The main legal point established is that the timing of the agreement to sell and the payment of advance should be considered for determining the capital gains, and the benefit of taxation legislation should be construed liberally in favor of the assessee.

This appeal is filed by the assessee challenging the order of the Income Tax Appellate Tribunal (ITAT) relating to the assessment year 2006-07.

2. The brief facts are that by an agreement dated 1.4.1995 the appellant/assessee had agreed to purchase 3 acres 39 guntas of land from one H R Gurappa @ Rs.310/Sq. Ft. (according to which the total price of land came to approximately Rs.4.80 crores) for which an advance of Rs.40.00 lakhs was paid by the assessee to the seller in terms of the agreement. However, because of certain disputes between the seller and one Vikas Housing, with whom also the seller and his brother had agreed to sell a large chunk of their land, including the land regarding which the agreement had been entered into with the assessee/appellant, and as an Original Suit No.3950/9596 had been filed relating to the said land, the sale deed could not be executed. The litigation between the parties relating to the land in question went up to the High Court and ultimately, a compromise was entered into between the parties, and in terms of the said compromise, instead of 3 acres 39 guntas of land which was to be sold in favour of the appellant for approximately Rs.4.80 crores, only 27 guntas of land was agreed to be sold to the assessee.

3. In terms of the said compromise, two sale deeds were executed in favour of the assessee for a sum of Rs.41.00 lakhs, and after adjusting the advance of Rs.40.00 lakhs already paid to the seller in terms of the agreement dated 01.04.1995, the balance amount of Rs.1 lakh was paid by the assessee at the time of execution of sale deed. The assessee thereafter sold the aforesaid 27 guntas land to a third party on 20.05.2005 for a sum of Rs.1,02,50,000/and paid tax on the same after claiming benefit of long term capital gains as defined in Section 2(42A) read with Section 2(29A) of the Income Tax Act (hereinafter referred to as ‘the Act’).

The returns filed by the assessee was processed under Section 143(1) of the Act but the Assessing Officer subsequently issued notice under Section 148 of the Act, and the assessment was finalized by an assessment order dated 31.12.2008 wherein the sale amount was treated as short term capital gains, instead of long term capital gains as had been claimed by the assessee. The appeal filed by the assessee was dismissed by CIT (A) vide order dated 13.5.2009. The further appeal filed by the assessee was also dismissed by the Tribunal on 18.12.2009. Aggrieved by the same, this appeal has been filed.

4. We have heard Sri A Shankar, learned counsel for the appellant as well as Sri Jeevan J Neeralgi, learned counsel for the respondent/revenue, and perused the records. By agreement of the learned counsel for the parties, we have reframed the question of law to be determined in this appeal, which is as follows:

“Whether the Tribunal was justified in law in holding that the income has to be treated as short term capital gains when the assessee had entered into an agreement to sell on 1.4.1995 and had paid a substantial advance of Rs.40.00 lakhs even though the sale deed may have been executed on 5.12.2002 on payment of further sum of Rs.1.00 lakh?”

5. The submission of Sri Shankar, learned counsel for the appellant/assessee is that in the facts of the present case, the authorities ought to have considered the date of agreement to sell (i.e., 1.4.1995) for the purpose of determining the capital gains, as according to the assessee he had come in possession of the property on 01.06.1995, shortly after the agreement and had also paid a substantial advance of Rs.40.00 lakhs at the time of agreement. It is contended that the sale deed could not be executed because of the pending litigation, which had been initiated immediately after the agreement was entered into on 01.04.1995, and it was only after the parties had entered into a compromise that 27 guntas of land was transferred in favour of the assessee on 5.12.2002 on payment of a further sum of Rs.1.00 lakh on