Capital Gains Tax on Immovable Property: Can Enjoyment of Property Considered Transfer?

Capital Gains arise on the occasion of the ‘transfer’ of capital assets. Section 2(47) defines transfer for the purpose of the Income Tax Act. Any transfer of a capital asset falling under this definition will trigger capital gains implications, potentially leading to a tax liability. In this article, we will understand an interesting case law that throws light on the meaning of transfer in substance, providing a deeper perspective on the incidence of capital gains.

Meaning of Transfer

Transfer under section 2(47) of the Income Tax Act means a sale, exchange, relinquishment, compulsory acquisition, etc., of a capital asset. We can broadly infer that transfer encapsulates any event or happening that makes the capital asset no longer controllable by the assessee in substance because someone else has taken control of the asset.

Seshasayee Steels P. Ltd. v. ACIT (2020) 421 ITR 46 (SC)

Seshasayee Steels P. Ltd. v. ACIT is a landmark case law which provides immense clarity on what constitutes a transfer of immovable property and what does not.

Date of Judgement

The Supreme Court passed the judgement on 4th December 2019.

Facts of the Case

1. The assessee agreed to sell his land to the Builders on 15.05.1998 for a specified sale consideration.
2. Permission was granted to Builders to advertise and start construction on the land.
3. On 19th July 2003, a memorandum of compromise was entered between the builder and the assessee, through which consideration was reduced by Rs.50 Lakh.
4. The assessee received the outstanding consideration during the financial year 2003-2004, except for the last few instalments.
5. The assessee did not file the return on income for the Assessment year 2004-2005. He did not respond to the notices received from the department, leading to best judgement assessment u/s 144. The assessment resulted in demand of payment of tax on capital gains on the transfer of immovable property.

Decision of the Supreme Court

After receiving the demand under assessment under section 144, the assessee went on appeals, and the case reached the Supreme Court. The Supreme Court held that the property had been transferred in substance on the following grounds.

1. Permission to advertise and construct on the land has already been given.
2. Significant sales consideration has already been settled during the financial year 2003-2004

Therefore, though the legal formalities pertaining to the transfer were still not complete, since the property has been transferred in substance to the buyer, the transfer is covered under section 2(47) of the Income Tax Act. 

Final Word

Therefore, capital gains implications arise if the transfer happens in substance. The transfer is said to be made in substance if significant ownership and sale consideration have been passed on as per the above case law. It is, therefore, essential to furnish capital gains income in the returns and pay the requisite tax even if the legal formalities for the transfer are still pending as long as the transfer has been made in substance.