By TIOL News Service

HYDERABAD, OCT 24, 2014: THE issue before the Bench is - Whether the sale of immoveable property through the medium of Memorandum of Understanding would fall within the meaning of transfer given in section 2(47) of the Income Tax Act. And the answer is YES.

Facts of the case

The assessee acquired an immoveable property through a Memorandum of Understanding (MoU), with the delivery being given to the assessee. This was an agricultural land. Thereafter, the assessee sold his immovable property and declared the income. He claimed that the profit earned by him in the process cannot be treated as taxable income, since it was in respect of an agricultural land. The AO accepted the claim of the assessee and passed an order of assessment. However, the Commissioner invoked section 263. According to him, the AO did not take the contents of the MoU into account and erroneously failed to bring the income earned by the assessee under the purview of the tax. On appeal, the Tribunal set aside the order of the Commissioner.

On appeal, the counsel for the Revenue argued that the Tribunal grossly erred in reversing the order of the Commissioner. He contended that the finding recorded by the Tribunal to the effect that the assessee became the owner of the agricultural land and thereby, he was not liable to pay any tax was contrary to law. He contended that in the given set of circumstances, the assessee cannot be said to have become owner of the property, much less can he sell it to third parties, so that he can claim the exemption from payment of capital gains tax by treating it as an agricultural land. He further submitted that once the transaction cannot be treated as the one of transfer of an agricultural land, the income was liable to be treated as the one from a different transaction and thereby liable to be brought under the purview of tax.

Having heard the parties, the High Court held that,

++ in the instant case, the rights were acquired by the assessee through MOU, dated 25.12.1993 vis-a-vis the property. On a perusal of the MOU, the Tribunal found that the possession of the property was delivered in favour of the person, who joined the transaction. Those facts in turn brought about transfer within the meaning of Section 2(47)(v) of the Act. Therefore, the assessee has acquired a right to transfer the same atleast from the point of view of income tax. The sale proceeds to the extent of the share of the assessee would certainly answer the description of capital gains. However, the classification of the land as the one of agricultural in nature, exempts the assessee from the obligation to pay the capital gains tax;

++ in the assessment order, the Assessing Officer recorded a finding to the effect that the land was agricultural in nature. It is true that he did not undertake the required amount of discussion vis-a-vis the nature of rights, which the assessee had acquired through the MOU and parted with other documents. The fact however remains that notwithstanding the expressions used either by the assessee or by the officers and authorities under the Act, they are in relation to an item of immovable property and that property in turn is an agricultural land. Though the Tribunal expressed the view that there was no occasion for the Commissioner to exercise the power under Section 263 of the Act, we do not agree with that. However, on merits, we find that once the Commissioner did not dispute the classification of the land, there was no way that he could have traced the income of the assessee to any other event other than the one of transfer of the agricultural land. We do not see any grounds in the appeal.

(See 2014-TIOL-1852-HC-AP-IT)