IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 23.10.2007
Coram
The Honourable Mr.JUSTICE K.RAVIRAJA PANDIAN
and
The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN
Tax Case (A) No.45 of 2004
M/s. Madathil Brothers
No.158
Arcot Road
Chennai 600 026. ..Appellant
Versus
The Deputy Commissioner of Income Tax
Special Range VI
No.122
Uttamar Gandhi Road
Chennai 600 034. ..Respondent
Appeal under Section 260-A of the Income Tax Act
against the order dated 31.12.2002 made in ITA No.569/mds/98
"C" Bench.
For Appellant : Mr.V.S.Jayakumar
For Respondent : Mr.Murali Kumaran,
Senior Standing counsel for Income Tax
J U D G M E N T
CHITRA VENKATARAMAN,J.
This Tax Case (Appeal) is preferred by the assessee
against the order of the Income Tax Appellate Tribunal
relating to the assessment year 1987-88.
2. In the grounds of appeal, the assessee raised five
questions of law. Except the one on the question of capital
gains arising out of the sale of an immovable property at
35, Nungambakkam High Road, Chennai, four questions of law
were admitted by this Court under order dated 23.4.2004.
3. It is stated that subsequent to the disposal of the
appeal, the applicant filed M.P.Nos.21 & 87 (MDS)/2003
before the Tribunal seeking a decision again on the question
of capital gains arising thereon treated as a short-term
gain and not a long term one. The appellant also sought for
reconsideration on the question of loss arising from the
film “Kasthuri Vijayam”. By order dated 1.9.2003, the
Tribunal allowed the M.P on the question of capital gains on
the sale of the immovable property accepting the same as
long-term capital gains. It is stated that the Revenue
filed an appeal in Tax Case No.272 of 2004. By order dated
6.8.2004, this Court took the view that the order of the
Tribunal granting the relief on capital gains amounted to
review of the order earlier passed rejecting the said plea.
This Court took the view that the Tribunal had no authority
under law to review its order. Hence, in the said view of
the matter, considering the prejudice that might be caused
to the appellant herein on the question of capital gains on
the sale of immovable properties, the appellant was
permitted to raise the question on capital gains as a
question of law for consideration along with other questions
admitted earlier under order dated 23.4.2004.
4. Accordingly, the appellant filed T.C.M.P.No.50 of
2007 seeking the following question also to be raised to
consider:
” Whether in law in holding that the
capital gains arising on the sale of
immovable property at 35 , Nungambakkam
High Road is a short term capital gain
and not a long term one?”
By order dated 14.8.2007, this Court ordered the T.C.M.P.
Thus, the said question is also considered as part of the
questions raised and admitted by this Court.
5. Hence, the questions of law that arise for
consideration as admitted by this Court are as follows:
“1. Whether on facts and in the
circumstances of the case, the Tribunal was
right in law in rejecting the appellant’s claim
of loss arising from two movies by name
“Kannamma” and “Uzaikum Karangal”?
2. Whether the Tribunal was right in
holding that the sum of Rs.1,26,000/- is
unexplained cash credit under Section 68 of the
Income Tax Act, 1961?
3. Whether the Tribunal was right in law
in upholding the disallowance of loss arising
from “Kasturi Vijayam”, without dealing with the
said grounds of appeal?
4. Whether the Tribunal was right in
disallowing the claim of loss of Rs.3,60,000/-
arising out of sale of shares of M/s. Sudershan
Clay and Ceramics Limited? 5. Whether in law
in holding that the capital gains arising on the
sale of immovable property at 35, Nungambakkam
High Road is a short term capital gain and not
a long term one?”
6. The assessee is a firm engaged in the business of
distribution and exhibition of films. It is stated that the
appellant herein had purchased the negative rights of two
feature films, namely, “Kannamma” and “Uzaikum Karangal”
from its sister concern M/s.Kamakshi Agencies Private
Limited for a consideration of Rs.5,76,000/- and
Rs.12,01,000/- on 22.8.1986 and 7.10.1986 respectively.
These two films were released as early as 1972 and 1976
respectively. The vendor, in turn, had purchased the rights
in the year 1982 and 1983 respectively from another sister
concern of the assessee, i.e., M/s.Sudarsan Agencies, which
is the proprietary concern of M/s.Sudarsan Trading Company.
It is stated that eversince the purchase of the two movies
in 1982 and 1983, the vendor, M/s.Kamakshi Agencies Private
Limited had not exploited these two movies in any manner and
were shown as closing stock and opening stock every year
till finally the negative rights were disposed of in favour
of M/s.Ashoka Brothers, a unit of the assessee herein, in
the year 1986. The assessee contended that as per the
agreement entered into by the assessee, these two films were
given to the mediators to exhibit the films in any
particular area for a particular period and amounts were
received thereon on the rights given. Admittedly, the
assessee had not entered into any agreement with the
exhibitors directly. The total collection made for
exhibiting these two films through the mediators were stated
to be to the tune of Rs.1.26 lakhs. The cost of these two
movies and the income earned were debited to the Profit and
Loss Account and the assessee has showed a net loss of
Rs.20,68,830/-.
7. In the course of the assessment proceedings, the
appellant was asked to show the necessary evidence as
regards the exploitation through the mediators. The
appellant herein produced confirmatory slips from different
parties who had taken the films on hire, the amount of hire
charges for the period for which they were screened, and the
place of screening. In terms of the addresses given in the
confirmatory slips, enquiries were made as to whether the
assessee had actually engaged the mediators for the
exhibition of the films. On enquiry, it was found that none
of the parties mentioned in the confirmatory slips were
found existing/or the addresses given were not found. There
were instances where the assessee could not give full
addresses of the persons who had claimed to have taken these
films for hire. By letter dated 31.1.1990, the assessing
authority called upon the appellant herein to identify the
persons who were stated to have been given the exhibition
rights and produce those parties for verification. In its
letter dated 12.2.1990, the appellant replied that it had
received the contracts only through the mediators and it had
no direct contact with the exhibitors and that the films
were given to the middlemen. Except for the confirmatory
slips produced before the assessing authority as regards the
receipt of film hire charges, no details were furnished by
the appellant herein. On the other hand, the appellant
stated that since the transactions had taken place well
before 31.3.1987, it was not practically possible to produce
the mediators before the assessing authority. The General
Manager of the appellant firm, the former Managing Partner,
expressed his inability to give the details or identify the
persons to whom the exhibition rights were given. He further
stated that some of the middlemen approached him through
some persons known to the appellant. The assessing authority
noted that nothing further could be elicited from the
General Manager of the firm Mr.C.V.Velayudham. In the face
of total lack of evidence as regards the mediators and the
exhibitors through whom the films were exhibited and in the
absence of any material to substantiate the confirmatory
slips, the assessing authority rejected the case of the
appellant-assessee for treating the loss as a business loss.
On the other hand, the assessing authority held that since
the films purchased had not been exploited during the year,
the entire cost of acquisition of the two films were allowed
to be carried forward as per Rule 9-B(iv) of the Income Tax
Rules, 1962. As regards the collection of Rs.1.26 lakhs for
the exhibition of the movies, the assessing authority
treated the same as unexplained cash credits under Section
68 of the Income Tax Act, 1961, on the premise that these
monies were really that of the appellant’s money introduced
in the guise of the receipts from the exploitation of the
films.
8. The second issue relates to the disallowance of loss
arising from the film “Kasthuri Vijayam”. It is stated that
the said film was purchased by M/s.Ashoka Brothers under the
banner “Moogambika Films”. The negative rights were owned
by the appellant-assessee firm. Since there was no
collection forthcoming, a sum of Rs.1,53,534.57 was written
off. The assessing authority took the view that as there
was no credit of collection during this period, the said
amount could not be written off under Rule 9-B.
9. On the next question as to the short term capital
loss of Rs.3,60,000/- arising out of sale of shares
purchased from its sister concern M/s.Sudarsan Clay and
Ceramics Limited, it was stated that the appellant-assessee
had purchased one lakh shares of Rs.10/- each on 3.10.1980.
The shares were sold for a consideration of Rs.8,40,000/- on
20.1.1987. This was claimed as a short-term capital loss in
the statement of accounts. The assessing authority pointed
out that M/s.Sudarsan Clay Products was a losing company and
the shares were originally transferred in the name of
Mr.Velayudham, the Managing Partner and representative for
and on behalf of the firm, and the company refused to
register the shares in the name of the firm. Subsequently,
the shares were sold by the appellant-assessee at the best
available price considering the fact that the company was a
loss making company. The appellant herein received
Rs.6,00,000/- out of the total consideration of Rs.8,40,000/-
and the balance of Rs.2,40,000/- was still outstanding. The
assessing authority felt that the claim of short term loss
had been deliberately incurred by the appellant herein to
avoid the capital gains. It is an admitted fact that the
company had not allowed any dividends at any point of time
from 1983 onwards. It is also pointed out that whether the
valuation was by the yield method or under Rule 1D of the
Wealth Tax Rules, the value of the shares were negative and
the balance sheet of M/s.Sudarsan Clay Products Limited
showed the value of the shares as ‘nil’. The assessing
authority took the view that there were no reasons stated
for purchase of the shares from the loss making company and
there was equally no reason assigned for the sister concern
purchasing the shares from the assessee at Rs.7/- per share.
Hence, there was no bona fide commercial principle involved
in this transaction. Hence, the assessing authority held
that it was only a colourable transaction to evade payment
of income tax, which otherwise would be liable to be paid
under the capital gains.
10. On the question of the claim for long-term capital
gains on the sale of the immovable property at 35,
Nungambakkam High Road, Chennai, the assessing authority
applied the decision of the Hon’ble Supreme Court reported
in 57 ITR 185 (ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF
INCOME TAX) to hold that the original agreement of sale
dated 16.9.1995 did not confer any title to the assessee
that the sale deed was executed as per the memo of
compromise entered into in the O.S. Appeal before the High
Court on 9th July 1986; that the sale deed was registered in
favour of the appellant-assessee only on 10.7.1986. Hence,
till the sale deed was executed in favour of the appellant
in the year 1986, the appellant did not have any title as an
owner; consequently, the sale effected by the appellant on
26.9.1986 resulted in short-term capital gains only. The
appellant-assessee did not hold the property for a period
more than 36 months to treat the gain as long term capital
gains.
11. Aggrieved by the order of the assessing authority,
the appellant -assessee went on appeal before the
Commissioner of Income Tax (Appeals). By an order dated
9.12.1992, the Commissioner of Income Tax (Appeals)
dismissed the appeal, upheld the order of the assessing
authority, thereby confirmed the assessment.
12. Aggrieved by the order of the Commissioner of
Income Tax (Appeals), the appellant-assessee preferred a
further appeal before the Income Tax Appellate Tribunal. By
an order dated 31.12.2002, the Tribunal rejected the appeal,
thereby confirmed the findings of the authorities below. As
against this order of the Tribunal, the appellant -assessee
has preferred this appeal before this Court under Section
260-A of the Income Tax Act, 1961 on the grounds as stated
above.
13. Heard counsel for the parties.
14. On the first question of claim of business loss on
the exhibition of the films, a perusal of the order of the
Tribunal shows the finding of fact that the assessee could
not produce any evidence as to the identity of the middle
men and the exhibitors. The parties issuing the confirmatory
letters were also found as either not traceable or the
addressees/address were not there. The Tribunal further
pointed out to the finding of the Assessing Officer that as
there was no exhibition receipts, the write-off for the
films could not be allowed. The Tribunal further found that
the films were not exhibited for quite some time and there
was no demand for those films. In the circumstances, the
Tribunal upheld the order of the Commissioner of Income Tax
(Appeals). The Tribunal further pointed out that
Sri.C.V.Velayudham, who had himself signed on the contracts,
refused knowledge about any of the alleged exhibitors. The
Tribunal further stated that when the said Velayudham was a
signatory to the documents, his plea that he had no
knowledge about the same clearly showed that the explanation
given could not be acted upon that the receipt of
Rs.1,26,000/- represented collection on the exhibition of
films. In the background of these facts, rightly, the
Tribunal upheld the orders of the authorities below.
15. Learned counsel appearing for the appellant could
not point out any error in the reasoning of the Tribunal, or
for that matter, any of the authorities. Being a pure
question of fact and appreciation of evidence and there
being no material produced to point out any error in the
findings of the Tribunal, we do not find any ground to
disturb the findings. Hence, we reject the plea of the
appellant-assessee on this issue.
16. The assessing authority came to the conclusion that
the appellant-assessee had no intention to exploit the films
and these films were lying idle with the assessee’s sister
concern; that these films were purchased at a cost higher
than what was paid by the sister concern. The Tribunal
referred to the findings of the assessing officer that the
idea of claiming loss was only to negate the capital gains
incidence which the appellant-assessee had during this year.
Hence, the plea of exploitation of the films through the
mediators itself was a fabricated one. The Tribunal
confirmed the findings of the assessing authority to hold
that since the films were not exploited during the year, the
entire cost of acquisition of these films were to be carried
forward as per Rule 9-B(4). Touching on this, learned
counsel appearing for the assessee took us through the
provisions of Rule 9-A and 9-B of the Income Tax Rules,
1962, to impress on the submission that these Rules have
relevance for the new films for exhibition. He submitted
that the assessing authority erred in invoking Rule 9-B that
the appellant could only have the benefit of carry forward
of the loss as per Rule 9-B. He emphasized that Rule 9-B
and Rule 9-A have to be read harmoniously to get at the
intention of the Rules provided therein that at best, these
Rules have relevance for new films alone and cannot be
extended to films already released and exhibited and further
sold to others for exploiting the rights. In the context of
the submissions, learned counsel stated that the appellant-
assessee would be entitled to have the adjustment under the
regular provisions of the Act. Elaborating on the facts, he
submitted that the appellant herein had, in fact, given the
details as to the middle men through whom the films were
given for exhibition before the assessing authority, and
that by efflux of time, the assessee had difficulty in
tracing the exhibitors or the middle men. He further pointed
out that when the details as regards those who had exhibited
the films through the middle men were furnished, the burden
is on the Revenue to make necessary enquiries to consider
the claim as to whether it is a genuine transaction or not.
In the context of the rejection of the claim for business
loss and treating the sum of Rs.1.26 lakhs as ‘unexplained
cash credit’, learned counsel referred to Section 68 of the
Income Tax Act, 1961. He contended that when the assessee
had discharged its burden and the amount was found in credit
in the books of accounts maintained by the assessee and an
explanation was offered as relating to the income earned on
giving the films for exhibition through mediators, the
assessing authority cannot invoke the provisions of Section
68 of the Income Tax Act, 1961, to treat the same as
unexplained cash credit. Learned counsel further pointed
out that the Section enjoins upon the assessing authority to
record the satisfaction as to the materials given by the
assessee before embarking on the provisions under Section 68
of the Income Tax Act, 1961. In the above circumstances,
learned counsel submitted that the assessing authority
failed to observe the provisions of Section 68 of the said
Act and hence, to treat Rs.1.26 lakhs as an unexplained
cash credit.
17. We do not agree with the aforesaid contentions by
the learned counsel for the appellant-assessee herein. On
the geniuneness of the claim of the exhibition through the
mediators, we have already rejected the plea of the
appellant herein. As regards the contention as to the
applicability of Section 68 treating the alleged exhibition
receipts as cash credits, it must be seen that the primary
onus as to the receipt of the said amount is on the
appellant-assessee to show the identity of the exhibitors
and the mediators and the genuineness of the transaction.
Only where the assessee discharges the burden prima facie,
that the burden shifts on to the revenue. The mere
production of the confirmatory letters would not, by itself,
prove the claim of the appellant as regards the exhibition
of the films. Read in the context of the inability
expressed by the assessee to bring the exhibitors before the
assessing authority and considering the fact that the
addressees were not there in the said address or the
particulars were not correct, the view of the assessing
authority could not be faulted with. It is no doubt true
that law does not contemplate or require compliance of an
impossible act. Yet, when the details regarding the
particular receipt is exclusive to the knowledge of the
assessee who has the necessary information relating to the
same, the initial burden is certainly on the tax payer to
discharge the same so that further enquiry thereon is taken
to the logical end by the revenue. Going by the findings
recorded by the Tribunal, we do not find any ground to
accept the plea of the appellant-assessee in this regard.
18. On the question of the claim of loss and the
applicability of Rules relating thereto, the amortization of
costs of film either in the hands of the producer or the
distributor is governed by Rules 9-A and 9-B of the Income
Tax Rules, 1962. A cursory glance of these provisions show
that Rule 9-A prescribes deductions in respect of
expenditure on the production of feature films. Rule 9-B
deals with the deduction available in respect of expenditure
on acquisition of distribution rights of feature films.
While Rule 9-A concerns itself as to the case of the film
producers, Rule 9-B is about film distributors, a stage
after the production of the film. These Rules lay down the
procedure for computing the profits and gains from film
production and/or film distribution business.
19. Admittedly, the case herein relates to exhibition
of old movies. Hence, going by the case of the appellant,
the deduction falls for consideration only under Rule 9-B.
The manner of allowing such a deduction is given in Sub Rule
(2) to Sub Rule (4). The explanation to Sub Rule (1) to
Rule 9-B defines the cost of acquisition. It states, the
cost of acquisition in relation to feature film means the
amount paid by the film distributor to the film producer or
another distributor under an agreement entered into by the
film distributor with such film producer or such other
distributor as the case may be for acquiring the rights of
exhibition expenditure. The provisions contained therein
also stipulate the minimum period for which the film should
have been exhibited for the purposes of gaining benefit
under these provisions.
20. A reading of Rule 9-B(1) with the explanation
thereon leaves no room for doubt that it intends to deal
with films coming for exhibition after its release for the
first time. The fact that it refers to “distribution from
one distributor to another or from one distributor to such
other distributors” clearly shows the futility in the
contention of the learned counsel for the appellant to read
this provision as relatable to new films and that there are
no reference to relate the same to old films. In contrast to
Rule 9-B, Rule 9-A shows that it relates to a new film. The
Section deals with deductions in computing the profits and
gains of production of feature films certified for release
by the Board of Film Censors in terms of the provisions of
Sub-Rule (2) to Sub Rule (4). A reading of the provisions
clearly show the difference in the area of operation of the
provisions of Rule 9-A and 9-B. In the circumstances, we do
not find any justification to hold that invocation of Rule 9-
B will not have any bearing to the case on hand. We agree
with the Tribunal that the appellant-assessee is, at best,
entitled to the cost of acquisition of these films to be
carried forward as per Rule 9-B(4). Consequently, questions
1 and 2 raised are answered against the assessee appellant.
21. As regards the third question raised by the
appellant herein on disallowance of loss arising from
“Kasturi Vijayam”, it may be noted that Rule 9-B(4) provides
that in the event of the assessee not exhibiting the film on
commercial basis or sell his rights of exhibition, thereby
resulting in no deduction in respect of the cost of
acquisition, the assessee is granted carry forward of the
loss. Learned counsel for the assessee pointed out the
provisions herein applied in relation to the assessment year
1987-88 that the provisions itself came to be effective on
and from the assessment year commencing after 1.4.1987 (Sub
Rule (7)). In these circumstances, the question of
construing any benefit as per Sub-Rule (4) does not arise.
Consequently, he states that the Rule has no relevance to
this case.
22. As already noted, Sub-Rule (7) makes provisions
effective from 1.4.1987. The Rule itself was introduced for
deduction in respect of expenditure on acquisition and
distribution rights of the feature films under the Income
Tax (Seventh Amendment) Rules, 1976. Learned counsel
submitted that the normal Rule as regards the deduction have
not been applied in this case. Learned counsel placed
reliance on the decision of Jabalpur Bench of the Income Tax
Bench reported in (1983) 5 ITD 142 in the case of ITO Vs.
R.S. Enterprises, which was referred to before the Tribunal.
The grievance of the appellant herein is that the Tribunal
had omitted to consider this issue raised. However, learned
counsel fairly stated that the Tribunal considered the claim
in the M.P. filed after the disposal of the appeal only to
reject the same once again.
23. A perusal of the order passed in M.P.Nos.21 &
87/03 dated 1.9.2003 shows that the Tribunal considered the
claim and pointed out that the facts relating to the
expenditure on the production of the films which was
abandoned were not placed before the authorities at all for
consideration.
24. It is no doubt true that the relevant Rule
pertaining to deduction comes into operation from 1.4.1987.
It may be noted that the assessee, in its application filed
before the Tribunal after the disposal of the appeal, stated
that the film was abandoned during the accounting year 1987-
88. The Tribunal pointed out that the contention that the
film was abandoned during the year 1987-88 was not available
in the petition to consider the contention that Rule 9-B
itself is not applicable as regards the assessment year 1987-
88. It may be noted that even before this Court, except for
the mere contention that Rule 9-B will not be applicable, no
facts are placed. As found by the authorities below, in the
absence of any material to substantiate his claim of
expenditure, we do not accept the plea of the assessee. The
Tribunal pointed out that as regards this claim, there are
no evidence placed before the Tribunal to show that the
rights were abandoned, since there were no credit of
collections. However, if the rights were purchased by the
assessee and there were no collection, the provision that
would be applicable would be Rule 9-B, which had been
rightly applied by the assessing authority concerned. The
Rule provides for deduction on certain basis. The deduction
is available only subject to exhibition of films for
particular number of days. In the absence of any details
thereon, the claim of the assessee was rejected. While
going through the order of the Commissioner of Appeals, it
is seen that when the assessee was asked to show how he was
entitled to write off the sum of Rs.1,53,534.57, it was
stated that the assessee explained vide letter dated
15.2.1989 that the amount should be allowed under Rule 9-A
and 9-B. If there are collections during the year, Rule 9-B
expressly states that the same should be credited to the
books of accounts of the assessee and deduction granted in
accordance with Rule 9-B. Since there was credit of
collections during the year, the assessee was not permitted
the write off by the assessing authority. Thus confirmed on
factual aspect, we do not find any ground to interfere with
the same in exercise of the jurisdiction under Section 260-A
of the Income Tax Act, 1961. It may also be pointed out
that the assessee had not denied the applicability of Rule
9B in the proceedings taken before the assessing authority
or before the first appellate authority. In any event, on
the view taken on facts and as to Rule 9-B and its
applicability, we do not find any justification to accept
the plea of the appellant herein. Hence the third question
is answered against the assessee.
25. As regards the fourth question on the disallowance
of the claim of capital loss of Rs.3.60 lakhs, the Tribunal
has considered the claim in detail to arrive at the finding
of fact that the purchase of shares was from a company which
was economically not very sound. Learned counsel for the
appellant submitted that the commercial decisions cannot be
dissected to reject the claim of loss arising out of the
sale of shares of M/s.Sudarsan Clay and Ceramics Limited. A
perusal of the order of the Tribunal shows that whether it
is by the application of break up value method or by yield
method, the value of shares of M/s.Sudarsan Clay Products is
shown as ‘nil’; in fact it showed a negative figure for the
years 1984-85, 1985-86, 1986-87 and 1987-88. In the face of
full knowledge of the state of affairs of M/s.Sudarsan Clay
Products, the Tribunal held that the whole transaction
lacked rational commercial principles involved in this. Thus
the Tribunal confirmed the finding that the appellant-
assessee could not prove the genuineness of the transaction,
that the claim of the short term capital gains was
deliberately made by the appellant to avoid tax on capital
gains. In the face of the findings of the Tribunal on this
issue which could not be assailed by the appellant, we do
not find any justification to interfere and hence, the same
is rejected.
26. This takes us to the claim of long term capital
gains arising on the sale of an immovable property at 35,
Nungambakkam High Road, Chennai. It is seen that the
appellant-assessee had an agreement for sale under document
dated 16.9.1975 and the possession was handed over to the
appellant herein on 1.1.1976. During the assessment year
1987-88, the appellant -assessee sold the property at
Nungambakkam High Road for a sum of Rs.45 lakhs to one
Kalpatharu Private Limited on 30.9.1986. It is stated that
the sale deed in favour of the appellant-assessee was
executed on 10.7.1986 by Velayudham and registered on
26.9.1986. The Assessing Authority took the view that since
the appellant-assessee was in possession for a period of
about two months, it is a short-term capital asset in terms
of Section 2(42-A) of the Income Tax Act, 1961. The
assessing authority thus took the view that the sale
proceeds from the short-term capital asset should be
assessed only as short term capital gains. Aggrieved of
this, the appellant-assessee went on appeal before the
Commissioner of Income Tax (Appeals). The first appellate
authority took the view that till 9th July 1986, the
appellant was not the owner of the property, that the
ownership could not be transferred by mere possession of the
immovable property without a document registered to its
name. Hence, the appellant could not be held to be the owner
holding the property for more than 36 months to treat the
sale as resulting in long-term capital gains. Thus the
appellate authority rejected the plea of the assessee. On
further appeal by the appellant assessee, the Tribunal took
a view that the assessee had its agreement for sale under
document dated 16.9.1975 and possession was handed over to
the appellant herein on 1.1.1976. The sale deed in favour of
the appellant herein was registered on 26.9.1986 pursuant to
the compromise memo recorded in the suit proceedings before
the Original Side of this Court. The appellant-assessee, in
turn, sold the property on 30.9.1986. The Tribunal viewed
that as per the law then stood, the transaction could be
treated as transfer only on the registration of the document
and part-performance could not be treated as transfer. The
Tribunal held that the definition of “transfer” under
Section 2(47) was amended to include even part-performance
under Section 53-A of the Transfer of property Act, 1882,
only on and from 1.4.1988. Hence, only from the date when
the sale was executed and registered that the appellant-
assessee could be held to be having the title to sell the
property. Thus taking this view, the Tribunal upheld the
orders of the authorities below holding the gains as short-
term capital gains.
27. Learned counsel appearing for the appellant pointed
out that the appellant had entered into an agreement for
purchase of the property on 16.9.1975. He was put in
possession as early as 1.1.1976. Hence, going by the
decision of the Calcutta High Court reported in 117 ITR 525
(CIT Vs. ALL INDIA TEA & TRADING CO. LTD.) and the
possessory right in terms of the agreement for sale, the
claim could not be considered as a short-term capital gains
to deny the benefit of set off. Learned counsel for the
appellant also pointed out that when the vendor refused to
go ahead with the agreement entered into, a suit was filed
before this Court on the Original Side in C.S.No.710 of 1980
for a relief of specific performance. Ultimately, the
dispute resulted in a settlement in the appeal, whereby, the
vendor agreed to execute the sale deed on a consideration of
Rs.45 lakhs as against the original consideration. In terms
of the agreement, the sale deed was executed and registered
on 30.9.1986. Learned counsel pointed out that since the
right is traceable to the original agreement, the claim of
the appellant-assessee has to be seen from the date of the
original agreement.
28. Per contra, learned Senior Standing Counsel
appearing for the Revenue submitted that it is an admitted
fact that the original agreement entered into in the year
1975 underwent changes as regards the consideration. Hence,
there was a novation of contract and the fresh sale
agreement was entered into and registered on 30.9.1986.
Hence, the right of the appellant-assessee has to be worked
out from the date the document was executed and registered
in favour of the appellant. Viewed thus, the claim could be
nothing but a short-term capital asset giving rise to short-
term capital gains.
29. A perusal of the documents filed before this Court
shows that admittedly, the appellant-assessee was put in
possession and enjoyment of the suit property as agreement
holder right from 1.1.1976. The suit for specific
performance was filed by the appellant- assessee herein
before the original side of this Court and in terms of the
compromise memo filed in the suit, a decree was passed on
30.9.1983 in favour of this appellant. It is no doubt true
that as part of the settlement terms, the parties agreed to
revise the sale consideration. However, the same was done
with reference to the claim under the agreement. The sale
deed was executed in terms of the settlement reached in the
suit proceedings. As such, there was no novation of
contract to result in a fresh agreement entered into.
30. On the question as to whether a possessory right
under this agreement, per se, confers an interest to claim
long-term capital gains, we may have to look at the
definition provisions relating to “Capital Asset” under
Section 2(14), “Short Term capital asset” under Section
2(42A) and ‘Transfer” under Section 2(47) of the Income Tax
Act, 1961. The relevant provisions necessary for the
purpose of our consideration are as follows:
Section 2(14) “Capital Asset”:
“capital asset” means property of any
kind held by an assessee, whether or not
connected with his business or
profession..”
Section 2(42A) “Short Term capital asset”:
Short term capital asset means a
capital asset held by an assessee for
not more than thirty-six months
immediately preceding the date of its
transfer: … ”
Section 2(47)’Transfer”:
“Transfer” in relation to a capital asset,
includes,-
(i) the sale, exchange or
relinquishment of the asset; or
(ii) the extinguishment of any rights
therein; or
(iii) the compulsory acquisition
thereof under any law; or
(iv)in a case where the asset is
converted by the owner thereof
into, or is treated by him as,
stock-in-trade of a business
carried on by him, such conversion
or treatment; (or)The following clause was inserted under Finance
Act, 1987 with effect from 1.4.1988:
(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 (4 of 1882); or…….. “
31. A conjoint reading of the provisions, as they stood
at the material assessment year, show that “capital asset”
means “property of any kind held” by the assessee. It may
be seen that the Income Tax Act, 1961, does not contain the
definition of “property”. In the decision reported in 76
ITR 471 (AHMED G.H. ARIFF Vs. COMMISSIONER OF WEALTH-TAX),
in the context of the Wealth Tax proceedings with reference
to the definition of “Assets” in Section 2(e) to “include
property of any description”, the Apex Court held that
‘property’ is a term of the widest import and, subject to
any limitation which the context may require, it signified
every possible interest that a person can hold or enjoy.
The definition of “capital asset” under the Income Tax
Act, referring to “property of any kind” carry no words of
limitation. The definition is of wide amplitude to include
every possible interest that a person may hold and enjoy.
The meaning ascribed by the Apex Court to the term
“property” applies with equal force to the understanding of
“capital asset” under the provisions of the Income Tax Act.
32. The definition of “capital asset” refers to
property of any kind “held” by an assessee. In
contradistinction to the word “owner” or “owned”, the
definition uses the phrase “held”.
33. Touching on the meaning of the term “owner” in the
context of assessability of the income from property under
Section 22, in the decision reported in 226 ITR 625 (C.I.T.
Vs. PODAR CEMENT PVT. LTD.), the Apex Court held that “Owner
is the person who is entitled to receive income from the
property in his own right.” The Apex Court held that in
the context of Section 9 of the 1922 Act, the owner must be
a person “who can exercise the rights of owner not on behalf
of the owner, but in his own right.” The Apex Court
pointed out to the amendment to Section 27 under the Finance
Bill, 1987, to get over an obvious omission to the meaning
of the word “owner” under Section 22 that even though in
common law, “owner” means a person who has got valid title
legally conveyed to him after complying with the
requirements of law under the Transfer of Property Act and
the Registration Act, having regard to the ground realities
and the object of the Act, namely, to tax income, in the
context of Section 22, the owner is the person who is
entitled to receive income from the property in his own
right. Adverting to the provisions of the Transfer of
Property Act under Section 53-A, 54 and 55, the Apex Court
held that legal title does not pass unless there is a deed
of conveyance duly registered. Referring to the effect of
Section 54, and Section 22 of the Income Tax Act, the Apex
Court said “That, however, would not take away the right of
the assessee to remain in possession of the property, to
realise and receive the rents and profits therefrom and to
appropriate the entire income for its own use. The so-called
vendor is not permitted in law to dispossess or to question
the title of the assessee (the so-called vendee). It was for
this very practical purpose that the doctrine of the equity
of part performance was introduced in the Transfer of
Property Act, 1882, by inserting section 53A therein. The
section specifically allows the doctrine of part performance
to be applied to the agreements which, though required to be
registered, are not registered and to transfers not
completed in the manner prescribed therefor by any law. The
section is, therefore, applicable to cases where the
transfer is not completed in a manner required by law unless
such a non-compliance with the procedure results in the
transfer being void.” Affirming the view of the Rajasthan
High Court, the Apex Court held that in the context of
Section 22, where the transferor had handed over possession
of the property pursuant to an agreement for sale, “owner is
a person who is entitled to receive income from the
property.” The Apex Court held that the amendment introduced
by the Finance Bill, 1987, was declaratory/clarificatory in
nature and hence, these provisions are retrospective in
operation.
34. The Rajasthan High Court had an occasion to
consider a case similar to the one that we have on hand.
Applying the aforesaid decision of the Apex Court to the
case dealing with a question of capital gains where
possession was given to an agreement holder, in the decision
reported in 259 ITR 724 (C.I.T. Vs. VISHNU TRADING AND
INVESTMENT CO.), the Rajasthan High Court held “Following
the view taken by their Lordships, we are of the view that
for taxing the capital gain, registration of the sale deed
is not necessary under the provisions of the Income-Tax
Act.” The said decision of the Rajasthan High Court was
again followed in the decision reported in 260 ITR 503
(C.I.T. Vs. RAJASTHAN MIRROR MANUFACTURING CO.) .
35. Again, in the decision reported in 234 ITR 140
(M.SYAMALA RAO Vs. C.I.T.), the Andhra Pradesh High Court
considered the situation, where, under the agreement of sale
on the 1st May 1962, the assessee was put in possession of
the land. The document of sale was registered on 8th June
1979. The assessee sold the land after converting it into
plots. The sale of these lands was sought to be assessed as
capital gains. On a reference, the Andhra Pradesh High
Court held that though the document was registered on June 8
1979, it related back to the date on which the agreement of
sale was executed in favour of the assessee by the vendor.
Hence, the assessee was deemed to be the owner of the
property with effect from 1962. The Andhra Pradesh High
Court pointed out that the assessee had held property for
more than 36 months; hence, the capital gains could not be
assessed as short-term capital gains.
36. Similar is the view expressed by the Punjab &
Haryana High Court on the scope of Section 2(42-A) of the
Income Tax Act, 1961, in the decision reported in 207 ITR
148 (C.I.T. Vs. VED PARKASH AND SONS (HUF). There, the
assessee entered into an agreement for purchase of a flat in
the year 1970. He was put in possession of the flat in the
same year. The assessee made a final payment in the year
1973, i.e., on February 10, 1973. On the same day, he sold
the property and claimed the gain arising therefrom as long-
term capital gains. The Punjab and Haryana High Court took
the view that Section 2(42-A) relating to the definition of
short-term capital gains asset refers to a capital asset
held by an assessee for not more than 36 months immediately
preceding the date of transfer. The High Court took the view
that “As is clear from a bare reading of section 2(42) of
the Act, the word “owner” has designedly not been used by
the Legislature. The word “hold”, as per dictionary meaning,
means to possess, be the owner, holder or tenant of
(property, stock, land . . . .). Thus, a person can be said
to be holding the property as an owner, as a lessee, as a
mortgagee or on account of part performance of an agreement,
etc. Conversely, all such other persons who may be termed
as lessees, mortgagees with possession or persons in
possession as part performance of the contract would not in
strict parlance come within the purview of “owner”. As per
the Shorter Oxford Dictionary, edition 1985, “owner” means
one who owns or holds something; one who has the right to
claim title to a thing.”
37. The High Court held that even if the amount was not
paid in full by the assessee in terms of the agreement, it
could not be construed that the assessee had no right or
interest in the property. The assessee was put in
possession as early as 1970 and was remaining in occupation
as a matter of right. Thus for all purposes, he was a
beneficial owner from the start. In the context of this
view taken, the Court held that the capital gain was
assessable as long-term capital gain.
38. We find no reason to differ from the view taken by
the other High Courts as stated above on the scope of
Section 2(47) with reference to the liability under Section
45. Although the decision of the Apex Court related to a
case of income assessability at the hands of an occupier who
need not be an owner in the normal connotation, yet, given
the scope of the definition provisions under Section 2(14)
and Section 2(47) and the effect of the amendment brought
forth by the insertion of Clause (v) under Section 2(47), we
agree with the view expressed by other High courts.
39. Learned Counsel for the respondent submitted that
in the context of the decision of the Apex Court reported in
57 ITR 185 (ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF INCOME
TAX), referred to above, the period of holding the property
has to be reckoned from the date of passing of title.
40. This decision was considered by this Court in the
decision reported in 254 ITR 175 (MECCANE INDUSTRIES LTD.
Vs. C.I.T.), that transfer meant effective conveyance of
capital asset to the transferee. It may be noted that the
case reported in 254 ITR 175 (MECCANE INDUSTRIES LTD. Vs.
C.I.T.), related to the Assessment Year 1968-69. This Court
held that the delivery of possession of immovable property
could not, by itself, be treated as equivalent to conveyance
of the immovable property. This Court held that having
regard to the law that prevailed in the assessment year
concerned, capital gains could be regarded only when the
conveyance was executed and not at any earlier point of
time.
41. The decision of this Court reported in 254 ITR 175
(MECCANE INDUSTRIES LTD. Vs. C.I.T.), no doubt, applied the
law declared by the Apex Court reported in 57 ITR 185
(ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF INCOME TAX) that
capital gain arose in the year in which the deed was
registered. However, it must be noted that the decision is
distinguishable as the same was with reference to the
chargeability under Section 45 with reference to “transfer”
as defined under Section 2(47) as it then stood prior to the
amendment under the Taxation Laws Amendment Act, 1984 with
effect from 1.4.1985. Hence, it does not cover the issue on
hand.
42. In the decision reported in 271 ITR 269 (ZUARI
ESTATE DEVELOPMENT AND INVESTMENT CO. PVT. LTD. Vs.
J.R.KANEKAR), the Bombay High Court considered the effect of
Section 2(47) which was amended from 1.3.1988. The Bombay
High Court held that for the transaction to amount to
“transfer” within the meaning of Section 2(47), the minimum
requirements are that there has to be an agreement between
the parties signed by the parties; it should be in writing;
it should pertain to transfer of property and the transferee
should have taken possession of the property. Referring to
the decision reported in 57 ITR 185 (ALAPATI VENKATARAMIAH
Vs. COMMISSIONER OF INCOME TAX) with reference to Section 12-
B of the Act of 1922, it pointed out that “transfer” for
the purposes of the Income Tax Act, 1961, require facts of
conveyance of the capital assets to the transferee.
Delivery of possession of immovable property, by itself,
could not be treated as equivalent to conveyance of the
immovable property.
43. The decision of the Supreme Court reported in 57
ITR 185 (ALAPATI VENKATARAMIAH Vs. COMMISSIONER OF INCOME
TAX) on which the Tribunal based its decision and relied on
by the revenue is to be understood with reference to Section
12-B of the Indian Income Tax Act, 1922. and in the context
of the provisions as they stood at the material time.
44. The provisions of Section 12-B of the Indian Income
Tax Act, 1922, which corresponds to Section 45 of the 1961
Act relating to capital gains liability brought to charge
capital gains “in respect of any profits or gains arising
from sale, exchange, relinquishment or transfer of a capital
asset…”. The 1922 Act contained a definition of “capital
asset” under Section 2(4-A). However, there was no specific
provision therein corresponding to Section 2(47) under the
1961 Act defining “transfer”. The present provision under
Section 2(47) defining “transfer” is wider in scope and is
an inclusive definition. Touching on the scope of Section
12-B, the Apex Court held “Before Section 12-B can be
attracted, title must pass to the company by any of the
modes mentioned in Section 12-B, i.e., sale, exchange or
transfer. It is true that the word “transfer” is used in
addition to the word “sale” but even so, in the context,
“transfer” must mean effective conveyance of the capital
asset to the transferee. Delivery of possession of immovable
property cannot by itself be treated as equivalent to
conveyance of the immovable property.”
45. A reading of Section 45 as it stands today, show
that capital gains is chargeable on “any profits or gains
arising from the transfer of the capital asset…”. Read in
the context of the definitions of “capital asset” and
“transfer” the Section carries no words of limitation to
read that a transfer effected by a person backed up with a
title passed on under a registered deed alone could be
considered as resulting in a profit or gain assessable under
Section 45. All that the present Section looks at is the
transfer of a capital asset held as understood under Section
2(14) and under Section 2(47). In the background of the
provisions as they stand today, the decision reported in 254
ITR 175 (MECCANE INDUSTRIES LTD. Vs. C.I.T.) relating to the
assessment year 1968-69, or for that matter, the decision of
the Supreme Court reported in 57 ITR 185 (ALAPATI
VENKATARAMIAH Vs. COMMISSIONER OF INCOME TAX), can have no
relevance to the issue in the matter of understanding the
scope of Section 2(47) and Section 45. As already seen, the
case on hand has to be analysed in the context of the
provisions prevailing during the relevant point of time. In
the circumstances, we do not agree with the view taken by
the Tribunal, applying the decision of the Apex Court in the
decision reported in 57 ITR 185 (ALAPATI VENKATARAMIAH Vs.
COMMISSIONER OF INCOME TAX) and the decision of this Court
reported in 254 ITR 175 (MECCANE INDUSTRIES LTD. Vs.
C.I.T.).
46. The question then is, what will be the effect of
the amendment brought forth to Section 2(47) by the
insertion of sub clause (v) to Section 2(47) relating to the
definition of “transfer” under the Finance Act 1987 with
effect from 1.4.1988.
47. This takes us once again to the decision of the
Apex Court reported in 226 ITR 625 (C.I.T. Vs. PODAR CEMENT
PVT. LTD.).
48. As already seen, the decision of the Apex Court was
concerned on the meaning of “owner” with reference to
Section 22. Yet, the construction given to the amendment
effected under the Finance Act of 1987 to Section 2(47) is
of relevance to the case on hand. Given the interpretation
of the term “property” and that assessee having possession
of a property pursuant to an agreement made has also to be
construed as “owner” for the limited purpose of Section 22,
the Apex Court held that the insertion of Section 53-A of
the Transfer of Property Act to Section 2(47) could only be
viewed as declaratory of what was already there and
intended. Touching on the scope of Section 27 of the Income
Tax Act, brought forth under the Finance Bill of 1987, the
Apex Court held “We have, therefore, no hesitation to hold
that the amendment introduced by the Finance Bill, 1987, was
declaratory/clarificatory in nature so far as it relates to
section 27(iii), (iiia) and (iiib). Consequently, these
provisions are retrospective in operation.” We have already
noted in Paragraph 33 of this judgment the discussion in the
decision of the Apex Court as to the provisions of the
Transfer of Property Act, particularly with reference to
Section 53-A, 54 and 55. Although the said decision is with
reference to the scope of Section 22 of the Act, yet the
decision of the Apex Court on the scope of the Finance Bill
of 1987 covers the issue on hand fully. The definition
under Section 2(47) is an inclusive Section which starts by
saying “transfer in relation to the capital asset includes
….”; as such, it is not possible to accept the stand of
the respondent that the transactions falling under Section
53-A of the Transfer of Property Act for the purpose of
considering the capital gains would fall for consideration
for the purpose of considering the same as falling under
long term capital asset only on and from the amendment
inserted under the Finance Act, 1987, with effect from
1.4.1988. In the light of the decision of the Apex Court
already noted, the insertion is only declaratory of the law
already there by reason of inclusive terms under Section
2(47) which is a wide definition in its import. In the
circumstances, we are in entire agreement with the view
expressed by the decision of the Punjab and Haryana High
Court reported in 207 ITR 148 (C.I.T. Vs. VED PARKASH AND
SONS (HUF)), the decisions of the Rajasthan High Court
reported in 259 ITR 724 (C.I.T. Vs. VISHNU TRADING AND
INVESTMENT CO.) and 260 ITR 503 (C.I.T. Vs. RAJASTHAN MIRROR
MANUFACTURING CO.) as well as the decision of the Andhra
Pradesh High Court reported in 234 ITR 140 (M.SYAMALA RAO
Vs. C.I.T.), that the capital gain arising on the transfer
of capital assets has to be worked out from the date of the
agreement under which the assessee was put in possession of
the property. The reasoning of the Tribunal, consequently,
cannot be upheld. The fact that the sale consideration had
undergone a change by reason of a compromise ultimately
entered into in the suit proceedings does not result in a
novation of a contract. The compromise entered in the suit
is itself with reference to the rights arising under the
agreement entered into in 1975 under which the assessee was
put in possession. Consequently, we have no hesitation in
setting aside the order of the Tribunal insofar as the
decision of the Tribunal is concerned on the capital gains
arising on the sale of the property. We hold that the
assessment has to be made treating the gain as long-term
capital gains arising out of the sale of the immovable
property at 35, Nungambakkam High Road, Chennai. The
relief, hence, has to be worked out in terms of the above-
said view that we have expressed.
49. In the light of the view that we have taken, our
conclusion is as follows:
On the question Nos. 1 to 4, the order passed by the
Tribunal is confirmed. We do not find any ground to
interfere with the findings arrived at by the Tribunal based
on materials and record. However, on the fifth question on
capital gains on the sale of the immovable property, we
answer the question in favour of the assessee reversing the
order of the Tribunal.
50. In the circumstances, the Tax Case (Appeal) stands
partly allowed. No costs.
sl/ksv