ORDER
C.L. Sethi, J.M.
1. All these three appeals filed by the Revenue against three different orders of the CIT(A) dt. 14th Feb., 1995, 15th Feb., 1995 and 14th Feb., 1995 in respect of three different assessees involved common issues arising out of the assessment order made under Section 143(3) of the IT Act, 1961 and related to issue of determination of sale consideration for the purpose of determining the long-term capital gain.
2. The appeals are time-barred by 7 days. Considering the reasons given in the condonation application, we condone the delay in filing the appeals and admit the above appeals.
3. The solitary common ground in all these three appeals taken by the Revenue is that the CIT(A) erred in accepting the assessee’s sale consideration of Rs. 67,10,000 instead of Rs. 1.40 crores taken by the Assessing Officer (AO in short).
4. Briefly stated, the material facts of the case are that all the assessees had equal shares of l/3rd each in respect of a jointly owned property at 143/10, Golf Link, New Delhi. It was submitted by the assessees that since the said property in question was under the occupation of tenants and it was not possible for them to manage the property from Calcutta, it was decided amongst themselves to dispose of the property. Accordingly, they had agreed to sale the property to one Real Estate Agent known as M/s Premium Estate (P) Ltd. of F-44, Bhagat Singh Market, New Delhi by executing an agreement for sale of the said property on 31st Aug., 1988 for a consideration of Rs. 67,10,000. An amount of Rs. 1,50,000 as earnest money was received by the assessee from the said purchaser M/s Premium Estate (P) Ltd. by cheque No. 741193 dt. 31st Aug., 1988 drawn on Canara Bank, Gole Market Branch, New Delhi, and the said amount of Rs. 1,50,000 was deposited by the assessees in their joint S.B. Bank a/c No. 15780 with Punjab National Bank, New Delhi.
5. The relevant clauses of the agreement for sale executed by the assessees on 31st Aug., 1988 are summarised as follows :
(1) Clause (i) stipulates about the total consideration fixed at Rs. 67,10,000.
(2) Clause (ii) speaks about the payment of Rs. 1,50,000 to the assessees on 31st Aug., 1988 by cheque at the time of execution of the agreement of sale.
(3) Clause (iii) stipulates about the matter of payment of the balance consideration.
(4) Clause (iv) provides the requirement of obtaining no objection certificate from the appropriate authority under the IT Act.
(5) Clause (vii) speaks about the completion of the sale transaction and in case the vendors fails to fulfil the obligation under the sale of agreement, of sale, the purchasers shall be entitled to have the agreement specifically enforced through Court at the cost of the vendors.
(6) Clause (viii)(d) permits the purchasers to assign and/or to transfer in any manner whatsoever its right under the agreement to any person/company whatsoever without the permission of the vendors and such assignment shall be binding on the vendors.
(7) Clause (xi) stipulates that the purchaser has a right to nominate -any person or persons or company in favour of which the vendors shall execute the final conveyance and complete the present sale transaction and any such nomination shall be binding on the vendors.
6. Thereafter, another agreement for sale was executed on 7th July, 1989 between the assessees and their group as vendors and Bank of Tokyo Ltd. as purchaser, along with Sanjay Mehra and Sangita Kapoor as First Confirming Party and M/s Premium Estates (P) Ltd. as Second Confirming Party in respect of the sale of the property in question. The relevant and material clauses of the said agreement for sale executed on 7th July, 1989 are reproduced below :
Recital portion on the agreement for sale
“And whereas the vendors herein have represented that they had entered into agreement for sale dt. 31st Aug., 1988 with Premium Estate (P) Ltd. of F-44, Bhagat Singh Market, New Delhi–Second Confirming Party hereto for the consideration and on the terms and conditions set out therein and the possession of the property was delivered to the said Second Confirming Party.
And whereas the Second Confirming Party has agreed to the sale deed being executed and registered by the vendors in favour of the purchaser herein for the consideration and on the terms and conditions herein contained.”
Terms and conditions
The vendors shall sell and the purchaser shall buy all the rights, titles and interests of the vendors in the property known as No. 145, Golf Links, New Delhi more particularly described in the Schedule hereunder written for a total consideration of Rs. 140 lakhs payable in the following manner:
(a) Rs. 15,00,000 paid at the time of execution of this agreement by way of earnest money, the receipt of which amount the vendors hereby admit and acknowledge.
(b) Rs. 1,20,00,000 shall be paid by the purchaser within 30 days of receipt of notice from the vendors that the requisite permission or approval of the appropriate authority under Section 269UC of the IT Act and Rules framed in pursuance thereof as provided in para 3 hereof have been obtained within which period of certificate in Form 34A of the IT Rules will be obtained by the vendors simultaneously with the delivery by the vendors and confirming parties of the vacant possession of the entire property together with all the original documents of title as per list annexed hereto.
(c) Rs. 5,00,000 shall be paid at the time of execution and registration of the sale deed by the vendors before the sub-registrar of assurances and First Confirming Party.
(d) The aforesaid payments specified in Sub-clauses (a), (b) and (c) hereinabove have at vendors request been agreed to be effected to the Second Confirming Party upon the vendors furnishing to the purchasers their acknowledgement and confirmation that they are in due discharge of the purchaser’s obligation towards payment of the sale price hereunder.
7. Pursuant to the agreement of sale dt. 31st Aug., 1988, the purchaser M/s Premium Estates (P) Ltd. paid the entire consideration money of Rs. 67,10,000 on different dates to the assessees as detailed in the order of the CIT(A).
8. Further, pursuant to the agreement of sale dt. 7th July, 1989 as referred to above, the Bank of Tokyo Ltd. (BOT, in short) paid consideration money of Rs. 1.40 crore to M/s Premium Estate (P) Ltd. (in short, Premium Estate) at the request of the assessees and upon confirmation by the assessees that the payments to Premium Estate are in due discharge of the purchaser’s obligation towards payment of the sale price under the agreement for sale. The consideration money of Rs. 1.40 crore was paid by BOT at the request of the assessees and as per the agreement in the following manner by way of cheque favouring Premium Estate :
Date of payment
How paid
Amount Rs.
7-7-1989
C.O. No. 18547
15,00,000
27-11-1989
C.O. No. 021702
1,20,00,000
13-5-1992
C.O. No. 043585
5,00,000
1,40,00,000
The entire consideration amount of Rs. 1,40,00,000 was paid by HOT to Premium Estate who confirmed to have received the same and deposited the same in its own bank account.
9. A certificate under Section 269UL(3) of the Act was issued on 10th Oct., 1988 by the appropriate authority in pursuance of a statement in Form No. 37-I in respect of the property in question filed on 22nd Aug., 1988 by the assessees as transferors and by Premium Estate as transferee, to the effect that the appropriate authority has no objection to the transfer of the property in question by the said assessees (transferor) to the said transferee Premium Estate for apparent consideration of Rs. 67,10,000 in addition to unearned increase payable to L&DO.
10. Again on 13th July, 1989, the assessees as transferors together with Premium Estate as confirming party submitted a statement of transfer of immovable property in question to the appropriate authority under Section 269UC of the Act showing therein the apparent consideration at Rs. 1.40 crores and EOT as transferee. The appropriate authority then issued certificate under Section 269UL(3) on 28th Aug., 1989 describing the assessees as well as Premium Estate as transferors and EOT as transferee and showing apparent consideration at Rs. 1.40 crores in addition to unearned increase payable to L&DO.
11. The assessees also obtained a certificate dt. 30th April, 1992 under Section 230A(1) of the Act from the assessing authority for the purpose of getting registration of deed of conveyance before the registrar, New Delhi in favour of transferee, EOT. In his application. for a certificate under Section 203A(1) the total sale consideration receivable from EOT was shown at Rs. 1,40,00,000 out of that sum of Rs. 72,90,000 was shown payable to Premium Estate and l/3rd of the balance of Rs. 67,10,000 to each of the assessees.
12. The deed of conveyance was ultimately registered on 19th May, 1992 with the sub-registrar, New Delhi in favour of the EOT by the vendors i.e., all the three assessees. However, the possession of the property was taken by the EOT on 1st April, 1990 as confirmed by the EOT vide its letter dt. 21st March, 1994 written to the AO.
13. In the course of assessment proceedings the AO formed an opinion that the entire amount of Rs. 1.40 crore paid by the EOT should be held as full consideration received by the assessees on account of sale of the property in question and, therefore, he computed the capital gain accordingly in the hands of each of the assessees. The reasons for his said opinion are summarised as follows:
(i) No service by Premium Estate could be proved in the deal except the creation of some agreement.
(ii) Since no registration of Deed of Conveyance was made in terms of the agreement for sale dt. 31st Aug., 1988, no sale could be considered to have been made to Premium Estate by the assessees.
(iii) The sale was actually executed by the assessees to the EOT at a consideration of Rs. 1.40 crore.
(iv) The payment of consideration to Premium Estate would be considered as ex gratia payment without consideration for any real service.
(v) There was no mention of the extent of consideration payable to Premium Estate in the, agreement for sale dt. 7th July, 1989 entered into with EOT.
(vi) In the deed of conveyance registered on 19th May, 1992 there was no mention of Premium Estate as confirming party nor the interest or Premium Estate to the extent of Rs. 72,90,000.
(vii) Neither the assessees could justify as to how Premium Estate developed an interest to the extent of Rs. 72,90,000 in the property in question merely by virtue of an agreement dt. 31st Aug., 1988, which was also not registered nor the sale deed in terms of agreement was registered.
14. On appeal, the CIT(A) having considered the entirety of the circumstances, directed the AO to revise the assessment by adopting the sale price received by the assessees at Rs. 67,10,000 and to compute the capital gains accordingly. The CIT(A) having given a finding, inter aha, that the assessees received nothing more than Rs. 67,10,000 the transactions in question were evidenced by the order of the appropriate authority, who granted clearance under Section 269UL of the Act and Premium Estate was assessed on the sum of Rs. 72,90,000 by the AO, held that both the agreements for sale are genuine in character and there is no cause for suspicion. Aggrieved with the decision of the CIT(A), the Department is in appeal before the Tribunal.
15. We have heard both the parties at length. We have gone through the relevant orders of the authorities below. We have also perused the papers placed in a paper book filed by the assessee.
16. The learned Departmental Representative supported the order of the AO and strongly contended that the entire amount of Rs. 1.40 crores paid by the EOT be treated as full consideration in hands of the assessees for determining the capital gains. The learned counsel for the assessees on the other hand, supported the order of the CIT(A) and reiterated the same contentions as made before the CIT(A).
17. The true and legal nature and character of the said agreement for sale can be ascertained from the surrounding circumstances, which are also at the same time necessary to find out the reality of the recitals made in the said agreement for sale. It is also essential and necessary to go behind the smoke-screen and discover the true state of affairs. We are not required to be satisfied with the form and leave alone substance of the transaction. A regard must be given to the substance of the transaction rather than to its more form. In the context of determining whether a transaction is a sham or illusory transaction or a device or a ruse, it. is necessary to penetrate the veil covering it and ascertain the truth. Keeping in mind these well established principles, we have to determine the true and legal nature and character of the said agreement for sale executed on 31st Aug., 1988.
18. It is admitted fact that the assessee received only the sums of Rs. 67,10,000 from Premium Estate on different dates by bank cheque/draft which was duly deposited in the joint account of the assessees in pursuance of an agreement for sale dt. 31st Aug., 1988. It is also apparent that the entire consideration of Rs. 1.40 crore payable by the EOT were paid to Premium Estate at the direction of the assessees by bank charges drawn in favour of Premium Estate. On perusal of the said agreement for sale dt. 31st Aug., 1988 it is found that the said agreement was executed by both the parties whereby it was agreed and decided that the assessees would sell to the purchase Premium Estate. The property in question for a total consideration of Rs. 67,10,000 on the terms and condition as contained therein, some of them being material and relevant to the case have already stated hereinbefore by us in para 5 of this order. The AO has raised suspicions and doubts on this agreement dt. 31st Aug., 1988 on the ground that the agreement dt. 31st Aug., 1988 was neither registered nor any registered sale deed was made in favour of Premium Estate in pursuance of the said agreement. But in our considered view the reasons cited by the AO are not tenable in the eyes of law inasmuch as the agreement for sale of property in question does not require compulsory registration under the provisions of Indian Registration Act nor it was obligatory on the part of Premium Estate to get the deed of sale registered in its favour in view of specific terms and conditions of the agreement, which provided that the purchaser has a right to nominate any person(s) or company in favour of which the vendors shall execute the final conveyance and complete the sale transaction, and any such nomination shall be binding on the vendors.
19. It is also manifest that an amount of Rs. 1,50,000 was paid on 31st Aug., 1988 by Premium Estate to the assessees by cheque at the time of execution of the agreement against the total consideration of Rs. 67,10,000. The assessee had, therefore, committed themselves to sell the property in question and made themselves liable to an action of specific performance by entering into commitments they made in the agreement for sale dt. 31st Aug., 1988 and by receiving part consideration of Rs. 1,50,000 on the date of execution of the said agreement.
20. In terms of the Clause 4 of the agreement for sale dt. 31st Aug., 1988 between the assessees and Premium Estate the assessees as transferors and Premium Estate as transferee furnished a statement in Form No. 37-I in respect of the transfer of property in question at an apparent consideration of Rs. 67,10,000 in addition to unearned increase payable to L&DO, to the appropriate authority who did not make any order under Section 269UD(1) for the purchase by the Central Government of the property in question and accordingly granted a certificate of no-objection to the transfer of the property in question for apparent consideration of Rs 67,10,000 in addition to unearned increase payable to L&DO, vide R.No. 1172 No. AA/88-89/272, dt. 10th Oct., 1988. It, therefore, shows that the assessees had in reality acted upon in terms of the agreement dt. 31st Aug., 1988 and had all the intentions to complete the transaction of sale in favour of Premium Estate even before making the agreement for sale of the property in question to the EOT which was made on 7th July, 1989.
21. It is also pertinent to note that Premium Estate had joined itself as the Confirming Party in the agreement dt. 7th July, 1989 to sell the property in question to the BOT describing therein that the assessees had entered into an agreement for sale dt. 31st Aug., 1988 with Premium Estate for the consideration and on the terms and conditions set out therein and the possession of the property was delivered to the said Premium Estate. It is, therefore, implied that the fact of entering into agreement for sale dt. 31st Aug., 1988 with Premium Estate was duly disclosed to and brought to the Knowledge of BOT at the time of entering into an agreement for sale dt. 7th July, 1989 of the property in question and accordingly, all the consideration money were paid by BOT to Premium Estate at the instruction of the assessees. It is evident that the agreement for sale dt. 31st Aug., 1988 with Premium Estate has found its place in the second agreement for sale dt. 7th Aug., 1989 implying thereby the parties to the agreement had in fact and in reality given due recognition and legal character to the agreement for sale dt. 31st Aug., 1988.
22. Further, it is an admitted position that none of the assessees is anyway interested in Premium Estate, which is separately assessed to income-tax vide GIR No. P-17 by Asstt. CIT, Comp. Circle 3(5), New Delhi. It is also found that the transaction for purchase and resale of the property in question were duly reflected in the P&L a/c of the relevant year of Premium Estate which confirmed to have entered into the transaction for purchase and resale of the property in question vide its letter dt. 7th July, 1994 addressed to the concerned AO assessing the assessees of these cases.
23. Again, the statement in Form No. 37-1 furnished to the appropriate authority, intending to transfer the property in question to BOT for the total apparent consideration of Rs. 1.40 crore speaks of Premium Estate having interest in the property to the extent of Rs. 72,90,000 out of the total consideration of Rs. 1,40,00,000 as well as of an agreement for sale dt. 31st Aug., 1988 with Premium Estate for consideration of Rs. 67,10,000. The appropriate authority accordingly granted certificate of having no objection to the transfer of the property in question describing Premium Estate as confirming party. The application in Form No. 34A for a certificate under Section 230A(1) of the Act has also a mention of apportionment of total consideration of Rs. 1.40 crore in the manner that the sum of Rs. 72,90,000 is payable to Premium Estate and l/3rd of the balance of Rs. 67,10,000 to each of the assessees. It, therefore, shows that the agreement for sale dt. 31st Aug., 1988 with Premium Estate had given due legal force and recognition by all the parties to the transaction of sale of property in question to the ultimate purchaser, the BOT.
24. It is also pertinent to note that in the registered sale deed executed on 18th May, 1992 by the assessees in favour of the BOT it is stipulated that the payment of consideration money have been paid to Premium Estate at the request of the assessees and it is also stated that the assessee and Premium Estates have already delivered the vacant possession of the entire property to the purchaser i.e., the BOT. It is further provided in the said deed of sale that the ground rent, municipal taxes etc. up to the date when physical possession of the property was handed over to the purchaser shall be bound and paid by
the assessees and/or Premium Estate. It is, therefore, clear that Premium Estate had acquired interest or right in the property by way of entering into an agreement for sale with the assessees inasmuch as the physical possession of the property in question was delivered by the assessees to Premium Estate.
25. In the light of the above discussion and in view of that matter, we can safely hold that the agreement for sale dt, 31st Aug., 1988 as well as the agreement for sale dt. 7th July, 1989 are genuine and give the picture of true state of affairs. The said two agreements have in reality and substance given legal effect to and have been acted upon.
26. Now, the question arises as to whether the payment of Rs. 72,90,000 to Premium Estate out of total consideration of Rs. 1.40 crore paid by the ultimate purchaser the BOT is to be treated as application of income or diversion of income at source. In order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into, and decide, whether the amount sought to be deducted, in truth, did not or did reach the assessee or as his own income. Obligations there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of his income. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is only when income or a portion of income is diverted at the source by an overriding title before it started following into the channel which was to reach the assessee concerned that it could be excluded from his assessable income. In order that a payment should be treated as a diversion at source, it is necessary that it should have been made under some legal obligation. Such obligation must attach to the source of income.
27. In the instant case, the assessees had entered into an agreement for sale of the property in question with Premium Estate on 31st Aug., 1988 for a consideration of Rs. 67,10,000 out of which an amount of Rs. 1,50,000 was received by the assessee in advance on the date of execution of aforesaid agreement for sale implying prima facie thereby that the certain legal incidents were attached to the advance amount received by the assessees.
The Clause 7(b) of the agreement for sale dt. 31st Aug., 1988 stipulates, inter alia, that in case the assessees fail to fulfil the obligations under the said agreement and complete the sale transaction, the purchaser shall be entitled to have the said agreement specifically enforced through Court at the cost of the assessees. Therefore, there was a legal obligation on the part of the assessees to complete the sale transaction as stated in the said agreement for sale. There was an overriding legal obligation on the assessees by reason of which the sale consideration received from the ultimate buyer, the BOT became payable to Premium Estate with whom the assessees had already entered into an agreement for sale of property. The agreement for sale dt. 31st Aug., 1988 has categorically stipulated that the purchaser has a right to assign and/or transfer in any manner whatsoever its right under the agreement to any person/company whatsoever
without the permission of the vendors and such assignment shall be binding on the vendors. It was further stipulated that the purchaser has a right to nominate any person/company in favour of which the vendors shall execute the final conveyance and complete the sale transaction and any such nomination shall be binding on the vendors. Thus, the purchaser, Premium Estate had acquired right to obtain conveyance of the property in question either in its own favour or in favour of its nominee or assignee.
28. In the circumstances of the case, the whole consideration amount of Rs. 1.40 crores paid by the ultimate buyer, the BOT cannot be deemed to have accrued or arisen to the assessees. The excess amount over and above the sum of Rs. 67,10,000 can be said to have been diverted by overriding title in view of the fact that the assessees had, out of their free will and desire, into an agreement for sale of the property in question to Premium Estate for a consideration of Rs. 67,10,000 and the assessees were thus, under .the legal obligation to complete the sale transaction in accordance with the terms and conditions embodied in the said agreement for sale dt. 31st Aug., 1988. And it was only later that Premium Estate decided to transfer his right to purchase the property in question to the BOT by executing an agreement for sale on 7th July, 1989 as confirming party.
29. Once the agreement for sale dt. 31st Aug., 1988 is found bona fide one and also enforceable, it must be held that Premium Estate acquired a legal right to purchase the property in question for a consideration of Rs. 67,10,000 either in its own income or in the name of its nominee or representative. The said right is a legal right and a right which overrides the assessees right to the entire consideration paid by the ultimate purchaser, the BOX. By virtue of the said agreement Premium Estate was also put into possession of the property in question entitling it to enforce performance of the contract of sale of property either in its favour or in favour of its nominee. In case the assessees refuse or neglect to complete the transaction of sale of property in terms of agreement for sale dt. 31st Aug., 1988, Premium Estate was entitled to file a suit against the assessees for specific performance of the contract.
It must be emphasised and it is significant to notice that the sale agreement, dt. 31st Aug., 1988 created a legal right in Premium Estate to purchase the property for a consideration of the sum of Rs. 67,10,000 and further created an overriding right in Premium Estate to a consideration over and above the consideration amount payable by it to the assessees under the agreement for sale dt. 31st Aug., 1988 and that the assessees were under a corresponding obligation not to receive any amount over and above the said consideration amount of Rs. 67,10,000. The case, before us is a case of diversion under an overriding title/right/obligation and not a mere case of application.
30. For the above reasons, we hold that the capital gains had to the computed only by taking into account the sum of Rs. 67,10,000 actually received by the assessees. The excess consideration amount of Rs. 72,90,000 over the agreed sale price of Rs. 67,10,000 have to be held as diverted at source by overriding title/right/obligation, and as such, the amount equal to the agreed sale price of Rs. 67,10,000 between the assessees and Premium Estate should be made the basis of computation of capital gains.
31. We, therefore, uphold the order of the CIT(A)
32. In the result, the Departmental appeals in all these co-owners assessees are dismissed.