Late Shri Gordhandas S. Garodia vs. DCIT (ITAT Mumbai)

DATE: November 1, 2017 (Date of pronouncement)
DATE: November 28, 2017 (Date of publication)
AY: 2010-11
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S. 45/ 48: The scheme of the Act is to assess real income and not hypothetical income. The word "accrue" in "full value of consideration received or accruing" in s. 45 means that the assessee has a legally enforceable right to receive the sum. An amount which is payable only on fulfillment of conditions does not create an enforceable right and has to be excluded while computing capital gains

(i) The observations of the Departmental Authorities that capital gain has to be computed on the total sale consideration, whether or not the assessee has received the amount of ` 50 crore, in our view, is legally untenable. In this context, we may refer to the relevant statutory provisions governing the issue.

(ii) A plain reading of section 45 of the Act would suggest that any profit or gain arising from transfer of a capital asset shall be deemed to be the income of the assessee of the relevant previous year, wherein, such transfer takes place. Thus, as per this provision, taxability of capital gain would depend upon arising of profit from transfer of a capital asset. Section 48 of the Act which provides the mode of computation of capital gain says that income chargeable under the head capital gain shall be computed by reducing certain amounts from full value of the consideration received or accruing as a result of transfer of the capital asset. The expression “full value of consideration received or accruing” would mean the amount actually received by the assessee or consideration which has accrued to the assessee. The expression “accrue” means a right acquired by the assessee to receive income. Unless, a debt due by somebody has been created in favour of assessee, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. An amount can accrue to assessee if he acquires a legally enforceable right to receive it from the debtor. Keeping in perspective the aforesaid statutory provisions, if we examine the facts of the present case, it cannot be said that assessee has either derived the profit or gain amounting to Rs 50 crore during the relevant previous year in terms of section 45(1) of the Act, nor it can be said that the amount of Rs 50 crore would form part of full value of the consideration received or accruing as a result of transfer of the capital asset. At the cost of repetition, we must observe that the amount of Rs 50 crore was payable to the assessee subject to fulfillment of certain conditions as enumerated in the sale deed. It is patent and obvious, the conditions as mentioned in clause 3.4 of the sale deed have not been fulfilled. Therefore, the assessee does not have any legally enforceable right under the agreement to receive the amount of Rs 50 crore. In these circumstances, computation of capital gain on the amount of Rs 50 crore, in our view, is not only improper but against the scheme of the Act. The entire purpose of the Income Tax Act, 1961 is to assess the real income of the assessee. Therefore, the Departmental Authorities cannot assess any hypothetical or notional income to tax.

(iii) Having held so, we feel it appropriate to refer to the decision of the Hon’ble Jurisdictional High Court in CIT v/s Mrs. Hemal Raju Shette, [2016] 68 319. The facts of the case are, by virtue of an agreement the assessee transferred its share holding in a particular company. As per the terms of agreement, initial consideration of Rs 2.70 crore was to be received immediately and deferred consideration of Rs 20 crore was to be received over a period of four years based on a formula. As per the working of the formula a situation may arise where no amount on account of deferred consideration could be receivable by the assessee. It so happened, the assessee could not receive part of the deferred consideration in assessment year 2006–07. However, the Assessing Officer held that, since, as per the terms of the agreement, assessee was to receive the deferred consideration in four assessment years, it is liable to pay capital gain tax.

(iv) The ratio laid down by the Hon’ble Jurisdictional High Court, as aforesaid, squarely applies to the facts of the present case. In view of the aforesaid, we hold that the amount of Rs 50 crore having neither been received by the assessee nor accrued in the financial year relevant to the assessment year under dispute, it cannot be considered as a part of sale consideration for computing capital gain in the impugned assessment year. The Assessing Officer is free to proceed in accordance with law if and when such income arises.

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