the property but not the right to the title of the property. The Transfer of Property Act, Section 58 defines mortgage as under : "A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability." The purpose or object of mortgage is to secure a debt. In a sale, all the rights of ownership which the transferor has, pass to the transferee, whereas in a mortgage, some rights are transferred to the mortgagee and some remain vested in the mortgagor. The nature of the right of transfer depends upon the form of the mortgage. But, whatever be the form of mortgage, there is a transfer of some interest only and not a transfer of the whole interest of the mortgagor. The characteristic feature of mortgage is that the right in the property created by the transfer is accessory to the right to recover the debt. Therefore, it creates a pecuniary liability on the mortgagor and the mortgagee becomes a secured creditor who has the first charge on the immovable property for the satisfaction of his debt. (Any mortgage of the property would not invalidate the contract of agreement of sale or part performance thereof, but would only give the right of preference for the satisfaction of the debt). Section 2(47)(v) of Income-tax Act or Section 53A of Income-tax Act, do not speak of transfer of title of ownership, but only speaks of transfer of possession of the property. Section 53 A of Income-tax Act, deals with part performance of a contract of transfer and not a final transfer. Final transfer of the property could be only with the execution of registered sale deed as provided under the law and that can be done only after the bank issues the no-lien certificate. Section 2(47)(v) of Income-tax Act, refers to transactions in the nature of contracts referred to in Section 53A of Transfer of Property Act.
11. Therefore, in our opinion, the condition under Section 53 A of the Transfer of Property Act are satisfied in this case and as per Section 2(47)(v), there is a transfer of immovable property in the assessment year 1998-99 only. Hence, the capital gains arise in this year only and not in 1999-2000. It is seen from the Assessing Officer order for assessment year 1998-99 that the Assessing Officer has added an office note as under:
As discussed in the above order the capital gains on sale of land and other assets of the assessee is taxable in assessment year 1999-2000. By offering this gains in this year the assessee has tried to take the benefit of the business loss of over 1 crore during the year so as to set off the entire capital gains on the sale of the assets. In the assessment year 1999-2000, however, the assessee has positive taxable income of 1,02,23,453, whereby the capital gain would become taxable in that year, as no set off against any business loss will be available. As the assessee has offered the capital gains in the year ie., 1998-99, it is being assessed on protective basis. The assessment for assessment year 1999-2000 has to be reopened by way of notice under Section 48 as it has not been picked up for scrutiny.
11.1 From the above, it is clear that the Assessing Officer was enthusiastic to tax the capital gains in the assessment year 1999-2000 since it had taxable positive income and the assessee would not be able to set off the business loss from the capital gains. In our opinion this approach of the Assessing Officer is not correct. The revenue authorities have to follow the provisions of law and should not be guided by revenue collection only. In this case, we find that the capital gains arise in 1998-99 only and therefore, the business loss in the year 1998-99 can be set off from the capital gains. In this view of the matter, the assessee's appeal is allowed.
12. In view of our findings in the appeal for assessment year 1998-99, this appeal is also allowed and the Assessing Officer is directed to assess the assessee's income for assessment years 1998-99 and 1999-2000 accordingly.
13. In the result, the appeals filed by the assessee are allowed.