Supreme Court Clarifies Capital Gains Tax on Property Transfer: Seshasayee Steels vs. ACIT (2019)

Date of the Judgment: 4 December 2019

Citation: (2019) INSC 1234

Judges: R.F. Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J. (Majority Opinion by R.F. Nariman, J.)

When does the transfer of property occur for the purpose of capital gains tax? The Supreme Court of India addressed this question in a case involving an agreement to sell and a subsequent compromise deed. The court clarified that the transfer occurs when the rights in the property are extinguished, not merely when an agreement to sell is executed. This judgment impacts how capital gains tax is calculated on property transactions. The bench comprised Justices R.F. Nariman, Aniruddha Bose, and V. Ramasubramanian, with the majority opinion authored by Justice R.F. Nariman.

Case Background

M/s Seshasayee Steels P. Ltd. (the appellant) entered into an agreement to sell a property with Vijay Santhi Builders Limited on May 15, 1998, for a total consideration of Rs. 5.5 crores. The agreement specified that the property, approximately 100 grounds, would be sold free of encumbrances. The agreement also allowed Vijay Santhi Builders to begin advertising, selling, and constructing on the land, subject to the appellant’s approval of advertisements and sales materials. A Power of Attorney was executed on November 27, 1998, appointing Chandan Kumar, a director of Vijay Santhi Builders, to execute sale agreements and deeds after developing the property into flats.

The appellant did not file any income tax return for the assessment year 2004-2005. The Income Tax Department later discovered the agreement to sell and a subsequent Memo of Compromise dated July 19, 2003. A notice under Section 148 of the Income Tax Act, 1961, was issued on November 4, 2008, to the appellant for non-filing of returns. Despite multiple notices, the appellant did not respond, leading to a best judgment assessment order under Section 144 of the Income Tax Act, 1961, on December 31, 2009, which treated the entire sale consideration as capital gain.

Timeline

Course of Proceedings

The Assessing Officer passed a best judgment assessment order under Section 144 of the Income Tax Act, 1961, on December 31, 2009, treating the entire sale consideration as capital gain due to the appellant’s failure to file tax returns and respond to notices. The Commissioner of Income Tax (Appeals) (CIT(A)) dismissed the appeal on October 28, 2010, after examining the agreement to sell, the Power of Attorney, and the Memo of Compromise. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s order on June 24, 2011, stating that the conditions of Section 2(47)(v) of the Income Tax Act, 1961, were not met at the time of the agreement to sell, and that the compromise deed indicated that the obligations of the agreement to sell were not fulfilled. The ITAT also noted that the last payments under the compromise deed were contingent upon the settlement with M/s. Pioneer Homes, which was confirmed to have been completed, with the last cheque being dated January 25, 2004. The High Court of Judicature at Madras, in its judgment dated January 25, 2012, upheld the concurrent findings of the lower authorities, ruling against the assessee.

Legal Framework

The Supreme Court examined the following key legal provisions:

• Section 2(47) of the Income Tax Act, 1961: This section defines “transfer” in relation to a capital asset. It includes:
  • (v) 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; or
  • (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
• Section 53A of the Transfer of Property Act, 1882: This section deals with part performance of a contract for the transfer of immovable property. It states:

  Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him 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 the contract: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.

The court interpreted these provisions in the context of determining when a transfer of property occurs for the purpose of capital gains tax. The court also considered the Explanation to Section 2(47) which clarifies that transfer includes disposing of or parting with an asset or any interest therein.

Arguments

Appellant’s Arguments (M/s Seshasayee Steels P. Ltd.):

• Argument 1: The agreement to sell, along with the Power of Attorney, attracted Section 2(47)(v) of the Income Tax Act, 1961, as it involved allowing possession of the property in part performance of a contract under Section 53A of the Transfer of Property Act, 1882.
• Argument 2: Alternatively, if Section 2(47)(v) did not apply, the transaction fell under Section 2(47)(vi) because it had the effect of “enabling the enjoyment of any immovable property.”
• Argument 3: The compromise deed of July 19, 2003, did not constitute a transfer of a capital asset under Section 2(47) for the assessment year 2004-2005.

Respondent’s Arguments (Assistant Commissioner of Income Tax):

• The Revenue argued that Section 2(47)(v) was not applicable as the conditions for part performance under Section 53A of the Transfer of Property Act, 1882, were not met.
• The Revenue supported the findings of the lower authorities and the High Court, asserting that the transaction did not fall under Section 2(47)(vi) at the time of the agreement to sell.
• The Revenue contended that the transfer occurred when the compromise deed was executed and the final payments were made, extinguishing the appellant’s rights in the property.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the agreement to sell and the Power of Attorney attracted Section 2(47)(v) of the Income Tax Act, 1961.
2. Whether the transaction fell within Section 2(47)(vi) of the Income Tax Act, 1961.
3. Whether the compromise deed of July 19, 2003, constituted a transfer of a capital asset under Section 2(47) for the assessment year 2004-2005.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 2(47) of the Income Tax Act, 1961: The court interpreted this section to define “transfer” and its scope, particularly in relation to immovable property.
• Section 53A of the Transfer of Property Act, 1882: The court interpreted this section to determine the conditions for part performance of a contract, noting that mere permission to construct does not equate to possession.
• Commissioner of Income Tax v. Balbir Singh Maini [(2018) 12 SCC 354]: The court relied on this judgment to interpret the expression “enabling the enjoyment of” under Section 2(47)(vi), clarifying that it implies a de facto transfer of ownership rights.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to determine the precise moment when a transfer of property occurs for the purpose of capital gains tax. The court emphasized that a mere agreement to sell or permission to construct does not constitute a transfer. Instead, the transfer occurs when the rights in the property are extinguished. The court’s reasoning focused on the following key points:

• The court emphasized that for Section 53A of the Transfer of Property Act, 1882, to apply, the transferee must have taken possession of the property, not just been granted a license to construct.
• The court clarified that Section 2(47)(vi) of the Income Tax Act, 1961, requires a de facto transfer of ownership rights, not merely the ability to use the property.
• The court emphasized that the compromise deed was crucial in determining the transfer since it was when the final payments were made and the rights of the assessee were extinguished.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The court considered alternative interpretations, particularly regarding the timing of the transfer. The appellant argued that the transfer should be considered as having occurred at the time of the agreement to sell or the Power of Attorney. However, the court rejected this interpretation, emphasizing that the transfer occurs when the rights in the property are extinguished, which happened when the final payment was made under the compromise deed. The court’s decision was reached by applying a strict interpretation of the legal provisions and considering the factual circumstances of the case.

The Supreme Court held that the transfer of the property occurred when the assessee’s rights were extinguished upon receipt of the last payment under the compromise deed. This was considered a transaction that had the effect of transferring the immovable property, falling under Section 2(47)(ii) and (vi) of the Income Tax Act, 1961.

The court quoted from the judgment: “Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be ‘possession’ within the meaning of Section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land.”

The court further stated: “Given the test stated in paragraph 25 of the aforesaid judgment, it is clear that the expression “enabling the enjoyment of” must take colour from the earlier expression “transferring”, so that it can be stated on the facts of a case, that a de facto transfer of immovable property has, in fact, taken place making it clear that the de facto owner’s rights stand extinguished.”

Finally, the court concluded: “This being the case, it is clear that the assessee’s rights in the said immovable property were extinguished on the receipt of the last cheque, as also that the compromise deed could be stated to be a transaction which had the effect of transferring the immovable property in question.”

There were no dissenting opinions in this case. All three judges concurred with the majority opinion.

Key Takeaways

• A mere agreement to sell or permission to construct on a property does not constitute a transfer for the purpose of capital gains tax.
• The transfer of property occurs when the rights in the property are extinguished, which may happen through a compromise deed or similar transaction.
• For Section 53A of the Transfer of Property Act, 1882, to apply, the transferee must have taken possession of the property, not just been granted a license.
• Section 2(47)(vi) of the Income Tax Act, 1961, requires a de facto transfer of ownership rights, not merely the ability to use the property.

This judgment clarifies the timing of property transfers for capital gains tax purposes, emphasizing the importance of the extinguishment of rights in the property. This may impact future cases involving agreements to sell and subsequent compromise deeds.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the transfer of immovable property for the purpose of capital gains tax occurs when the rights of the owner in the property are extinguished, not merely when an agreement to sell is executed or permission to construct is granted. This clarifies the interpretation of Section 2(47) of the Income Tax Act, 1961, and its interaction with Section 53A of the Transfer of Property Act, 1882. This judgment reinforces the principle that a de facto transfer of ownership is necessary for a transfer to be recognized under Section 2(47)(vi) of the Income Tax Act, 1961.

Conclusion

The Supreme Court dismissed the appeal, holding that the transfer of property occurred when the assessee’s rights were extinguished upon receipt of the final payment under the compromise deed. This decision clarifies that the mere execution of an agreement to sell or granting permission for construction does not constitute a transfer for capital gains tax purposes. The judgment emphasizes the importance of the extinguishment of rights in the property for a transfer to be recognized under the Income Tax Act, 1961.