JUDGMENT [ENTITY], J.
1. [CASE NUMBER] at the instance of the Revenue is a reference under [SECTION] of the [ACT] (hereinafter referred to as "the Act" for short). In the said income-tax reference, the Commissioner of Income-tax, Cochin, assails the order of the Income-tax Appellate Tribunal in [CASE NUMBER] which was an appeal filed by the respondent, namely, [ENTITY], the assessee. [CASE NUMBER] is an appeal filed by the Commissioner of Income-tax, Cochin, under [SECTION] of the Act challenging annexure D order of the Income-tax Appellate Tribunal passed in [CASE NUMBER][CASE NUMBER] in the matter of the assessment of the respondent, [ENTITY]. Both the proceedings relate to the assessment year 1989-90. The Tribunal had, inter alia, accepted the contention of the assessees that there was no evidence of the assessees having obtained a sum of Rs. 10,00,000 (rupees ten lakhs) by way of pakidi from their tenant one [ENTITY] to whom the ground floor of a commercial building situated by the side of M.G. Road, Ernakulam, was let out as per an unregistered lease deed executed on February 10, 1989.
2. We heard senior advocate Sri [ENTITY], appearing for the Revenue, and learned Counsel appearing for the two assessees, respectively.
3. Supporting the order of the Tribunal, learned Counsel appearing for the assessees made the following submissions before us:
4. There was no transfer of interest in immovable property either under the provisions of the Act or under the [ACT], so as to attract capital gains. The lease deed dated February 10, 1989, is an unregistered document whereunder the monthly rent reserved was Rs. 5,000 and the period of lease fixed was 20 years. It was, therefore, a compulsorily registrable instrument within the meaning of [SECTION] of the [ACT], and [SECTION] of the [ACT], Although the transaction recorded in the said instrument is a lease, legally there is no transfer of a capital asset so as to attract capital gains tax. Moreover, the document recites payment of a refundable security of Rs. 2 lakhs only. There is no whisper in the document to suggest payment of Rs. 10 lakhs by the tenant to the assessees by way of pakidi. When the document is silent about the payment of any amount by way of pakidi it is impermissible to find such a case. On the very same date on which a search was conducted in the premises of the tenant, the Department had conducted a search in the premises of one of the assessees, namely, [ENTITY]. Nothing could be unearthed to indicate receipt of any amount over and above the sum of Rs. 2 lakhs recited in the document of lease. In the absence of any circumstance to indicate receipt of any amount by way of pakidi by the assessees, it is not permissible to draw inferences founded on mere conjectures to conclude that the assessees had received a sum of Rs. 10 lakhs by way of pakidi. The solitary piece of material namely the sworn statement by [ENTITY] was not put to the assessees nor were they given an opportunity to cross-examine the said [ENTITY]. Hence, the Tribunal was right in dislodging the findings reached by the assessing authority and the appellate authority that the assessees had obtained a sum of Rs. 10 lakhs by way of pakidi and that the said amount was liable to be assessed as capital gains in the hands of the assessee.
5. After hearing both sides at length, we are of the view that the matter has to be probed further before a conclusion either way could be reached.
6. We will first examine the contention of the assessees that there was no transfer of an interest in immovable property so as to attract capital gains tax. "Capital gains" in the context of [SECTION] of the Act would mean any profit or gain arising from the transfer of a capital asset. The words "capital asset" have been defined under [SECTION] of the Act to mean property of any kind held by an assessee, whether or not connected with his business or profession. Thus, in order to attract capital gains tax there must be profit or gain arising from the transfer of a capital asset. "Transfer" in the context of the Act has to be considered with reference to the said expression as defined under [SECTION] which reads as follows:
(47) '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
(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] of the [ACT]); 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.
Explanation.For the purposes of Sub-clause (v) and (vi) 'immovable property' shall have the same meaning as in [SECTION].
(underlining by us to supply emphasis)
7. Thus, any transaction by way of any agreement or arrangement which has the effect of transferring or enabling the enjoyment of any immovable property is a transfer within the meaning of the Act. The assessees have no case that the instrument in question does not amount to a transaction by way of an arrangement having the effect of enabling the enjoyment of immovable property. Hence, the instrument in question is clearly a transfer of a capital asset and therefore any profit or gain arising out of such transfer will definitely generate capital gains.
8. Even under the general law, merely, because the instrument is a com-pulsorily registrable one by virtue of [SECTION] of the [ACT] and [SECTION] of the [ACT], the transaction in question does not become anything other than a lease transaction. The apex court had an occasion to consider this aspect of the matter in [PRECEDENT]. There also the instrument in question was an unregistered one purporting to create a lease for 5 years and, therefore, compulsorily registrable. Although the Supreme Court held that the instrument as such could not be looked into for holding that the execute thereunder was a lessee, it was observed as follows (page 399):
When lease is a transfer of a right to enjoy the property and such transfer can be made expressly or by implication, the mere fact that an unregistered instrument came into existence would not stand in the way of the court to determine whether there was in fact a lease otherwise than through such deed.
9. CIT v. T.M.B. Mohamed Abdul Khader [1987] 166 [ACT] 207 relied on by the assessees has no application to the facts of the present case. In the above decision, the proposition of law that was laid down was that in a case where there is no registered document of transfer by the assessee partner of his immovable property in favour of the firm in which he is a partner, there is no liability to capital gains. This legal position is well settled. When a partner makes over his personal asset to the firm in which he is a partner, there is no transfer involved. Similarly distribution of surplus properties of the dissolved firm among the partners after settlement of accounts also does not involve any transfer and does not require registration vide [PRECEDENT], CIT v. Juggilal Kamalapat [1967] 63 [ACT] 292 (SC) : AIR 1967 SC 401, S.V. Chandra Pandian v. S.V. Sivalinga Nadar [1995] 212 [ACT] 592 (SC) : [1993] 1 SCC 589, [PRECEDENT] and N. Khadervali Saheb v. N. Gudu Sahib [2003] 261 [ACT] 1 (SC) : AIR 2003 SC 1524. Where there is no transfer of immovable property involved in a transaction it cannot be gainsaid that there is no capital gains arising from such transaction so as to give rise to a liability for capital gains. But, that is not the position in the case on hand. Here, there is a clear transfer of interest in immovable property by the assessees in favour of [ENTITY] referred to above attracting capital gains tax on the profits and gains arising therefrom.
10. What now survives for consideration is the further question as to whether the assessees had received Rs. 10 lakhs by way of pakidi under the lease arrangement in question. The respondents/assessees are brothers. They are co-owners in respect of the commercial building constituting the subject-matter of the aforementioned lease deed. No doubt, the original assessing authority and the appellate authority placed reliance upon the sworn statement of [ENTITY], the tenant of the assessees to hold that he had paid Rs. 10 lakhs to the assessees by way of pakidi from out of his unaccounted money. The Tribunal dislodged the findings recorded by the authorities below for the reason that the assessees were not confronted with the sworn statement of [ENTITY] and that even the search conducted in the premises of one of the assessees on the very same day on which the premises of [ENTITY], the tenant were searched, did not yield any material to indicate receipt of Rs. 10 lakhs allegedly paid to the assessees. It is true that the assessees did not have the opportunity of challenging the sworn statement given by the tenant. But the fact that about 1350 square feet of commercial premises with all amenities on the ground floor of a three-storeyed building bearing Cochin Corporation Door No. 38/2154 situated in a prime location near the Jayalakshmi Textile Shop and by the side of M.G. Road, Ernakulam, were let out by the assessees to [ENTITY] on February 10,1989, fixing a monthly rent of Rs. 5,000 for a period of 20 years after admittedly receiving a refundable security deposit of Rs. 2 lakhs, cannot be lost sight of. The building is in a prime location. Both the assessees are businessmen. Their tenant, [ENTITY] is a jeweller and a partner in Geeri Pai Jewellery Shop, Broadway, Ernakulam (as is discernible from his sworn statement). The [SECTION] of the [ACT], indicates that the law does not foreclose the existence of contemporaneous oral agreements regarding such matters on which the written instrument is silent. The adjudicatory authorities cannot ignore the ground realities and the common course of human conduct and also the mercantile malpractices. It is pertinent in this context to note that the tenant of the assessees in his sworn statement has in unequivocal terms declared his unaccounted income to the tune of Rs. 17,44,226 out of which Rs. 10 lakhs was stated to be the pakidi given to the assessees. He had brought the said amounts to tax. This statement of the tenant was one made against his own pecuniary and proprietary interest because, by making such a statement, he was running the risk of incurring additional tax liability. But then, the assessees were not confronted with the aforesaid sworn statement of [ENTITY]. It would be an infraction of the cardinal principles of natural justice to rely upon a piece of material against an assessee behind his back. But then in a case where the order is vitiated for non-compliance with the principles of natural justice, the proceedings do not come to an end. Upon the quashing of the order the matter will stand restored to the stage prior to the one at which the order impugned was passed See CIT v. M. Sreedharan [1991] 190 [ACT] 604 (Ker). We are therefore inclined to give the Revenue an opportunity to pursue its case by following a fair procedure. It is well-settled that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision, the appeal is preferred, to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute See Kapurchand Shrimal v. CIT [1981] 131 [ACT] 451 (SC).
11. Since we are of the considered view that the Revenue should be given an opportunity to find out whether Rs. 10 lakhs or any amount by way of pakidi was received by the assessees from their tenant [ENTITY] while letting out their commercial building as per the lease deed dated February 10, 1989, the orders of the Tribunal, appellate authority and the original assessing authority are set aside and the matter is remitted to the original assessing authority for a revised assessment after giving the Revenue as well as the assessees an opportunity to substantiate their respective contentions. The question of law raised in the I.T.A. is answered in favour of the Revenue.
12. The [ACT] and [ACT] are disposed of accordingly.