No Capital Gain If Sale was to Protect Vendees’ Properties and to settle Legal Disputes: ITAT [Read Order]

In Padmini Chand & Anr. vs. Asstt. Commissioner of Income Tax, the Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) held that capital gain will not arise when sale deeds have been executed to safeguard the properties of the vendee and to settle legal disputes.

The assessee, Padmini Chand & Rajini Chand, were sisters who had a joint property and other properties in dispute. Many civil suits were pending in various courts. The had filed partition suit against their father. They transferred the property at below market price to one Mr. Janardhan Reddy, a family friend who had promised to look after all the suits including partition suits and other Court matters. The transfer was a security for Mr. Janardan Reddy. The assessee had neither received any money on execution of the sale deed nor did they give possession to him.

The Assessing Officer was not convinced with the averments of the assessee. He observed that the sale deed was a valid document and the property was handed over to the vendee for a consideration of Rs. 14.22 lacs and considered the transfer to be completed as per section 2(47) of the Income Tax Act,1961. He therefore, computed the Long-Term Capital Gain on the property and brought it to tax. The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the order of the A.O. Aggrieved the assessee appealed before the Tribunal.

The Counsel for the assessee argued that Shri B. Janardan Reddy, has given a declaration that the cash and cheque payments shown in the sale deed were only nominal and no such amount, has in fact, been paid by him and that he has taken blank cheques from Smt. Shantabai and her children and further that the sale deed, agreement of sale, General Power of Attorney obtained from Smt. Shantabai and others are only for the purpose of solving all the disputes relating to the property and are to be cancelled and given back to Shantabai and others after such disputes are settled. He contended that there was no transfer of property and that no Long-Term Capital Gains had arisen to the assessee.

The Departmental Representative (D.R) argued that since the sale deeds are registered, the transfer is complete and unless and until they are set aside by the Courts, the sale deeds have become final and hence the LTCG has arisen to the respective assessee’s.

The bench comprising of Judicial Member P. Madhavi Devi observed “As regards the LTCG being brought to tax by the AO, we find that the vendee himself has given a declaration, by a registered deed, that the sale deeds have been executed only in order to enable him to safeguard the properties and to settle all the legal disputes and that they shall be cancelled thereafter. In fact, the assessee’s have also filed the suits for cancellation of the sale deed which are pending before the Hon’ble Civil Courts. In such circumstances, I am of the opinion that the transfer is not complete and the capital gain therein will not arise. However, the outcome of the civil suits will determine the question of transfer and if the Civil Courts hold the transfer to be final, then in that year, the assessee’s will be liable to pay the tax on the capital gain. In view of the same, I am inclined to allow the assessee’s appeals with the above observations.”