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Tax Publishers ACIT v. Ijyaraj Singh [ITA Nos. 152, 91/JP/2019, dt. 18-6-2020] : 2020 TaxPub(DT) 2606 (Jp.-Trib.) Capital gains levy on cancellation of sale deed due to non-payment of consideration -- Section 53A of Transfer of Property Act, 1882 interplay -- real income concept in capital gains *Facts:* Assessee had transferred certain agricultural lands to various people. Of this transfer under section 2(47) by way of sale where the conveyance was also done; one such purchaser bounced the cheques which were issued as consideration for the transfer. To annul that conveyance deed registered with the respective purchaser; assessee filed and obtained court injunction invalidating the deed. Besides injuction, notice under section 138 of the Negotiable instruments act 1881 was also filed against the purchaser for having bounced the cheques. Assessee returned the said cancelled transfer also as capital gains in the original return of income and subsequently revised it post bouncing of cheques by excluding the capital gains on said transfer in the revised return. The assessing officer subjected the cancelled transfer also to capital gains which was negated by the Commissioner (Appeals). An aggrieved department went in higher appeal to the ITAT. Held in favour of the assessee (against the department) that the cancellation of the agreement by way of injunction meant there was no transfer in the first place. Capital gains cannot be levied on a notional hypothetical transaction. The departmental plea for taxability was in reference to section 2(47)(v) where reference to part performance under section 53A of Transfer of Property Act, 1882 is mentioned. The ITAT held that to trigger section 53A both of the below conditions ought to exist -- 1. In the part performance, there has to be willingness to perform his part of contract by the transferee. 2. The transferee should have been put in possession in such part performance of the contract and the transferor has agreed to transfer the property for consideration. Here in this case there is no willingness to perform the conveyance as manifested by the injunction suit and criminal complaint under section 138 of NI Act. Though conveyance was done and cancelled no possession was done. The injunction order obtained also confirmed non-possession by nullifying the sale deed. Thus no transfer took place in this instance. To tax income it has to be "real income" as held in CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC). In CIT v. Balbir Singh Maini (2017) 398 ITR 531(SC) : 2017 TaxPub(DT) 4346 (SC) it was held that there must be a consideration to tax a capital asset and the consideration must be real which was applied here. It is only the real gain which can be taxed and not the notional gain which has not been received or accrued to the assessee thus it was held in K.P. Verghese v. ITO (1981) 131 ITR 597 (SC) : 1981 TaxPub(DT) 0972 (SC). A deed carries evidentiary value but it is possession with conveyance which confirms the transfer. In the absence of possession but only conveyance there is no invocation of section 53A of Transfer of Property Act, 1882. *Editorial Comment:* The topic of real income in capital gains is a vexed issue with certain takeaways need to be remembered to examine capital gains applicability -- 1. What is the intention of the parties? 2. When is the contract conclusion happening? 3. Conveyancing document is of evidentiary value -- no doubt in this but is not the only evidence. 4. Were there developments which created embargo on the property even post conveyancing or after receipt of consideration? 5. Is there an income in the first place? If yes, is it real or notional? 6. If notional is that income in the deemed capital gain head? It is the above points which were factually examined and applied in the above decision.

Tax Publishers

ACIT v. Ijyaraj Singh [ITA Nos. 152, 91/JP/2019, dt. 18-6-2020] : 2020 TaxPub(DT) 2606 (Jp.-Trib.)

Capital gains levy on cancellation of sale deed due to non-payment of consideration -- Section 53A of Transfer of Property Act, 1882 interplay -- real income concept in capital gains

Facts:

Assessee had transferred certain agricultural lands to various people. Of this transfer under section 2(47) by way of sale where the conveyance was also done; one such purchaser bounced the cheques which were issued as consideration for the transfer. To annul that conveyance deed registered with the respective purchaser; assessee filed and obtained court injunction invalidating the deed. Besides injuction, notice under section 138 of the Negotiable instruments act 1881 was also filed against the purchaser for having bounced the cheques. Assessee returned the said cancelled transfer also as capital gains in the original return of income and subsequently revised it post bouncing of cheques by excluding the capital gains on said transfer in the revised return. The assessing officer subjected the cancelled transfer also to capital gains which was negated by the Commissioner (Appeals). An aggrieved department went in higher appeal to the ITAT.

Held in favour of the assessee (against the department) that the cancellation of the agreement by way of injunction meant there was no transfer in the first place. Capital gains cannot be levied on a notional hypothetical transaction.

The departmental plea for taxability was in reference to section 2(47)(v) where reference to part performance under section 53A of Transfer of Property Act, 1882 is mentioned.

The ITAT held that to trigger section 53A both of the below conditions ought to exist --

1. In the part performance, there has to be willingness to perform his part of contract by the transferee.

2. The transferee should have been put in possession in such part performance of the contract and the transferor has agreed to transfer the property for consideration.

Here in this case there is no willingness to perform the conveyance as manifested by the injunction suit and criminal complaint under section 138 of NI Act. Though conveyance was done and cancelled no possession was done. The injunction order obtained also confirmed non-possession by nullifying the sale deed. Thus no transfer took place in this instance.

To tax income it has to be "real income" as held in CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC).

In CIT v. Balbir Singh Maini (2017) 398 ITR 531(SC) : 2017 TaxPub(DT) 4346 (SC) it was held that there must be a consideration to tax a capital asset and the consideration must be real which was applied here.

It is only the real gain which can be taxed and not the notional gain which has not been received or accrued to the assessee thus it was held in K.P. Verghese v. ITO (1981) 131 ITR 597 (SC) : 1981 TaxPub(DT) 0972 (SC).

A deed carries evidentiary value but it is possession with conveyance which confirms the transfer. In the absence of possession but only conveyance there is no invocation of section 53A of Transfer of Property Act, 1882.

Editorial Comment: The topic of real income in capital gains is a vexed issue with certain takeaways need to be remembered to examine capital gains applicability --

1. What is the intention of the parties?

2. When is the contract conclusion happening?

3. Conveyancing document is of evidentiary value -- no doubt in this but is not the only evidence.

4. Were there developments which created embargo on the property even post conveyancing or after receipt of consideration?

5. Is there an income in the first place? If yes, is it real or notional?

6. If notional is that income in the deemed capital gain head?

It is the above points which were factually examined and applied in the above decision.