Case: M/S SESHASAYEE STEELS P. LTD Vs. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(2), CHENNAI

1. The appellant-assessee entered into an agreement to sell, on 15.05.1998, with one Vijay Santhi Builders Limited for a total sale consideration of Rs.5.5 crores2. The important clauses of the sale agreement are set out hereinbelow:1. The consideration for the sale of the property shall be Rs. 5,50,000/- (Rupees Five Lakhs Fifty Thousand only) per ground. The total area of the property to be sold is around 100 grounds and the total sale consideration of Rs.5,50,00,000/-(Rupees Five Crores Fifty Lakhs only) will be paid directly by the nominees/members on behalf of PARTY OF THE SECOND PART or by the PARTY OF THE SECOND PART, whichever is earlier. The property shall be free of all encumbrances at the time of registration2. It is agreed that the total extent of the property is 100 grounds approximately including the areas allotted for road and other amenities, plus the actual extent available for flats12. THE PARTY OF THE FIRST PART has already handed over to the PARTY OF THE SECOND PART Xerox copies of all land documents of the schedule mentioned property for their legal counsels scrutiny and opinion. THE PARTY OF THE SECOND PART have also satisfied themselves about the title deeds. The PARTY OF THE FIRST PART agree to show the original title deed which are kept with them to the nominees of the second part as and when required after fixing prior appointment14. Both the parties are entitled to specific performance of this agreement16. THE PARTY OF THE FIRST PART hereby gives permission to the PARTY OF THE SECOND PART to start advertising, selling, construction on the land herein mentioned. Advertisements, sales catalogues and leaflets shall be approved by the PARTY OF THE FIRST PART before publication or circulation3. Pursuant to this agreement to sell, a Power of Attorney was executed on 27.11.1998, by which, the assessee appointed one Chandan Kumar, Director of M/s. Vijay Santhi Builders Ltd. to execute and join in execution the necessary number of sale agreements and/or sale deeds in respect of the schedule mentioned property after developing the same into flats. The Power of Attorney also enabled the Builder to present before all the competent authorities such documents as were necessary to enable development on the property and sale thereof to persons4. The appellant did not file any Return for Assessment Year 2004-2005. Apparently, it was detected later by the Assessing Officer, that the agreement to Sell had been entered into and that, subsequently, a Memo of Compromise had also been entered into between the parties dated 19.07.2003. Based on the discovery of this fact, Notice dated 04.11.2008 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as I.T. Act for brevity) was served on the appellant. Even in response to this notice, no Income Tax Return was filed. A notice dated 08.09.2009 was issued under Section 142(1) fixing the case for hearing on 20.09.2009. Here again, the appellant did not turn-up, as a result of which, another notice was issued dated 23.10.2009, but this time again the assessee did not turn-up, so a third letter was issued on 11.12.2009 fixing the case for hearing on 22.12.2009. In response to the aforesaid letter, the assessee, by letter dated 29.12.2009 stated as follows: -I refer to your letter dated 11.12.2009. I request you humbly and sincerely not to pass any order u/s 144 and to give me time for one month from today. I shall positively submit all necessary statements and documents within 30 days of today to your satisfaction. I seek this time only because of my very serious illness after an abdominal surgery5. Since time bar was foremost in the mind of the Assessing Officer, limitation falling on this transaction by 31.12.2009, a Best Judgment Assessment Order was then passed under Section 144 of the I.T. Act dated 31.12.2009. Vide this Order, the entire sale consideration was treated as a capital gain and brought to tax6. An appeal was preferred against this Order. The Commissioner of Income Tax (Appeals) (hereinafter referred to as CIT (A) for brevity) by Order dated 28.10.2010 examined the three documents in question and ultimately dismissed the appeal. The Income Tax Appellate Tribunal (hereinafter referred to as ITAT for brevity) by Order dated 24.06.2011 agreed with the CIT(A) and found that on or about the date of the agreement to sell, the conditions mentioned in Section 2(47)(v) of the I.T. Act could not be stated to have been complied with, in that, the very fact that the compromise deed was entered into on 19.07.2003 would show that the obligations under the agreement to sell were not carried out in their true letter and spirit. As a result of this, Section 53A of the Transfer of Property Act, 1882, (hereinafter referred to as T.P. Act for brevity) could not possibly be said to be attracted. What was then referred to was the Memo of Compromise dated 19.07.2003 under which various amounts had to be paid by the Builder to the owner so that a complete extinguishment of the owners rights in the property would then take place. The last two payments under the compromise deed were contingent upon M/s.Pioneer Homes also being paid off, which apparently was done, as the Appellate Tribunal held:Further on the specific query from the Bench as to whether all the cheques as mentioned in the compromise deed have been encashed, the answer to which was Yes. This further supports that the transfer took place during the assessment year 2004-05 as the last cheque is dated 25.01.20047. The High Court, by the impugned judgment dated 25.01.2012, adverted to the concurrent findings of the authorities, and stated that the three questions of law that were set out were all answered in favour of the Revenue and against the assessee.

Court's reasoning:
14. On a reading of the agreement to sell dated 15.05.1998, what is clear is that both the parties are entitled to specific performance.16. Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be possession within the meaning of Section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, Section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone19. Given the test stated in paragraph 25 of the aforesaid judgment, it is clear that the expression enabling the enjoyment of must take colour from the earlier expression transferring, so that it can be stated on the facts of a case, that a de facto transfer of immovable property has, in fact, taken place making it clear that the de facto owners rights stand extinguished. It is clear that as on the date of the agreement to sell, the owners rights were completely intact both as to ownership and to possession even de facto, so that this Section equally, cannot be said to be attracted20. Coming to the third argument of the learned senior counsel on behalf of the appellant, what has to be seen is the compromise deed and as to which pigeonhole such deed can possibly be said to fall under Section 2(47) of the Income Tax Act. A perusal of the compromise deed shows that the agreement to sell and the Power of Attorney are confirmed, and a sum of Rs.50 lakhs is reduced from the total consideration of Rs.6.10 crores. Clause 3 of the said compromise deed confirms that the party of the first part, this is the appellant, has received a sum of Rs.4,68,25,644/- out of the agreed sale consideration. Clause 4 records that the balance Rs.1.05 crores towards full and final settlement in respect of the Agreement entered into would then be paid by 7 post-dated cheques. Clause 5 then states that the last two cheques will be presented only upon due receipt of the discharge certificate from one M/s. Pioneer Homes21. In this context, it is important to advert to a finding of the ITAT, which was that all the cheques mentioned in the compromise deed have, in fact, been encashed22. This being the case, it is clear that the assessees rights in the said immovable property were extinguished on the receipt of the last cheque, as also that the compromise deed could be stated to be a transaction which had the effect of transferring the immovable property in question23. The pigeonhole, therefore, that would support the orders under appeal would be Section 2(47)(ii) and (vi) of the I.T. Act in the facts of the present case.