2(47) of the Income-tax Act, 1961 — Entering into an MOU with the builder and
receiving total sale consideration — There was transfer of property in terms
of S. 2(47)(v) & (vi) read with S. 53A of the Transfer of Property Act,
45 of the Income-tax Act, 1961 — Capital gains will be taxable in the year in
which transactions are entered into, even if transfer of immovable property is
not effective or complete for want of registration under general law.
C. S. 55A of the
Income-tax Act, 1961 — CIT or AO can assume power u/s.55A(a) only when, in his
opinion, fair market value disclosed by assessee is less.
The assessee, with the intention
of disposing of her property, executed a Memorandum of Understanding on 8-6-1995
with a builder, SA and accepted Rs.5.50 crores from SA as total sale
consideration. In terms of the MOU, the assessee conferred upon SA irrevocable
right to identify buyers for the property and to obtain clearance certificates,
etc., and agreed that she would not claim reimbursement of any expenses incurred
for the purpose of developing property and identifying buyers for the property
and would have nothing to do with the profit earned or loss incurred by SA on
identifying buyers of the property and receiving the sale consideration.
On 1-7-1998, an agreement to
sell was executed by the assessee’s attorney for a total consideration of
Rs.11.87 crores and the assessee was referred to as a vendor and SA was referred
to as confirming party. In that way, SA received Rs.6.37 crores extra in the
said sale. The assessee and SA did not file any statement u/s.269UC in the
prescribed Form No. 37-I in relation to said MOU. Such statement was duly filed
in respect of sale agreement dated 1-7-1998 and clearance from appropriate
authority was also obtained and the subsequent agreement to sell was registered.
The assessee filed her return of
income declaring long-term capital gain of Rs.2.69 crores arising out of sale
consideration of Rs.5.50 crores. The Assessing Officer completed the assessment
and accepted the long-term capital gains declared by the assessee. The assessee
had disclosed fair market value of the property as on 1-4-1981 at Rs.1 crore on
the basis of the report of a registered valuer.
The CIT, acting u/s.263,
directed the Assessing Officer to re-examine the correct tax liability of the
capital gains after making necessary enquiries regarding the fair market value
of the property as on 1-4-1981, for which he may avail services of Department’s
Valuation Cell. He further observed, inter alia, that the sale agreement
dated 1-7-1998 drawn up with the buyer-society was registered with the
registration authorities in April 1999 and, therefore, the taxability of
charging of the long-term capital gain would be the year 2000-01 and not
1996-97; that the disproportionate sum of Rs.6.37 crores paid to SA was not
commensurate with the services rendered by him and that the fair market value of
the property, as shown by the assessee as on 1-4-1981 based on an approved
valuer’s report at Rs.1 crore, was on the higher side keeping in view the
appreciation in real estate prices.
Since there was a difference of
opinion between the Members of the Tribunal, the matter was referred to the
Third Member u/s.255(4).
The Third Member held as
(a) Capital gains were taxable
in A.Y. 1996-97 and not in A.Y. 2000-01.
(b) Capital gains were to be
computed only on the sale consideration of Rs.5.50 crores received by the
assessee and not on any higher amount.
(c) Since, in the opinion of
the CIT, the fair market value disclosed by the assessee of Rs.1 crore was on
the higher side, reference to Departmental Valuation Officer u/s.55A(a) was
The Third Member noted as
(1) In order to attract S.
53A, there should be an agreement for consideration; it should be in writing;
it should be signed by the transferor; it should pertain to transfer of
immovable property; the transferee should have taken possession of the
property and the transferee should be ready and wiling to perform his part of
(2) From the MOU it was clear
that the assessee had entered into an agreement with SA to dispose of the said
property for a total consideration of Rs.5.50 crores. The possession of the
property was handed over to the builder SA and original documents were also
given to him on that day, with an understanding that he will obtain all
necessary clearance certificates under the Urban Land (Ceiling and
Regulation) Act, 1976 and certificate u/s.269UC. This
was a transaction by which the assessee transferred the property in question
in the manner prescribed in sub-clauses (v) and (vi) introduced in S. 2(47)
with effect from April 1988. The events which had taken place constituted
transfer, which includes any transaction which allows possession to be
taken/retained in part performance of a contract of the nature referred to in
S. 53A of the Transfer of Property Act, 1882 and any transaction entered into
in any manner which has the effect of transferring or enabling the enjoyment
of any immovable property.
(3) Capital gains would be
taxable in the year in which such transactions are entered into, even if the
transfer of the immovable property is not effective or complete for want of
registration under the general law.
(4) In respect of the CIT’s
observation that the amount received by SA was substantially more than what
was received by the assessee, there was no material on record to show that
either the MOU dated 8-6-1995 or the agreement dated 1-7-1998 was a sham
transaction. Under the circumstances, unless it was held that those were sham
transactions and that the assessee had received more than what was purported
to have been received by way of MOU, it could not be said that SA, who
received consideration more than the assessee after about three years for
locating buyers and fulfilling necessary conditions to transfer, was a
justifiable reason for invoking the jurisdiction u/s.263. The assessee should
be assessed on the real income and not on the presumptive income. Just because
the third party has earned more profit, it would not be justified to invoke
jurisdiction u/s.263 in the eyes of law.
(5) In respect of reference to
the DVO, provisions of S. 55A(a) would apply since the assessee had filed a
valuation report. Clause (b) comes into play when the assessee has not
furnished any valuation report in support of its claim. In terms of clause (a)
of S. 55, the CIT or the Assessing Officer can assume powers when the value
disclosed by the assessee is less than the fair market value. In this
case, the CIT had mentioned that the value disclosed by the assessee, i.e.
Rs.1 crore as on 1-4-1981 as per the valuation report furnished was on the higher
side. Therefore, invoking jurisdiction u/s.263 on these facts was illegal.
In view of the above, the CIT’s
order u/s.263 was cancelled.