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Hira Lal Ram Dayal v. Commissioner Of Income Tax
Factual and Procedural Background
The assessee, a Hindu Undivided Family (HUF) constituted by Shri Chanan Ram as karta and his sons, owned a gram-dal and cotton ginning factory at Dabwali. For the assessment year 1963-64, the assessee declared a loss of Rs. 1,394, but the Income Tax Officer (ITO) determined the total income at Rs. 1,42,560. The assessee had executed a registered sale deed on 14th June 1962, selling the factory to a co-operative society for Rs. 1,31,400. During assessment proceedings, the assessee claimed the sale was a sham transaction with no capital gains accruing, which was disbelieved by the ITO and upheld by the Appellate Assistant Commissioner (AAC) and the Tribunal. The Tribunal treated the registered sale deed as conclusive evidence and rejected the assessee's contention, despite the property being repurchased by the assessee later in the year. The assessee sought legal references from this court under section 256(2) of the Income-tax Act, 1961, on questions of law arising from the Tribunal's order. Additionally, penalty proceedings under sections 271(1)(a) and 271(1)(c) were initiated, and corresponding questions of law were also referred to this court for opinion.
Legal Issues Presented
- Whether it is open to the assessee to prove that the sale transaction evidenced by the registered sale deed was a sham transaction and no sale in fact took place?
- Whether the amount of capital gains liable to assessment has been correctly computed in accordance with the provisions of Section 55(2) of the Income-tax Act, 1961?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty under section 271(1)(a) of the Income-tax Act, 1961, was exigible?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty under section 271(1)(c) read with Section 274(2) was exigible in the instant case?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indian Registration Act, 1908 | Registered documents are to be given evidentiary value and cannot be ignored lightly. | The Tribunal erred in treating the registered sale deed as conclusive proof, refusing to consider other evidence to prove the transaction was a sham. |
| Section 256(2) of the Income-tax Act, 1961 | Procedure for referring questions of law arising out of Tribunal orders to the High Court. | The court accepted the petition under this section and directed the Tribunal to refer specific questions of law. |
| Sections 271(1)(a), 271(1)(c) and 274(2) of the Income-tax Act, 1961 | Provision for imposing penalties for concealment and furnishing inaccurate particulars of income. | The court referred penalty-related questions of law to itself for opinion, pending determination of the main factual issue. |
Court's Reasoning and Analysis
The court found that the Tribunal committed a legal error by holding the registered sale deed as conclusive proof of the sale transaction without considering other evidence. While recognizing the evidentiary value of a registered document under the Indian Registration Act, 1908, the court emphasized that such a document is not the final word if the assessee can provide cogent evidence to prove that no actual sale took place. The court explained that capital gains accrue only if a genuine sale or transfer occurs. Therefore, the Tribunal should have examined the additional material presented by the assessee to determine whether the sale was a sham transaction. The court rejected the Tribunal's view that ignoring the registered deed would defeat the purpose of the Registration Act, clarifying that the real question is the factual existence of a sale and the actual sale consideration, which the Income Tax authorities must evaluate. Consequently, the court decided the first question of law in favor of the assessee, holding that the Tribunal must reconsider the matter on the proper facts. As the answer to the first question affects the computation of capital gains and penalty proceedings, the court declined to answer the other referred questions, leaving them to be decided by the Tribunal after proper fact-finding.
Holding and Implications
DISPOSED OF
The court held that the assessee is entitled to prove that the registered sale deed was a sham transaction and that no actual sale took place. The Tribunal erred in refusing to consider evidence beyond the registered document. The question of capital gains computation and penalty imposition must be reconsidered by the Tribunal in light of this principle. The direct effect is that the matter is remanded for fresh consideration of the factual issues by the Tribunal. No new precedent was established beyond clarifying the evidentiary approach to registered documents in tax assessments.
1. This judgment will dispose of Income-tax References Nos. 98, 99 and 100 of 1974.
2. Brief facts giving rise to these references are that, the assessee is a HUF constituted by Shri Chanan Ram, karta, and his sons, Shri Niranjan Dass, Nathu Ram and others. The previous year relevant to the assessment year 1963-64 ended on 31st March, 1963. The assessee showed a loss of Rs. 1,394. The ITO determined the total income at Rs. 1,42,560.
3. The assessee had executed on 14th June, 1962, a registered sale deed in favour of a co-operative society known as the Mandi Dabwali Haryana Handmade Paper and General Works Production-cum-Sale Co-operative Industrial Society Ltd. purporting to sell for Rs. 1,31,400, the assessee's gram-dal and cotton ginning factory at Dabwali, During the assessment proceedings, the assessee pleaded that the said sale was a sham transaction and there was no capital gain accruing to the assessee. The ITO disbelieved the assessee's version. The appeal by the assessee before the AAC failed.
4. In second appeal, the Tribunal considered the registered sale deed as a sacrosanct document bearing the seal of the Government and rejected the plea of the assessee holding that such a plea was " preposterous and dishonourable ", It may be observed that the same property was re-purchased by the assessee on 3rd December, 1962, for a sum of Rs. 1,20,000 and the Tribunal repelled the contention of the assessee holding that the re-sale was a transaction subsequent to the transaction of sale and thus was of no assistance to the assessee. The assessee's appeal was dismissed by the Tribunal. The assessee then approached the Tribunal requesting for a reference of the questions of law arising out of the order of the Tribunal to this court but the said prayer was refused. The assessee then made a petition under section 256(2) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), and his petition having been accepted by this court, the Tribunal was directed to refer the following questions of law to this court for its opinion :
"(1) Whether it is open to the assessee to prove that the sale transaction evidenced by the registered sale deed was sham transaction and no sale in fact took place ?
(2) Whether the amount of capital gains liable to assessment has been-correctly computed in accordance with the provisions of Section 55(2) of the Income-tax Act, 1961 ?"
5. The proceedings against the assessee under sections 271(1)(a) and 271(1)(c) of the Act were also initiated. The penalty was imposed on the assessee and in these penalty proceedings, the assessee also approached this court and his petition having been accepted, the Tribunal was directed by this court, to refer the following question of law in I.T. Reference No. 98 of 1974 for its opinion under section 271(1)(a) of the Act:
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty under section 271(1)(a) of the Income-tax Act, 1961, was exigible ?"
6. As regards the proceedings under section 271(1)(c) of the Act, on the direc-tion of this court, the following question of law has been referred to this court for its opinion in I.T. Ref. No. 100 of 1974 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty under section 271(1)(c) read with Section 274(2) was exigible in the instant case ?"
7. After hearing the learned counsel for the parties, we are of the opinion that the Tribunal fell in legal error in recording the following finding;
" If we are to ignore a document which is duly registered with the Sub-Registrar, we will be defeating the purpose of the Indian Registration Act of 1908, when an assessee intends to derive certain benefits from a statute, and that too the Indian Registration Act, where the registration of a document is a condition precedent and he cannot ignore the document so * registered, much less can we. Therefore, when the assessee contends that the sale deed executed and registered with the Sub-Registrar should be taken to be a sham and a bogus document and should be ignored we can do no better than condemn his contention, a contention which, if we may say so, is preposterous and 'dishonourable. We will not go by any other consideration but the one that the document before us is a registered document duly registered with the Sub-Registrar, and whatever it says has to be accepted on its face value. We have, therefore, no hesitation in agreeing with the revenue authorities that the registered document is a genuine one and because the said document shows a consideration of Rs, 1,31,400 the sale consideration which passed is Rs. 1,31,400. The cost of the assets as shown is Rs. 12,887, Therefore, the capital gain has been rightly computed at Rs. 1,18,513 which we confirm."
8. It is no doubt true that the evidentiary value has to be attached to a registered document but the said document cannot be a final word in the matter. It has to be remembered that capital gains accrue only if there is a sale or any other transfer of the capital asset and if the assessee is able to prove that in fact no sale took place in that case no capital gain accrued which could be assessed to income-tax. If the assessee, even in the face of the registered sale deed, is able to prove by cogent evidence and.
satisfy the Tribunal that no sale in fact took place, in that case, the Tribunal has to come to the conclusion that there was no capital gain. As is apparent from the observations made in the order of the Tribunal, the Tribunal was under the misapprehension that the registered sale deed was final and, therefore, refused to look into the ,other material produced by the assessee with a view to prove its case that the sale transaction was a sham transaction. It is, however, a different matter that the Tribunal may not feel convinced that the sale transaction was a sham transaction and refuse to rely on the material produced by the assessee for good reasons, but the said material had to be taken into consideration and could not be ignored. As already observed, the enquiry before the Tribunal was to be directed to find out whether there had been a sale and if the Tribunal comes to the conclusion that the sale had taken place, in that case, the capital gains tax would become payable. The matter can be viewed from another angle. It is a matter of daily happening that people, who want to avoid payment ,of tax, would sell the property by getting the sale deeds registered at an under-estimated value. If it is held that the sale deed is final, in that case, the I.T. authorities will be debarred from looking into as to how much sale consideration passed under the transaction, which is not the law. The factum of sale and the sale proceeds are the real questions to be determined by the I.T. authorities. From what has been stated above, it is clear that the Tribunal fell into an error in refusing to examine the material put forth by the assessee to prove that the sale was a sham transaction.
9. For the reasons recorded above, the question No. 1 referred to this court in I.T. Reference No. 99 of 1974 is decided in favour of the assessee and against the revenue. As regards question No. 2 in I.T. Reference No. 99 of 1974, in view of our finding on question No. 1, the said question need not be answered as in view of the findings of fact regarding the question whether the sale in question was a sham transaction or not, and if it was not a sham transaction as to how much were the actual sale proceeds, the amount of capital gains tax shall have to be determined accordingly.
10. In view of our findings on question No. 1 in I.T. Ref. No. 99 of 1974, the questions of law referred to this court in the I.T. References Nos. 98 and 100 of 1974 need not be answered as the penalty proceedings shall follow the decision in the main case on question No. 1 in I.T. Reference No. 99 of 1974, which question shall be determined by the Tribunal after recording its finding on the real question involved in the case. We order accordingly. However, there will be no order as to costs.
J.V. Gupta, J.
11. I agree.
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