Relinquishment of right to purchase a property in lieu of a sum was ‘transfer’; to be taxed as capital gain

Consideration received from relinquishment of right to purchase a property to be taxed as capital gain and not as income of other sources as relinquishment of right over a capital asset amounts to transfer under section 2(47).

Facts:

a)The assessee entered into an agreement to purchase a plot. As per the terms of agreement of sale, assessee paid certain sum as advance to the vendor with the understanding to pay the balance at the time of registration.

b)Since the vendor did not act upon the agreement of sale, the assessee filed a suit for specific performance, which ultimately resulted in compromise. A Memorandum of Understanding (‘MOU’) was entered into between the assessee and the land owner in terms of which assessee gave up his claim over property against consideration of Rs. 1.50 crore (including the advance of Rs. 25 lakhs paid by the assessee at the time of agreement of sale).

c)The assessee disclosed said amount as sale consideration received by him for transfer of plot and computed long term capital gain which was accepted by the Assessing Officer (AO)

. d)The CIT revised the order of AO with an opinion that amount received by the assessee from the land owner being a windfall gain, should have been assessed as income from other sources and not as long-term capital gain. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)Relinquishing or extinguishing one's right over a capital asset amounts to transfer as per section 2(47) of the Income-tax Act. Therefore, when the assessee, as per terms of the MOU, gave up his claim over the property against consideration, certainly it could be interpreted that the assessee had relinquished or extinguished his right over the property.

2)Thus, there was 'transfer' of capital asset within the purview of section 2(47) attracting capital gain.

3)The assessment order passed by AO could not be considered to be erroneous and prejudicial to the interests of revenue, only because the Commissioner considered the receipts as windfall gain and in his opinion such receipt had to be assessed as income from other sources -P. Ramgopal Varma vs. ACIT [2014] 47 taxmann.com 334 (Hyderabad - Trib.)

No capital gains when revaluation reserve is credited to partner’s capital account; not taxable under sec. 45(4)

Where revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio did not entail any transfer as defined under section 2(47), gains on revaluation could not be brought under tax net.

Facts:

a)The assessee was a partner in Cable TV advertising business. The partnership firm had revalued network rights and corresponding credit in respect thereof was given to the partners including the assessee.

b)After revaluation of network rights, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. The Assessing Officer (‘AO’) held that the revalued sum was to be charged to tax as the assessee had earned short-term capital gain.

c)On appeal, the CIT(A) confirmed the order of AO. The aggrieved-assessee filed the instant appeal

. The Tribunal held as under:

1)Crediting the amount of revaluation reserve to partner's capital account does not amount to transfer of partnership firm's assets to the individual partner. As per settled principle of law of partnership, during continuation of partnership, partners do not have separate rights over the assets of firm in addition to interest in the share of profits;

2)After revaluation also, there would neither be division of assets nor any realization of assets. Networking rights were property of partnership firm until date of its conversion into a company as per Part IX of Companies Act. Provisions of Section 45(4) would not be applicable to firm or to partners as there was no official dissolution of firm and distribution of assets of firm among partners.

3)Revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio would not entail any transfer as defined under section 2(47), hence, gains on revaluation could not be brought under tax net

4)Thus, there was no merit in the action of the lower authorities in bringing gains on revaluation under the tax net. – RAVINSHANKAR R. SINGH V. ITO [2014] 45 taxmann.com 359 (Mumbai- Trib.)