ITAT Suggests Government To Work-Out Mechanism To Ensure Tax Recovery From ARCs/Banks On sale Of Security Assets

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has suggested the government work out a mechanism to ensure tax recovery from Asset Reconstruction Companies (ARCs)/banks on the sale of security assets.

"It is time that the Government seriously considers protecting its legitimate interests by ensuring some mechanism to ensure that the tax liability on the capital gains is duly recovered from the borrower whose property is sold, and when it is not possible to do so on account of the borrower‟s genuine financial difficulties, from the person who receives the proceeds of the sale of such assets. With the increasing number of cases in which recovery measures are enforced by selling properties, held by the bankers and ARCs as collateral securities, and the inevitable liquidity or bankruptcy issues with such borrowers, there must already be a good amount of such avoidable losses to the revenue. Such a position must not continue," the two-member bench headed by Pramod Kumar (Vice President) and Pavan Kumar Gadale (Judicial Member) stated.

The tribunal noted that in most of the cases in which assets are taken over, as part of the recovery of commercial borrowings by the bankers or by the ARCs, the owners of these assets are not in a position to pay their dues, and that is the reason that these assets are taken over. However, on the sale of such properties, even as the entire sale proceeds go to the bankers, the owner of the property alone is expected to pay the capital gains tax, and there is no mechanism to ensure that the dues of the state, i.e., tax on the long term capital gains, are secured in the process of the sale of such properties. The owners of these assets do not have the funds to pay the tax in question because they are already bankrupt and no portion of the sale proceeds reaches them anyway. The recipients of sale considerations, i.e., the banks and the ARCs, have no liability to make the payments of taxes-even in the vicarious capacity as tax withholdings.

The appellant/assessee is an individual, and it was a case of reopened assessment. The reassessment proceedings are on the short ground that the assessee has sold immovable property valued. The Assessing Officer had reasons to believe that the long-term capital gain from the said transaction is taxable, and the income, to that extent, has escaped assessment for the assessment year 2006-07.

The Assessing Officer noted that the assessee was a director of M/s Abid Steels Co. Ltd. (ASCL) and that the assessee had given his personal guarantee to, on behalf of the ASCL and in respect of its commercial borrowings from, the State Bank of India. The assessee owned land. The assessee purchased the property on 22.8.1983 for Rs 2 lakhs. As collateral security, the property was given to SBI. The SBI recalled the credit facilities given to ASCL and invoked the personal guarantee given by the assessee.

The assessee was also made a party, as a director of ASCL as well as a guarantor of the ASCL, to the recovery proceedings before the Debts Recovery Tribunal. On March 29th, 2004, the State Bank of India entered into an assignment agreement with Asset Reconstruction Co. India Ltd (ARCIL), a company registered as a securitization and asset reconstruction company pursuant to section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. As per the assignment agreement, the Malad land of the assessee, which was offered as collateral security by the assessee to the SBI, was assigned to the ARCIL.

The ARCIL sold the property to Advent Developers Pvt. Ltd. (ADPL) for Rs 2,00,00,000, whereas, as per stamp duty valuation, the market rate of the property was Rs 2.04,93,500. The assessee was a confirming party to the sale transaction between ARCIL and ADPL.

The Assessing Officer noted that in the sale deed "the confirming party (assessee) has surrendered all his rights, title, and interest to the vendor" (ADPL). The AO proceeded to tax the entire amount of Rs 2,04,93,500 as a long-term capital gain. The assessee appealed before the CIT(A) but without success.

The assessee stated that, as per section 45, "any profits or gains arising from the transfer of a capital asset affected in the previous year shall be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place."

The ITAT noted the transactions between the ARC and the end buyer but the very fact that the ARC is selling the property as the owner of the property does indicate that the transfer from the assessee to the ARC, via SBI, perhaps, took place at an earlier stage. The year of transfer in which the taxability arises, so far as the assessee is concerned. However, there is no categorical finding about that aspect of the matter at any stage. It is also unclear on what date the transfer from the assessee to the State Bank of India occurred, as well as what documentation or court/DRT orders were not examined.

The tribunal remitted the matter to the file of the CIT(A) for recording a specific finding after giving a due and reasonable opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order. The question of the taxability of capital gains will arise only in the year in which a transfer takes place.

Case Title: Abbasbhai A. Upletawala Versus Income Tax Officer

Citation: ITA No. 5332/Mum/2015

Date: 21.10.2022

Counsel For Appellant: Madhur Agarwal, Fenil Bhat and Kiran Mehta

Counsel For Respondent: Shailja Rai, Manoj Sinha

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