Month: April

1.1. The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.

2. Particulars in a Statute:
Every enactment normally contains Short title; Long title; Preamble; Marginal notes; Headings of a group of sections or of individual sections; Definition of interpretation clauses; Provisos; Illustrations; Exceptions and saving clauses; Explanations; Schedules; Punctuations; etc. Title may be short or long. Preamble contains the main object. Marginal notes are given. Chapters and Headings are group of sections. In the Finance Bill, Memorandum containing explanation on every clause, intent and purpose for the proposal is given. Central Board of Direct Taxes issues Circulars explaining each clause. Finance Minister in his speech refers to the proposed insertions, amendments, alterations, modifications etc. It is highly desirable to go through such material apart from unmodified provision for proper understanding, pleadings and arguments.

3. Classification of the Statute:
Statute can be of various classifications. Providing date of commencement, territorial jurisdiction, mandatory or directory, object, whether codifying or consolidating or declaratory or remedial or enabling or disabling, penal, explanatory, amending retrospective or retroactive or repeal with savings or curative, corrective or validating. Applicability can be on all the subjects or class of persons or specified territorial area or specified industries etc. Assent of the President is a requisite condition. Rules have to be framed by the rule making authority and to be operative from specified date or notified date.

4. The General Principles of Interpretation:
Broadly, the general principles, as applied from time to time by the Courts are : The literal or grammatical interpretation; The mischief rule; The golden rule; Harmonious construction; The statute should be read as a whole; Construction ut res magis valeat quam pereat; Identical expressions to have same meaning; Construction noscitur a sociis; Construction ejusdem generis; Construction expression unius est exclusion alterius; Construction contemporanea exposition est fortissimo in lege; etc. Taxation statutes collecting taxes, duty, cess, levies, etc. from the subjects, have to be beneficially and liberally construed in favour of the tax payers. Penal statutes have to be construed strictly and the benefit of doubt to go to the culprit. Penalty provisions are a civil liability, but have to be construed reasonably. Penalty is corrective and not revenue earner. Levy of interest is compensatory and is treated as mandatory. Charge should be specific and there must be satisfaction of the authority issuing show-cause and levying penalty.

4.1. Other statutes in pari-materia have to be cautiously applied and if phraseology and intent is identical, may apply. Ratio decendai may also apply. Amending statutes are normally prospective unless specifically stated as retrospective. There are mandatory and directory or conjunctive and disjunctive enactments. There exist internal or external aids to interpretation. There can be retrospective, prospective or retroactive operation of a provision. Many maxims are used for interpretation. While interpreting tax laws ‘Double Taxation Avoidance Agreements’ have to be considered as supreme and would prevail even if meaning and language in the statute is different and there exists a confrontation. No provision should be in infringement of the Constitution and it should not be violative or unconstitutional but intravires – not ultravires. Certain issues may be resintegra or nonintegra.

4.2. There are binding precedents under articles 141 and 226 – 227 of the Constitution of India. Even order of the Income Tax Appellate Tribunal and High Court, other than the jurisdictional High Court, have to be respected. Judgment of larger bench as well as co-ordinate bench has to be followed unless and until raised issue is referred to the President of the Income Tax Appellate Tribunal or the Chief Justice, as the case may be, for constituting a larger bench. Judgment of the Constitutional Bench prevails over judgments of lower authorities and single benches. However recently it has been noticed that even orders of the Income Tax Appellate Tribunal or Single or Division Bench of High Courts have been referred and considered, if no appeal has been filed by the Revenue and their ratio has been accepted impliedly or explicitly.

4.3. The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Provisions of Civil Law, Criminal Law, Hindu Law, Evidence Act, Transfer of Property Act, Partnership Act, Companies Act and other specific, relevant and ancillary laws equally apply unless until a different provision is enacted in tax statute and such laws expressly excluded. As analysed, about 108 Acts other than tax statutes need be read, referred and relied upon to make an effective representation, knowledge whereof is imperative.

4.4. Ordinances are also issued, which have limited life, till the statute is enacted or for the specified period. Its purpose is to be operative during the intervening period, where after it automatically lapses. Circulars, instructions, directions are issued statutorily as well as internally, which are binding on tax administration, but not on a tax payer. By such circulars, scope of exemption, deduction or allowance can be expanded, even though literal meaning of the relevant provision may be to the contrary; being beneficial to the tax payer.

5. The Tax and Litigation:
Return is filed. Assessment is framed by the assessing authority. First appeal lies with the Commissioner of Income-tax (Appeals), a superior assessing authority. Second appeal lies, and lis commences, on appeal to the Income Tax Appellate Tribunal. Income Tax Appellate Tribunal is final fact finding body. Third appeal lies with the Division Bench of the jurisdictional High Court, on substantial question of law and finality is given by the Supreme Court, where an appeal as well as a Special leave Petition can be filed. Appeal is statutory and S.L.P. is discretionary. Scope is larger on SLP. Revisional power is with the Commissioner of Income-tax u/s. 263 as well as 264. Writ remedy can be availed before the jurisdictional High Court, if there is no alternative, effective, efficacious remedy of appeal or if there is lack of jurisdiction or violation of principles of natural justice or perversity or arbitrariness, disturbing conscious of the Court. The Hon’ble High Courts are slow in permitting writ jurisdiction. Even notice u/s.148 can be challenged by writ, on lack of jurisdictional requirements. Substantial disputes can be settled through the medium of Income Tax Settlement Commission and Dispute Resolution mechanism. Interpretation of documents is a substantial question of law as held by the Apex Court in Unitech Ltd. vs. Union of India (2016) 381-ITR-456 (S.C.).

5.1. Eminent Jurist Cardozo states, “You may say that there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. I am not disposed to deny this, but in my view it is quite beside the point. The point is rather that this power of interpretation must be lodged somewhere, and the custom of the Constitution has lodged it in the Judges. If they are to fulfill their function as Judges, it could hardly be lodged elsewhere. Their conclusions must, indeed, be subject to constant testing and retesting, revision and readjustment; but if they act with conscience and intelligence, they ought to attain in their conclusions a fair average of truth and wisdom.”

5.2. Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted i.e. by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the constitution.

5.3. No tax can be imposed by any bye-law, rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax.”

5.4. Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. vs. State of Rajasthan (1970) 26-STC-341; the apex court while upholding the classification made on the basis of the value of sold garments, held that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. The same view has been taken in State of Gujarat vs. Shri Ambica Mills Ltd., (1974) 4-SCC-916. In ITO vs. N. Takin Roy Rymbai (1976) 103-ITR-82 (SC); (1976) 1 SCC 916, the apex court held that the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.

5.5. With National litigation policy of the Government of India, the Central Board of Direct Taxes issued Instruction No. 5 dated July 10, 2014 and lately in exercise of powers conferred u/s. 268(A) of the Income-tax Act issued Circular dated December 10, 2015 bearing No. 21 of 2015, enhancing monetary limits for an appeal before the Tribunal exceeding tax Rs. 10 lakh, before the High Court exceeding tax Rs. 20 lakh and before the Hon’ble Supreme Court exceeding tax Rs. 25 lakh with specified exceptions. Tax would not include interest. Same limit for penalty appeals. It applies to pending appeals and references. Writs have been excluded. The instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits may be withdrawn or not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.

5.6. The Hon’ble Bombay High Court in C.I.T. vs. Sunny Sounds Pvt. Ltd. (2016) 281-ITR-443 (Bom.) at 452 observed: “The need for the Central Board of Direct Taxes to issue the December 15, 2015, Circular and to clarify that it would apply retrospectively to govern even pending appeals arose on account of the enormous increase in the number of appeals being filed by the Revenue over the years”. It also observed: “This policy of non-filing and of not pressing and/or withdrawing admitted appeals having tax effect of less than Rs. 20 lakh has been specifically declared to be retrospective by the Circular dated December 10, 2015. There is no reason why the circular4 should not apply to pending references where the tax effect is less than Rs. 20 lakh as the objective of the Circular would stand fulfilled on its application even to pending references”. Ultimately reference application of the Revenue was returned unanswered. The Ahmedabad Bench of I.T.A.T. in Dy. Commissioner vs. Some Textiles & Industries Ltd. and Others (2016) 175-TTJ (Ahd.) 1 by Order dated 15.12.2015 have also held so for pending appeals. Thus cost of the Government has been saved. Fairly large number of pending appeals have been / are being withdrawn. Appeals / References which fall under the Circular as interpreted by the Courts and Tribunals need be brought to the notice of the relevant forum or the concerned Commissioner for its expeditious withdrawal. It is ‘Professional Social Responsibility’ of each one of us. I have noticed department is slack and is not filing withdrawal applications or providing lists to the I.T.A.T./ High Courts. It is improper.

5.7. Regularly at short intervals, Voluntary Disclose or Declaration Schemes and Schemes to reduce / waive outstanding demands like Kar Vivad Samadhan Scheme etc. are introduced. The Finance Bill, 2016 also introduces (1) The Income Declaration Scheme, 2016; (2) The Direct Tax Dispute Resolutions Scheme, 2016, benefit whereof deserves to be availed of by the eligible persons. It is advisable to cut down tax disputes, purchase peace and concentrate on earning income after developing tax culture. Our duty is to guide clients for payment of due and legitimate taxes.

5.8. In tax administration, accountability is absent, work culture is missing and slackness is apparent. High pitched additions are made, arbitrarily, capriciously, with perversity and malafides. Corruption is flagrant. The Raja Chelliah report suggested that black marks be given to such officers, whose additions do not stand test of appeal. But the same was not accepted. However, by the Finance Bill, 2016 some steps towards accountability and expeditious are proposed. Such steps need to be implemented vigorously to usher in discipline. Many more measures are necessary and expedient in the interest of just collection.

6. Charging and Machinery Provision :

The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others (1998) 229 ITR 1 held: “The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word “individual” in the charging section cannot be stretched to include entities which had been deliberately left out of the charge.

6.1. The charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC 37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC), India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955) 27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab (1963) 48-ITR-1 (SC).

6.2. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature, manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only when the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. Liberal and strict construction of an exemption provision are, as stated in Union of India vs. Wood Papers Ltd. (1991) 83-STC-251 (SC) “to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject. But once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”

6.3. The Apex Court in C.I.T. vs. Calcutta Knitwears (2014) 362-ITR-673 (S.C.) stated: “The courts, while interpreting the provisions of a fiscal legislation, should neither add nor subtract a word from the provisions. The foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule”. It also observed: “Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear and apparent. Hence, departure from the literal rule should only be in very rare cases, and ordinarily there should be judicial restraint to do so” and : It is the duty of the court while interpreting machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not to be hesitant in espousing a common sense interpretation of the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat it”.

Position under Transfer of Property Act, 1882:
Before
discussing the position under the Income-tax Act, it would be
imperative to understand the implications under the General Law i.e.
Transfer of Property Act. Section 54 of Transfer of Property Act
provides that ‘A contract for the salel of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties. It does not, of itself, create any interest in or
charge on such property.’ As the section expressly provides, an
agreement to sell is merely a contract for sale on agreed terms and the
agreement itself does not create any right or interest in the property.
It is therefore considered as a contract between the parties with
ensuing respective contractual obligations. In so far as the property is
concerned, no right in the property is affected. The parties to the
contract however get a right of specific performance of contract under
Specific Relief Act. This right of specific performance is a right
independent of the right in the property. This right is also construed
as right to obtain conveyance.

Further, section 40 of Transfer
of Property Act provides that where a third person is entitled to the
benefit of an obligation arising out of contract, and annexed to the
ownership of immovable property, but not amounting to an interest
therein or easement thereon, such right or obligation may be enforced
against a transferee with notice thereof or a gratuitous transferee of
the property affected thereby, but not against a transferee for
consideration and without notice of the right or obligation, nor against
such property. E.g., A sells Sultanpur to C. C has notice of the fact
that there is a contract of sale between A and B. B may enforce the
contract against C who is a third person and stranger to contract just
as he could enforce it against A. This provision is based on equity.
Accordingly, although a contract for sale does not create any interest
in land or charge upon it yet, it does create an obligation annexed to
ownership of property. However, it is to be seen that this obligation is
not enforceable against a transferee for consideration who had no
notice of the earlier contract.

Part Performance:
It
would also be necessary to appreciate the provisions of Part Performance
u/s. 53A of the Transfer of Property Act. As the provisions of section
53A where any person contracts to transfer for consideration any
immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract taken possession of the property or part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract and the transferee has performed or willing to perform his
part of the contract, then notwithstanding that the contract, though
required to be registered, has not been registered, or, where there is
an instrument of transfer, that the transfer has not been completed in
the manner prescribed therefore by the law for the time being in force,
the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or
continued in possession, other than a right expressly provided by the
terms of the contract:

Provided that nothing in this section
shall affect the rights of a transferee for consideration who has no
notice of the contract or the part performance thereof.

This
doctrine is a step subsequent to the execution of agreement to sell. It
applies where the transferee is in possession of the property in
pursuance of agreement for transfer of the property and he is willing to
perform his obligation under the agreement, then transferor is debarred
from claiming any right against the transferee. This doctrine gives a
right to the transferee to protect his possession and does not create a
title in the property. This right can be used as a shield but not as a
sword. This is based on the principle of equity However, the proviso to
section 53A further makes it clear that the right under this section
does not affect the right of a transferee who is different than the one
with whom the agreement to sell is made.

Thus it can be seen
that under both the situations above, there is no transfer of any right
in the property to the transferee but they give some other rights in
different forms. In case of Agreement to sell, the purchaser gets right
of specific performance of the agreement and in case of part
performance, the purchaser is entitled to protect his possession. The
transferor can transfer the property to third person and the new
transferee for a consideration who has no notice of such earlier
agreement gets proper title.

Position under Income-tax Act:

The  right  arising  fromthe  agreement  to  sell  has  been explained in various decisions. Since, the agreement to sell does not create rights in the assets, there have been instances where the assessee claimed specific performance of the contract and in that process, the amount received by assigning the right of specific performance was claimed to be capital receipt. While dealing with such question, the hon. Bombay high Court in case of CIT vs. Tata Services 122 ITR 594 held a contract of salel of land is capable of specific performance. It is also assignable. therefore, such right to obtain conveyance was ‘property’.
 

As contemplated by section 2(14). in that case, the assessee entered into an agreement with Seth Anandji Haridas for purchase of 5,000 sq. yards of land situated at  Bombay,  @  Rs.  175  per  sq.  yard  and  paid  earnest money of Rs. 90,000. the vendor was to obtain requisite permission from municipal and other authorities at his cost. the agreement of purchase was to be completed within 6 months of its execution. if the permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement and the earnest money was to be refunded. the vendor could not obtain requisite permission  and  wanted  to  cancel  the  agreement.  this was  not  accepted  by  the  assessee.  finally,  a  tripartite agreement was entered into among Seth anandji haridas, the assessee and m/s advani & Batra. in consideration, the assessee received a sum of Rs. 5,90,000 from m/s. advani & Batra, consisting of rs. 5 lakh as consideration for transfer and assigning its rights, etc., and Rs. 90,000, being the earnest money paid to Seth anandji haridas. the tribunal held that it was a case of transfer of a capital asset. the case of the assessee was that the agreement for sell did not create any interest or right in land in favour of  the  assessee  as  per  section  54  of  the  transfer  of property act.  the  amount  of  Rs.  5,90,000  was  merely compensation and not consideration of transfer of any right, etc. in the land as the assessee did not own any asset as contemplated by section 2(14) of the act. the hon’ble Court pointed out that as per section 54 of the transfer of property act, a contract for sell of immovable property does not by itself create any interest in such property. However, it was difficult to see how the aforesaid provisions were applicable to the facts of the case. It was nobody’s case that the aforesaid agreement gave rise to a right in the land which was agreed to be sold by Seth anandji  haridas  and  purchased  by  the  assessee.  the case  of  the  revenue  was  that  under  the  agreement  to sell, the assessee had a right to obtain a conveyance of the immovable property. This right of conveyance either get extinguished or was assigned in favour of m/s. advani & Batra for a consideration, of rs. 5,90,000. the hon’ble Court referred to the definition of ‘capital asset’ given in section 2(14) of the act and pointed out that it has a wide ambit. The hon’ble Court also referred to the provisions of section 2(47) of the Act, which defines the term ‘transfer’ to include the sell, exchange, relinquishment of asset    or extinguishments of any right therein, etc. It was also pointed out that a contract of sell of land is capable of specific performance. It is also assignable. Therefore, such right to obtain conveyance was ‘property’ as contemplated by section 2(14). This right was assigned in favour of m/s. advani & Batra and, therefore, it amounted to transfer of right by way of extinguishment of any right therein. a similar view has been taken in the following cases–

CIT vs. Vijay Flexible containers 186 ITR 693 Bom,
K. R. Shrinath vs. ACIT 268 ITR 436 Mad CIT vs. H. Anil Kumar 237 CTR 537 Kar

The above decisions imply that the right acquired under agreement to Sell is a right which is a capital asset since the definition of Capital asset u/s. 2(14) provides property of any kind. it further implies that this right is different than the property itself. The agreement to Sell gives rise to a right which is separate and independent right than the right in the property itself. Applying this principle of law,  in cases where the assessee enters into agreement to sell with the intention to purchase a flat to be constructed in a scheme by a builder, and if the rights are sold before possession and conveyance, the capital gains are chargeable on account of transfer of rights arising out of the agreement to sell.

Right to sue:
The right to obtain specific performance or right to obtain conveyance is further distinguished from right to sue. in a given case, if after agreement to sell, one of the party refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. there is no other right flowing from the contract except the right to complain about breach and sue for damages or specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. Once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee’s rights therein since such a transfer would be hit by section 6(e) of the transfer of property act. Section 6(e) provides for exceptions to property that can be transferred. it provides in clause (e) that a mere right to sue cannot be transferred. in such situation, the amount received an account of damages would not be chargeable under the head capital gains. Gujrat high Court in case of Baroda Cement & Chemical Ltd vs. CIT 158 ITR 636 has adopted this line of proposition. In order to find out the exact nature of amount received by the assessee   as to whether it is from assignment of right attracting capital gains or purely damages for breach of contract  to be treated as capital receipt, it would be essential      to refer to the agreement minutely and determine the exact transaction.

Period of holding:
The next question  is as to the period of holding. for the purpose of determining the nature of capital gains as to long term or short term, the period of holding is relevant. the question arises as to which date, the capital asset was acquired, the date of agreement to sell or the date of possession or actual conveyance. Section 2(42a) defines short term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. as per this section, the period for which the asset was held by the assessee is to be seen. the interpretation of the word ‘held’ requires attention. the term can be understood to mean held as a legal owner in which case the date of acquiring the legal title would be relevant or the term ‘held’ can be interpreted to include beneficial ownership as well without the legal title.  the  Bombay  high  Court  in  case  of  CIT  vs.  R.  R. Sood 161 ITR 92 held that it is well-settled in law that     a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. all that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. the fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. at best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. However, the punjab  & haryana high Court in case of CIT vs. Ved Parkash & Sons (HUF) 207 ITR 148 has taken a different view on the question. in the case before the punjab & haryana high Court, the assessee entered into an agreement for sell and was put into possession on the same day. the consideration was to be paid in installments. When the last installment was paid, the same day the property was sold. the capital  gains was assessed as short  term  by ao. the high Court held that from the bare reading of section 2(42A) of the act, word `owner’ has designedly not  been  used  by  the  legislature.  The  word  `held’ as per dictionary meaning means to possess, be the owner, holder or tenant of (property, stock, land. ). Thus, person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of agreement, etc. Conversely, all such other persons who may be termed as lessees, mortgagees with possession or persons in possession as part performance of the contract would not, in strict parlance, come within the purview of an `owner’. As per Shorter oxford dictionary, edition 1985, `owner’ means one who owns or holds something; one who has the right to claim or title to a thing. the assessee in terms of agreement to sell having been put in possession, remained in its occupation as of right and thus for all intents and purposes was its beneficial owner from the start. the capital gain was a long-term capital gain. the meaning of beneficial ownership was also adopted in case of decision of itat in A. Suresh Rao vs. ITO 144 ITD 677 (Bang). The decision of the Bombay high Court in case of r. r. Sood was before the amendment to Section 2(47) by which the concept of part performance u/s. 53a of transfer of property act was recognised for the purpose of transfer. The meaning of beneficial ownership may be possible and if the assessee is in possession of the property as a beneficial owner and is beneficially enjoying it, such date can be suitably adopted for computing the period of holding. Other relevant and supporting factors for claiming beneficial ownership could be the municipal bill, the electricity connection or income from the property if assessed in his hands. On the other hand, if the rights to obtain conveyance are transferred, the date of agreement would be the date relevant for computing period of holding as held in Gulshan Malik vs. CIT 102 DTR 354 (Del) in which case the booking rights were transferred.

Nature of Transaction of sale: The transaction of sale of property may involve two stages. first,  the  stage  of  agreement  to  sell.  if  the  agreement is entered into and thereafter it becomes matured for conveyance by fulfillment of the respective obligations from both sides, it would be a transaction of sell of property i.e land or building. the agreement to sell gives rise to right of specific performance but if the conditions are fulfilled, the right thereafter gets merged or converted into ownership after the purchase of the property. if however, the terms are not fulfilled; either party has option to use their right of specific performance under Specific Relief Act. The suit for specific performance may have various outcomes. The Court may direct for specific performance in a given case or the parties may arrive at the settlement involving assignment of this right to someone else or the party may accept pure damages. in such cases where the right is assigned, it would be a transfer of right to obtain specific performance liable for capital gains u/s.
45. It is essential to carefully identify in a given situation as to whether is it transaction of sale of property itself or transfer of right of obtaining conveyance in pursuance of agreement to sell.

Transfer u/s. 2(47):
In both the situations, the point at which the transfer u/s. 2(47) needs to be determined. In the case where the right is surrendered, the transfer u/s. 2(47) would arise at a time when the agreement for surrender of such right is entered into. in other case where the agreement to sell is to be acted upon by fulfilling the obligations, section 53A would be applicable. Section 2(47) was amended in 1987 which enlarged the scope of transfer to transaction contemplated  u/s.  53A of  transfer  of  property act. the CBDT’s Circular no. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses :

“11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or aop or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. transactions, of the nature referred to above are not required to be registered under the registration act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi- storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in sectiosssssn 53A of the transfer of property act, 1882. now sub-cls. (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.”

The above amendment makes it clear that earlier, there was no transfer unless conveyance deed was executed. To prevent avoidance of capital gains liability to indefinite period, the scope of transfer was widened and the event of transfer was preponed to the stage of contemplated under part performance u/s. 53a of transfer of property act.  This  goes  to  show  that  the  mere  execution  of agreement to sell did not trigger transfer u/s. 2(47) of the property. Specifically in the context of purchase of property, the transfer has to be seen with reference to clause (v) of section 2(47) dealing with part performance. The necessary event would therefore be the obtaining of possession by the transferee in pursuance of agreement to sell.

Decision of The supreme court in The case of Sanjeev Lal:
in the case before the Supreme Court, the agreement to sell was made in 2002. the assessee received Rs. 15 lakh out of total consideration of rs 1.32 crore. the assessee purchased  new  house  on  30-4-2003.  thereafter,  there were suits filed challenging the will document by which the assessee had acquired the  property.  Because  of the interim order of the court of civil suit restraining the parties to deal with the property, the sell deed could not be executed. the dispute was resolved and then the sell deed was executed on 24-9-2004. The assessee claimed the capital gains to be exempt since the gain was invested in new house. the claim was rejected on the ground that the transfer took place in 2004. Since the new house was purchased before one year prior to the date of transfer, the exemption was held to be not allowable by the learned ao.  the  matter  reached  upto  the  Supreme  Court.  in dealing with the question of transfer the Supreme Court held that-

1.    An agreement to sell gives rise to a right in personam in favour of transferee. It gives right of specific performance if vendor is not executing sell deed.
2.    Some right in respect of capital asset had been transferred in favour of vendee which got extinguished because after agreement to sell as it was not open to the appellants to sell the property to some one else in accordance with law. There was a transfer u/s. 2(47) on agreement to sell.
3.    Purposive interpretation should be given while considering a claim of exemption. Since the amount was invested in new house, the assessee was entitled to exemption u/s. 54.

The  immediate  question  that  is  raised  in  one’s  mind  is that does it lay down the law that transfer of property u/s. 2(47) gets triggered on agreement to sell. As discussed earlier considering the provisions of section 2(47), the amendment in 1987 so as to insert clause (v) thereby encompassing the situation of part performance within the meaning of transfer, the reading of the decision to that effect may not be appear to be in consonance with the existing or prevailing provisions of the act. The provisions of transfer of property also do not provide for any express bar for the transferor to sell the property to third person. the agreement to sell gives rise to independent right of Specific Performance without affecting the title of the owner or transferor. Even the obligation attached to the property in view of section 40 of the transfer of property act does not bind the third person is he has no knowledge of the contract.

In view of this inconsistency between the above interpretation of the decision and the prevailing law, the decision could not be understood to be laying down the law on transfer u/s. 2(47) for agreement to sell in general. the Supreme Court’s verdict was on the whole question as to the transfer of property u/s. 2(47) as also the exemption u/s. 54. Since the assessee had invested the capital gain in new asset, the Supreme Court proceeds to adopt purposive interpretation and did not hesitate to hold that the transfer was effected u/s. 2(47) on agreement  to sell appreciating that ultimately the legislature did not want to burden the tax payer if he invested in prescribed asset. If one looks at the decision as a whole question, it can be said that the decision is in the specific context of facts and law before them. The obvious reason for such view is that the Supreme Court decides not to go into the law on transfer in general but restricts itself to question of exemption rws transfer u/s. 2(47). In the context of general law, the Supreme Court makes a categoric observation in para 20 of the decision that the question as to whether the entire property can be said to have been sold at the time when agreement to sell is entered into, in normal circumstances has to be answered in the negative. The entire discussion of the Supreme Court in connection with transfer u/s. 2(47) is in the background of exemption u/s. 54 which appears expressly in the judgement.

In  the  context  of  general  law,  section  52  of transfer  of property act is based on a doctrine called “Lis Pendens” meaning during the pendency of any suit regarding title of a property, any new interest in respect of that property should not be created. in essence, the provision prohibits transfer of property pending litigation. This aspect though crucial in general law could not prevail the mind of the Supreme Court as it did not find relevant for deciding the question before them.

Similar situation arose before Supreme Court in case of CIT vs. Sun Engineering Works P. Ltd. 198 ITR 297 in which the Supreme Court had to interpret the judgement of Supreme Court in case of V. Jaganmohan Rao vs.  CIT reported in 75 ITR 373. it was urged before the Supreme  Court  that  in  case  of  jaganmohan  rao,  the Supreme Court has taken a view that in reassessment proceedings, the entire assessment is reopened and the original assessment is wiped off. The Supreme Court in case of Sun engineering held that to read the judgment in  V.  jaganmohan  rao’s  case  (supra),  as  laying  down that reassessment wipes out the original assessment and the reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete  “law”  declared  by  this  Court.  the  judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned :”it is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” The above observations thus help us in interpretation of the decision in Sanjeev lal’s case.

Conclusion:
Agreement to sell in the literal as also in legal sense means, a contract or agreement to transfer property on agreed terms. It needs to be perceived as a contractual arrangement to be fulfilled in future. The taxability on transfer of property may not be guided by the agreement to  sell.  The  verdict  of  Supreme  Court  needs  to  be interpreted being restricted to the question before it in light of the discussion above. However, the agreement to sell is an essential document to find out and determine the exact nature of property that is transferred and its chargeablity to capital gains.