Capital Gains Tax on Property Transfers: Supreme Court Clarifies Section 2(47) of IT Act

The case of M/S Seshasayee Steels Pvt. Ltd. v. Assistant Commissioner of Income Tax is a landmark ruling on capital gains tax implications under Section 2(47) of the Income Tax Act, 1961. The Supreme Court, in its judgment dated December 4, 2019, upheld the assessment of capital gains tax on a property transaction, dismissing the appeal filed by the assessee. The ruling clarifies that capital gains tax is applicable when property rights are extinguished through an agreement, even if full ownership transfer does not occur immediately.

Background of the Case

The appellant, M/S Seshasayee Steels Pvt. Ltd., entered into an agreement to sell a property on May 15, 1998, to Vijay Santhi Builders Ltd. for Rs. 5.5 crores. The agreement allowed the builder to take possession, develop flats, and sell them to third parties. A power of attorney was also executed, granting the builder rights to execute sale agreements on behalf of the appellant.

The appellant did not file an income tax return for the assessment year 2004-05, despite executing a Memo of Compromise in 2003 that modified the payment structure and settled the property rights issue. The Income Tax Department issued a notice under Section 148 of the Income Tax Act upon discovering the transaction. Since the appellant failed to respond, the Assessing Officer completed a Best Judgment Assessment under Section 144 and taxed the entire sale consideration as capital gains.

Petitioner’s Arguments

The appellant contended that:

• The sale agreement was not completed, and possession under Section 53A of the Transfer of Property Act was not granted.
• The mere execution of an agreement did not amount to a “transfer” under Section 2(47) of the Income Tax Act.
• The agreement was modified by a Memo of Compromise in 2003, which changed the nature of the transaction.
• The tax authorities erred in treating the entire consideration as capital gains in 2004-05.

Respondent’s Arguments

The Income Tax Department argued that:

• The agreement to sell and power of attorney enabled the builder to exercise control over the property.
• The builder had advertised, developed, and sold flats, indicating effective ownership transfer.
• The Memo of Compromise reaffirmed the transfer and provided for payment terms that were fully complied with.
• The transfer fell within the scope of Section 2(47)(v) and (vi), making it taxable as capital gains.

Supreme Court’s Analysis

The Supreme Court examined the agreement to sell, power of attorney, and the Memo of Compromise and concluded:

• Possession under Section 53A of the Transfer of Property Act is not limited to physical possession; it includes legal rights conferred to a transferee.
• Clause 16 of the agreement explicitly permitted the builder to construct flats and sell them, signifying a de facto transfer of property rights.
• The Memo of Compromise reaffirmed the agreement and showed that the transfer was effectively completed.
• Section 2(47)(vi) of the Income Tax Act applies to transactions enabling enjoyment of immovable property, even if formal ownership is not transferred immediately.

The Court emphasized:

“The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression ‘enabling the enjoyment of’ takes color from the earlier expression ‘transferring’, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof.”

Key Legal Precedents Cited

The Court referred to several important rulings:

• Commissioner of Income Tax v. Balbir Singh Maini – Holding that transactions enabling enjoyment of immovable property trigger capital gains tax.
• G. S. Homes & Hotels (P) Ltd. v. CIT – Recognizing that possession and control rights can constitute a transfer under tax laws.
• Suraj Lamp & Industries v. State of Haryana – Emphasizing that property sales through agreements and powers of attorney must be scrutinized for tax implications.

Final Judgment

The Supreme Court dismissed the appeal and upheld the tax assessment:

“The assessee’s rights in the immovable property were extinguished upon receipt of the last payment. The transaction falls within the scope of Section 2(47) of the Income Tax Act, making it liable for capital gains tax.”

Impact of the Judgment

This ruling has significant implications for real estate transactions:

• It broadens the scope of “transfer” under capital gains tax laws.
• It clarifies that possession and enjoyment rights are sufficient to trigger tax liability.
• It prevents taxpayers from deferring capital gains tax through strategic agreements.
• It ensures that property transfers through powers of attorney and development agreements are properly taxed.

Conclusion

The Supreme Court’s ruling in M/S Seshasayee Steels Pvt. Ltd. v. Assistant Commissioner of Income Tax provides crucial clarity on the tax treatment of property transactions. By reaffirming the expansive interpretation of “transfer” under Section 2(47) of the Income Tax Act, the judgment ensures that real estate transactions are subject to proper tax scrutiny, closing potential loopholes used to evade capital gains tax.

Petitioner Name: M/S Seshasayee Steels Pvt. Ltd..
Respondent Name: Assistant Commissioner of Income Tax.
Judgment By: Justice Rohinton Fali Nariman, Justice Aniruddha Bose, Justice V. Ramasubramanian.
Place Of Incident: Chennai, Tamil Nadu.
Judgment Date: 04-12-2019.

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