Income Tax Appellate Tribunal - Madras
K.G. Arts Centre (P.) Ltd. vs Income-Tax Officer on 15 September, 1987
Equivalent citations: [1988]24ITD467(MAD)
ORDER
George Cheriyan, Vice-President
1. This appeal is by the assessee. The appeal relates to the assessment year 1981-82. The assessee is a company in which the public are not substantially interested. The accounting year ended on 30-6-1980. The assessee- company was incorporated on 19-6-1979. The assessee had purchased a piece of land together with a building standing on it and the purchase was made under two documents, for Rs. 8 lakhs.A resolution was passed by the assessee that the existing building would be demolished and the demolished material would be sold.In pursuance of this resolution, the building was demolished and the assessee filed a computation claiming short-term capital loss as under
COST OF ACQUISITION Rs.
Purchase value of land & building 8,00,000
Less : Value of land as determined by Valuation Cell
of the Income-tax Department in the Acquisi-
tion proceedings 6,59,400
Balance cost of Bldg. demolished-I 1,40,600
Sale price of Debris (realised) 10,850
Stock of debris 20,475
Total (II) 31,325
Cost of acquisition as in I above 1,40,600
Add : Expenses on demolition 3,600
Less : Sale price as in II above 1,44,200
Balance short-term capital loss 31,325
1,12,875
The ITO was not impressed with the contention of the assessee that there was a "transfer" within the meaning of Section 2(47) because there was extinguishment of rights and hence a capital loss had resulted. The reasons for the ITO not accepting this plea have been set out in the directions given by the IAC under Section 144B(4) in his order dated 28-7-1984 and are as under :
1. The act of demolition is voluntary and on its own accord.
2. To assume the value of debris as equal to original value of the building is at the best imaginary and at the worst unreal.
3. Transaction does not involve any relinquishment of rights.
4. There is no transfer at all, the building was pulled on its own accord.
5. There is no extinguishment of any rights. Assets remained with the assessee in the form of demolished materials which were sold.
Before the IAC, the plea was reiterated that when a building was demolished, the entire asset was annihilated and this was clearly extinguishment and, therefore, there was a "transfer" within the meaning of Section 2(47). Since there was a loss, it was urged that the loss should be allowed as a capital loss. The IAC stated that on a plain reading of the provisions of Section 45, it was clear that the profit or loss must have arisen to the assessee as a result of extinguishment of any rights in the capital asset and not on account of any extinction of some other distinct rights. The IAC also stated that a unilateral act of permitting demolition would not result in the extinguishment of rights unless one was to do violence to the concept of such expression, or interpret it too technically. In passing the IAC also observed that in order that there should be a transfer of immovable property, there should be a registered document. The resolution of the Board and the subsequent act of demolition through a contractor, according to the IAC, could not be regarded as transactions which resulted in the extinguishment of rights. The rights in the assets, the IAC stated, continued. He also stated that it was wrong to give an artificial value to the building. Finally, the IAC posed the question at what point of time the right got extinguished and to this he stated that there was no immediate answer since the full demolition had not been completed during the year as evidenced from the fact that certain stock of material had been valued and adjusted. He eventually directed the ITO to disallow the claim of loss which the ITO did in making the assessment on 31-7-1984. The order of the ITO, of course, has to be read with his draft assessment order dated 27-1-1984 and the I AC'S directions thereon.
2. The assessee appealed and before the CIT(A) reliance was placed on the contents of a letter from one Raju to the company. Raju was the person who undertook demolition of the property. The assessee reiterated the stand taken before the IAC and also referred to various judicial pronouncements such as that of the Supreme Court in the case of CIT v. R.M. Amin [1977] 106 ITB 368 to submit that unilateral acts could also lead to extinguishment of rights and that even yoluntary extinguishment could, lead to a transaction falling within the definition of "transfer" in Section 2(47) according to the decision of the Gujarat High Court in the case of Kartikey V. Sarabhai v. CIT [1982] 138 ITR 425. Reference was also made to the decision of the Tribunal in ITO v. Air India [1984] 10 ITD 120 (Bom.) in the case of Air India (supra) on the loss of an aircraft. The CIT(A) referred to the decision of the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. v. CIT [1979] 119 ITR 399 and stated that at page 408, the Court had pointed out that a transfer always involved more than one party and since in the present case there was only a single party, namely, the assessee who purchased the building and demolished it by spending Rs. 3,600, there was no extinction of any rights which involved any transfer since there was no second party to the transaction. While expressing appreciation that the contentions of the assessee raised a point of nicety, the CIT(A) eventually held against the assessee.
3. Before us the learned counsel for the assessee submitted with reference to the provisions of Section 2(47) of the Income-tax Act that 'transfer' in relation to a capital asset included under Sub-clause (ii) 'the extinguishment of any rights therein'. He emphasised that even if the asset itself was extinguished that would be tantamount to 'extinguishment of rights therein' and there would be a 'transfer'. He stated that in the present case, the building was demolished and the extinction of the asset resulted in the extinguishment of rights therein and there was clearly a 'transfer' within the meaning of Section 2(47). The learned counsel referred us to the observations of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 where their Lordships had explained the concept of 'transfer' at page 517 by stating that in one case there may be a passing of the entire bundle of rights and in another case the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property and in a third case there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. He, therefore, submitted that as long as there was annihilation in rights due to whatever reason it be, there was an extinguishment and consequently, there would be a 'transfer' within the meaning of Section 2(47). The other cases to which the learned counsel made reference were those of the Allahabad High Court in CIT v. J.K. Cotton Spg. & Wvg. Mills Co. Ltd. [1987] 164 ITR 18 to support the proposition that 'extinguishment of rights in a capital asset', would take within its purview extinguishment of capital asset itself, and of the Calcutta High Court in Marybang & Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661 where the amounts paid by an insurance company on assets being partially destroyed by fire were held to be assessable as a result of a transfer. The decision of the Gujarat High Court in the case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 was relied on to submit that there was an extensive discussion on the concept of the term 'extinguishment' and it was clear that if this concept was considered as spelt out by the Gujarat High Court in the aforesaid case, it was evident that there was extinguishment of rights in the present case and consequently a 'transfer' within the meaning of Section 2(47). The decision of the Tribunal in the case of Air India (supra) was also referred to wherein many of the judicial pronouncements relied on by the learned counsel for the assessee had been considered. The learned counsel submitted, in particular, that the transaction had to be viewed as a whole and just because there was a series of steps in finalising the transaction, it did not mean that each step was a different transaction. If the transaction as a whole amounted to a 'transfer', then, he submitted, there was a capital Joss which would have to be allowed. For this proposition, particular reference was made to the observations of the Gujarat High Court in Vania Silk Mills (P.) Ltd.'s case (supra) at pages 312 and 313.
4. The learned Departmental Representative, on the other hand, stated that in order that there should be a 'transfer', there should be two parties at least to the transaction and for this proposition, reliance was placed on the observations of the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. (supra) at page 408 where their Lordships had mentioned that "a transfer always involves more than one party. There cannot be a transfer from a person to himself. In this view, the expression 'or the extinguishment of any rights therein' in Section 2(47) must mean the extinguishment of rights as a result of some operation involving more than one person". The Calcutta High Court, the learned Departmental Representative stated, had made these observations having due regard to the pronouncements of the Gujarat High Court and the Supreme Court. The final submission of the learned Departmental Representative was that there should be causal connection between the extinguishment of rights and the receipt of money and then alone there would be a 'transfer' and not if there was an independent transaction.
5. We have considered the rival submissions. It is settled law that in India a person can be the owner of the land and another person can be the owner of the superstructure. If authority for this proposition is required, there is the decision of the Full Bench of the Madras High Court in the case of CIT v. Madras Cricket Club [1934] 2 ITR 209-Observations at pages 214 to 216. In the present case, the assessee had purchased the land together with the building-standing thereon. The assessee, of course, was the owner of the land as well as the building. But, if the assessee so chose, as the assessee did in this case, it could deal with the building- separately and part with the entire bundle of rights which went to constitute the ownership of the building or part with only some or any other rights. After the property was purchased, the assessee negotiated with one Raju and the results of these negotiations are set out in a letter of 12-4-1980 from Raju to the assessee, a free and agreed translation of which reads as under :
From : Raju, CHBNNANOOR.
To :
K.G. Arts Centre Private Ltd., Arts College Road, Coimbatore.
Sir, I agree to demolish and raze to the ground the building standing on the land and building belonging to you for a payment of Rs. 3,600 (Rupees three thousand six hundred only) on the following terms and conditions and I also agree to complete the work within the time agreed. CONDITIONS (1) I shall separate without any damage the doors, windows, rafters, reaper tiles, glass, iron, etc., during demolition separate them. (2) I agree to separate size Bricks, Bricks during demolition and keep them in order.
(3) I agree to remove up to basement and level up the ground.
(4) I agree to complete the work within 15 days from 12-4-1980.
(Sd.) Raju Coimbatore 12-4-1980.
It is clear that the agreement with Raju was that Raju should demolish the building and should separate doors, windows, rafters, reaper tiles and bricks according to size, etc. There the agreement with Raju ended. Raju fulfilled this part of the contract. Therefore, through Raju the assessee demolished the building. The matter ended there. The assessee thereafter took possession of the doors, windows, rafters, bricks according to size, etc. From the statement of computation of loss set out above, it is clear that the assessee sold part of these items and realised Rs. 10,850. The balance of these items valued at Rs. 20,475 remained with the assessee. The question is whether there was a 'transfer' within the meaning of Section 2(47). The decision of the Gujarat High Court in Vania Silk Mills (P.) Ltd.'s case (supra) contains an illuminating discussion on the scope of the word 'extinguishment' which according to their Lordships at page 307 is the kingpin of the expression. In substance, their Lordships pointed out that the word 'extinguishment' had a wide ambit and coverage without limitation or qualification and it must be given as wide a construction as possible and it covered, every possible transaction which resulted in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights qualitative or quantitative which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. Their Lordships went on to state that there was nothing in the subject or context which compels the conclusion that in order that extinguishment of rights could take place, the asset itself must continue in existence. According to their Lordships, 'extinguishment' could occur even where an asset was so extensively damaged by fire, flood, earthquake and the like to render it useless and the rights therein, if any, stood, wiped out. To this extent, therefore, the reasons which weighed with the ITO to hold that there is no 'extinguishment' cannot, in our view, be upheld on scrutiny. When the superstructure which belonged to the assessee, was pulled down, there was certainly 'extinguishment' of rights of the assessee in the building.
6. The question which we have to address ourselves next is at what point of time the extinguishment occurred. The extinguishment occurred when Raju had completed his work of demolition. For this no consideration was received. Thereafter, the assessee was left with the remaining rights, namely, ownership over separated doors, windows, rafters, etc. The assessee started selling some of these and some were left in stock. This was an ordinary transaction of sale of goods and the money received had no relation to the extinguishment of rights in the capital asset itself, namely, in the building which was pulled down. The Gujarat High Court in Vania Silk Mills (P.) Ltd.'s case (supra) stated at pages 312 and 313 as under:
There is one aspect, however, which, must be emphasised at this stage and it is that in order to subject any profit or gain received by or accruing to the assessee to the charge of 'capital gains', the sine qua non is that the receipt or accrual roust have originated in a 'transfer' within the meaning of Section 45 read with Section 2(47). This .requirement clearly flows from the words 'any profits or gains arising from the transfer of a capital asset' in Section 45. There must, therefore, be a causal nexus between the 'transfer', that is, the extinguishment of any rights in a capital asset and the profit or gain accruing to or received by the assessee. In other words, it is such extinguishment which must have occasioned the profit or gain and not any other independent transaction as a result of which some different rights are terminated by satisfaction or otherwise. However, merely because a transaction resulting in extinguishment consists of a series of steps, it would not necessarily follow that each step is a separate or disjointed transaction which successively extinguishes distinct rights. In such a case, on an overall view of the entire transaction, it must be ascertained whether each step is really a link in the chain and whether the cessation of any right in the asset and the profit that has accrued or has been received are still substantially connected with each other as cause and effect despite these several intermediate steps. This is really the ratio of the decision of the court in CIT v. R.M. Amin [1971] 82 ITR 194 (Guj.) also in which this court read Section 48, which says that the income chargeable to tax as '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' certain amounts therein mentioned, in order to appreciate the true meaning of the words 'profits or gains arising from the transfer of a capital asset' in Section 45, and applying the well-settled rule of interpretation that statute must be construed ex vigoenibus actus, and having considered its provisions observed (page 203) :
'The transfer that is contemplated by Section 45 read with Section 2(47) is, therefore, a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the words 'extinguishment of any rights in the capital asset' for the words 'transfer of the capital asset', the transaction, in order to attract the charge of tax as capital gains, must, therefore, be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset.' On the plain language of Section 45 itself and even by reading the said provision along with Section 48, therefore, it is manifest that the profit or gain must have been received by or accrued to the assessee as a result of the extinguishment of any rights in a capital asset and not on account of extinction of some other distinct rights.
7. We have analysed the facts and our finding has been that the loss in the present case has accrued to the assessee not as a result of extinguishment of rights in the capital asset, namely, the demolition of the building. The loss arose from an entirely different transaction, namely, the transaction which occurred after the extinguishment of such rights, i.e., the sale of the doors, windows, rafters, etc., which still remained the property of the assessee. There was, therefore, no causal nexus between the extinguishment of some of the bundle of rights or rather the most of it of the capital asset, which was the building, by pulling down the same and the loss which accrued to the assessee, which was out of the sale of the material which had been garnered and handed over to the assessee by Raju in terms of the letter of 12-4-1980. It is not a case where the transaction resulting in extinguishment consisted of a series of steps all of which have to be considered as one. The transaction of pulling down the building was one transaction which was independent. The transaction of sale of the material garnered was an entirely different transaction. By extinguishment of rights in the building, therefore, in the present case, there was no "transfer" within the meaning of Section 2(47) of the Income-tax Act and, therefore, the assessee is not entitled to the allowance of capital loss as claimed of Rs. 1,12,875.
8. We have discussed the law to the extent necessary for rendering a decision on the facts as ascertained by us. In view of this, we do not consider it necessary to go into detail and discuss the various other cases on which reliance was placed by the parties. Suffice it to say that in all cases where insurance money was received the extinguishment of rights in the asset by devastation due to fire, flood, etc., was linked with the contract to receive insurance amounts and the courts discountenanced the view canvassed that the contract of insurance was separate in such cases. We may also, before parting with this appeal, say that where an immovable asset like a house is being demolished, it is difficult to conceive of the necessity of executing a registered document which is a pre-requisite for only such transfers as are contemplated under the general law and not perhaps deemed transfers which are not transfers under the general law but are considered to be transfers only because of the inclusive definition of Section 2(47) and would really be events which otherwise would not be transfers as generally understood.
9. Before parting with the appeal, we have to record our appreciation for the very analytical manner in which the case was presented on behalf of the assessee by Shri Jagadisan and the very able and elaborate manner in which each point was sought to be met on behalf of the Revenue by Shri Mohanty and Shri Ranga-nathan.
10. The result in the appeal is dismissed.