NEW DELHI, JAN 31, 2013: THE issues before the Bench are - Whether the amount of gain arising on relinquishment of rights acquired to a specific plot, is taxable under the head of income from other sources, although "No Objection Certificate" was obtained from the Income Tax Department; Whether relinquishment of vested rights in an immovable property cannot be considered as "transfer" within the meaning of Section 2(47) of the Income Tax Act, merely because the sale deed could not be executed and Whether a claim made under a wrong head of income amounts to concealment of income, even though the assessee has made a full and complete disclosure in the return of income. And the verdict goes in favour of the assessee.

Facts of the case

The assessee in the year 1997 entered into a Memorandum of Understanding (MoU) with developers for the purchase of 500 sq mtrs. of land or a residential flat not exceeding 300 sq mtrs, in Chanakaya Puri, New Delhi for a sale consideration of Rs. 4,28,00,000. At the time of entering into the MoU a sum of Rs. 68,00,000 was paid and the balance amount was to be paid in two installments; the first installment when the layout plan was sanctioned by the competent authority and the second installment at the time of possession of the plot. Thereafter, in the year 1998, the assessee entered into a supplementary MoU by which the plot was allotted and a “No Objection Certificate" by the Department in respect of the plot was issued to to the Petitioner for an apparent consideration of Rs. 4,28,00,000. In the year 2005, the assessee relinquished its ownership rights in the said plot for a total sale consideration of Rs. 5,05,00,000 (including the Rs. 68,00,000 paid at the time of entering into the MOU). In terms of the relinquishment agreement the assessee released and discharged the vendors from all obligations and also relinquished and released all its claims, ownership, right, title and interest in the said plot. In 2007, the assessee filed its income tax return for the AY 2006-2007 and declared capital gain of Rs. 3,94,19,345 on account of receipt of Rs. 5,05,00,000 for sale of its rights/title in the said Plot.

In the year 2009, a notice u/s 148 was issued for reopening of the assessment. Thereafter, objections were raised against the notice, which were rejected by the AO. The AO passed an order stating that the income of Rs.5,05,00,000 earned by the assessee on account of transfer of capital asset was “ income from other sources” and not “capital gains”. The assessee preferred an application u/s 264 of the Act, seeking revision of the said order but the Commissioner, rejected its application.

Aggrieved, the assessee filed this writ petition before the High Court.

The AR contended that the AO erred in considering that the MOU and the two supplementary agreements entered into did not confer any ownership rights in its favour. Therefore, it was submitted that the view taken by the Authorities that the right was not capable of being transferred is flawed.

On the other hand, the DR contended that there was no transfer of any capital asset qualifying for treatment of the amount received as capital gain and in the absence of any definite right to own property, the assessee could not claim ownership of any immovable property, or for that matter, any property. He relied on the terms of the MOU, and submitted that the vendor had never promised to part nor indeed parted with the title to any particular property. The amount which passed hands was only towards property that was to be conveyed in the future.

Having heard the parties, the High Court held that,

+ in J.K. Kashyap vs. Asst. CIT a Bench of this Court held that if the assessee relinquishes his rights in the property for a consideration it amounts to transfer under Section 2(47) of the Act and he is liable to capital gain tax under Section 45 of the Act. In the present case, the undeniable facts are that the petitioner paid Rs. 68 lakhs, at the time of entering into the MoU, i.e the Agreement for Sale. That transaction was reported to the revenue; a no objection certificate was issued. No doubt, the MOU did not assign a particular defined plot of land. A supplementary deed was later entered into, and the petitioner was consequently allotted plot no. A-1;

+ the decision in J.K. Kashyap is an authority for the proposition that even when an assessee becomes entitled to an undefined and undivided share in a property, through an agreement, which he later relinquishes, the gain has to be assessed as income from capital gain, and not as income from other sources;

+ this Court is in agreement with the above reasoning. That apart, in the present case, the Petitioner had acquired right to a specific plot; furthermore, the interest was in the nature of an actionable claim, which could be asserted in a legal proceeding. The tax authorities had issued a no objection certificate in respect of the transaction. In these circumstances, the reporting of the amount received as capital gains was correct. Moreover, Calcutta Discount Ltd. vs. ITO, is an authority for the proposition that as long as the assessee makes a full and true disclosure of the income, the fact that it might claim that as falling under one head which is ultimately not accepted, would not make it a wrong disclosure, or suppression. The question as to the proper assessability of any amount, to income tax falls within the domain of the tax adjudicator;

+ in view of the above discussion, the writ petition is entitled to succeed; the reassessment proceedings are hereby quashed.

(See 2013-TIOL-71-HC-DEL-IT)