DASA SHETTY KANTHA,BANGALORE vs. ACIT CIRCLE 3(2)(1), BANGALORE, BANGALORE

The assessee has raised as many as 12 grounds of appeal challenging the validity of the assessment on technical and merit of the addition made by the authorities below. For the sake of brevity, we are not inclined to reproduce the grounds of appeal.

The issue raised by the assessee through Ground Nos. 1, 2, 11 and 12 are general in nature and therefore, the same do not require any separate adjudication. Likewise, the issue raised by the assessee through Ground No. 10 pertain to the levy of interest under section 234A, 234B and 234C of the Act which is consequential in nature and does not require any separate adjudication. Hence, all these grounds of appeal are hereby dismissed as infructuous.

The issue raised by the assessee through Ground Nos. 2 to 6 are interconnected challenging the validity of the assessment. However, we note that issue raised through these grounds of appeal has not been pressed by the ld. AR as per the instruction of the assessee. Hence, we dismiss the same as not pressed.

The interconnected issue raised by the assessee through Ground Nos. 7 to 9 pertains to the addition of long-term capital on the transfer of land under JDA for development of residential flats. & 299/Bang/2025

Subsequently, through supplementary JDA dated 21st January 2011 the flats (32 flats, 38093 sq. ft.) were allotted as the share of the assessee. After the completion of construction, the assessee received his share of flats during A.Y. 2013-14. Thereafter the assessee sold those flats and offered capital gain directly on the sale of flats in the respective assessment year (in A.Y. 2013-14 and in subsequent years).

The AO was of the view that on the date of JDA, the land property was transferred to builder/developer for construction which amount to transfer of capital assets as per the provision of section 2(47)(v) of the Act. Therefore, the assessee is liable to offer capital in the year of JDA on the deemed value of cost of construction of his share of flats. In support of the view taken, the AO referred the judgment of Hon’ble Supreme Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay vs. CIT reported in (2003) 260 ITR 491 and decision of Hon’ble & 299/Bang/2025

The aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the addition made by the AO by observing that assessee during the appellate proceeding not submitted any evidence against the view taken by the AO despite given sufficient opportunity by way of several notices.

Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. & 299/Bang/2025

The learned AR alternatively contended that if capital taxed in the year under consideration, then the deemed value of cost of construction should be computed considering Rs. 800 per sq. ft. being stamp duty value as against Rs. 1000 sq. ft. taken by the AO without any basis. Furthermore, the cost of land acquisition should also be provided to the appellant assessee which is not allowed by the AO.

On the contrary, the learned DR before us vehemently supported the order of the authorities below. & 299/Bang/2025

1 From the records, it is evident that the assessee entered into two JDAs dated 27.01.2010 and 31.07.2010, whereby he permitted the builder to construct a residential complex on his land. In exchange, he was to receive 35% of the super built-up area. Subsequently, by way of a supplementary agreement dated 21.01.2011, his share of 32 flats aggregating to 38,093 sq. ft. was identified. It is also undisputed that the assessee received possession of the flats during A.Y. 2013–14 and offered capital gain tax on the actual sale of such flats in the relevant and subsequent years. However, the AO invoked the provisions of section 2(47)(v) of the Act, read with section 53A of the Transfer of Property Act, to hold that a transfer had taken place in the year of the JDA. He therefore assessed the capital gain on a “deemed” basis by estimating the cost of construction of the assessee’s share of flats at ₹1,000 per sq. ft., leading to an addition of ₹3,59,10,000 as long-term capital gain in the year under consideration.

2 We note that the provisions of section 2(47)(v) of the Act applies where the possession of capital assets is given to any person in lieu of part performance which is legally enforceable under section 53A of the & 299/Bang/2025

3 From perusal of the above clause, it clear that the permission of possession of property to the developer was given only for the purpose of construction of residential flats in term of the JDA. The impugned clause specifically mentioned that the permission/ possession was given for the development and not with the intent as delivery of possession for part performance under section 53A of the Act. Hence, we find merit in the argument of the learned AR that the possession given to the builder was only permissive in nature, for the purpose of development, and not a transfer in part-performance within the meaning of section 53A of the Transfer of Property Act. There is nothing on record to suggest that the possession granted was irrevocable or had created any enforceable right in favour of the developer. Accordingly, in our considered opinion the essential condition for applying section 2(47)(v) is not satisfied. We also note that the coordinate bench of this Tribunal in the case of Sri Sai Lakshmi Industries Pvt. Ltd. (ITA No. 1624/Bang/2019), where in similar & 299/Bang/2025

4 Furthermore, we find that the assessee has offered capital gains to tax in A.Y. 2013–14 when the flats were sold. In our considered view, the tax is to be levied on real income, and unless the transaction is completed, it does not result in accrual or receipt of income, taxation on a notional or deemed basis without actual transfer cannot be sustained in the given facts and circumstances. This principle is well-supported by the settled judicial position and follows the concept of taxation of real income. & 299/Bang/2025

6 However, it is equally important to note that the Hon’ble Supreme Lakshmi Industries Pvt. Ltd. (supra). In that case, the Tribunal held that: • The developer was granted only a permissive licence. • The landowner explicitly retained legal possession. • There was no clause in the JDA indicating transfer of possession as contemplated under section 53A of the Transfer of Property Act. & 299/Bang/2025

9 The Bangalore Bench in Sri Sai Lakshmi Industries Pvt. Ltd. (supra) held that such clauses in a JDA are sufficient to conclude that no "transfer" took place in the year of agreement. We see no reason to take a different view in the present case.

10 While the Hon’ble Bombay High Court's decision in Chaturbhuj Dwarkadas Kapadia (supra) laid down important principles, but in our humble understanding, it did not hold that mere execution of a JDA automatically triggers section 2(47)(v) of the Act. On the contrary, the Hon’ble Bombay High Court emphasised that the agreement must be read as a whole to determine if there was effective transfer of possession and control.

11 In the present case, we find no such transfer of possession or control over land happened. Thus, in the absence of delivery of legal possession in part performance of a contract as envisaged in section 53A of the Transfer of property Act, the provisions of section 2(47)(v) are not attracted. & 299/Bang/2025

13 As the main argument of assessee is allowed, we do not find necessary to adjudicate alternate grounds of appeal. Hence, the alternate ground of appeal and argument advanced for alternate ground of appeal is hereby dismissed as infructuous. Thus, the ground of appeal of the assessee is hereby allowed.

In the result, the appeal filed by the assessee is hereby partly allowed.

The assessee has raised as many as 11 grounds of appeal challenging the validity of the assessment on technical and merit of the addition made by the authorities below. For the sake of brevity, we are not inclined to reproduce the grounds of appeal.

The issue raised by the assessee through Ground Nos. 1, 2,10 and 11 are general in nature and not requiring any separate & 299/Bang/2025

The issue raised by the assessee through Ground Nos. 3 to 7 are interconnected and pertains to the taxation of receipt of sale consideration of flats received under JDA as business income instead of capital and further disallowance of the expenses.

The relevant facts are the assessee during the A.Y. 2007-08 has purchased 2 plots of land admeasuring 1 acer and 2183 sq. ft. situated at survey no. 16/1, Nylasandra village, Kengeri Hubli for consideration of 1,75,45,594/- only. In the respect of impugned land property, the assessee entered into Join Development Agreement (JDA) with M/s Vaashu Structure Pvt Ltd (builder/developer) dated 27th January 2010 (for 1 acer) and 31st July 2010 (for 2183 sq. ft.). As per the impugned JDAs the assessee has given the entire land property to the builder/developer for construction of residential complex of super built- up area of 108838 sq. ft. In terms of the JDAs, he was entitled to receive 35% of super built-up area in lieu of land property given by him. The project was completed, and the assessee received his share of flats during the year under consideration and sold the same during the year for a consideration of Rs. 6,82,65,677/- only. The assessee on the sale of flats computed long term capital gain in the following manner: - Sale Consideration

The above computed LTCG was offered by the assessee to tax in the year under consideration.

The assessee during the assessment proceedings claimed that for making sale of flats, he incurred commission expenses and legal expense of Rs. 5 lakhs and TDS on the payment of Rs. 1.5 Lakh was also deducted. Likewise, to make the flats marketable, he has carried out certain interior work including installation of kitchen cabinet, wardrobe at a cost of Rs. 5.5. lakh per flats. These works were carried out through contractors namely Muthu Kumar Sawami, Shivam Gowda Patil, Ajay Srinovasan. The assessee in support of his claim also provided their ledger copies. The assessee claimed that all the payments were for interior work and the same paid through banking channel.

However, the AO held that the assessee has purchased the land, entered into JDA to develop residential flats and sold the flats. Therefore, such activity amounts to business of land development and the proceeds from the sale of flats are liable to tax under the head income from business.

Regarding the claim of commission and legal expenses of Rs. 5 lakhs, the AO found that no proof was produced by the assessee for & 299/Bang/2025

Likewise, the AO found that the expenditure on interior work of flats includes an amount of Rs. 15,20,020/- incurred in relation to land development of Harohalli project and not for the flats received under JDA. The AO further found that the assessee has not provided the detailed agreement entered with those 3 contractors for carrying out interior work and has also not furnished the invoices or bill raised by them and also not furnished the details of finished work wardrobe and kitchen cabinet in each flat by those contractors. The AO also observed that the sale deed nowhere mentions any description of kitchen cabinet, wardrobe and woodwork as part of flat deal. Hence, the AO disallowed the claim of the assessee for cost of improvement for Rs. 1,65,20,020/- only.

Hence, the AO in view of the above worked out the business income from the sale of flats at Rs. 2,40,31,738/- in the assessment completed under section 143(3) of the Act. Subsequently, the business income from impugned sale of flats were revised vide rectification order dated 09-06-2016 at Rs. 2,36,61,980/- only.

The aggrieved assessee preferred an appeal before the learned CIT(A) which was dismissed by holding that the assessee during the appellate proceeding failed to make submission and furnish evidence in support of ground of appeal raised in the memo of appeal. & 299/Bang/2025

The learned AR before us filed paper book running from pages 1 to 176 and contended that the assessee purchased the land property in the F.Y. 2007-08 from self-fund and entered into JDA for the same in F.Y. 2009-10. The property was shown as fixed assets throughout the years which can be verified from the balance sheet for F.Y. 2007-08 to 2012-13. At no point of time, the property was converted or held as stock in trade. Therefore, sale proceeds realised out of capital assets held as investment is taxable under the head capital. The learned AR in support of his contention relied on the judgment of Hon’ble Madras High 578 and decision of ITAT Bench of Vishakhapatnam in case of MG Gopal vs. DCIT reported in 165 taxmann.com 649. 31. The learned AR further emphasised that the assessee was not subject any entrepreneurial risk associated with development/ construction of the residential complex. All the risk and responsibility associated with the construction or development lies only with the developer. Therefore, in the given facts and circumstances, the assessee cannot be held to be indulged in business activity.

The learned AR with respect to the cost of improvement being installation of Kitchen cabinet, wardrobe and woodwork etc submitted these expenses were incurred with a view to make the flats marketable and get better deal. It was submitted that the expenses are genuine & 299/Bang/2025

On the contrary the learned DR before us vehemently supported the order of the authorities below.

We have carefully considered the facts of the case, the findings of the lower authorities, and the submissions made by the assessee before us. The issue for our consideration is whether the income arising from the sale of flats received under a Joint Development Agreement (JDA) should be treated as business income or as capital gain, and whether the deduction for selling and improvement expenses should be allowed while computing the capital gains.

1 It is not in dispute that the assessee purchased two parcels of land during the financial year 2007–08 and entered into two JDAs with a developer in 2010. The assessee was entitled to 35% of the built-up area in exchange for transferring development rights over the land. These flats were subsequently sold, and the assessee offered the resultant gain to tax under the head “Long Term Capital Gains” after & 299/Bang/2025

2 The Assessing Officer, however, treated the activity as a business venture, holding that the assessee purchased land, developed it through the builder, and sold the flats as part of a commercial venture. The AO also disallowed the assessee’s claim for improvement and selling expenses on the ground that sufficient evidence was not furnished. The ld. CIT(A) dismissed the appeal without considering the materials placed before him.

3 On going through the records and paper book submitted before us, we find merit in the assessee’s contentions. The assessee has shown the land as a fixed asset in the balance sheet from the date of purchase till the date of transfer. There is no evidence to show that the land was ever treated as stock-in-trade. This supports the claim that the land was held as a capital asset and not for trading purposes. There is also no indication that the assessee was engaged in the business of real estate or property development in any other instance. In fact, the entire construction activity was undertaken by the developer, and the assessee only received the constructed flats as consideration for transfer of development rights.

4 Further, the assessee has produced documents to show that expenses for improvement—such as installation of kitchen cabinets, wardrobes, and other woodwork—were incurred through proper banking channels and supported by contractor ledgers. Merely because such & 299/Bang/2025

5 We also find that the assessee was not exposed to any risks or responsibilities typically associated with a business venture. All obligations relating to construction, marketing, and approvals were handled by the developer. Therefore, the arrangement clearly reflects the character of a capital investment yielding a return in the form of constructed property, rather than an adventure in the nature of trade.

6 The decisions relied upon by the assessee, including the judgment of the Hon’ble Madras High Court in CIT v. Kasturi Estate Pvt. Ltd. (supra) support the proposition that development of land through JDA and subsequent sale of allotted flats does not automatically result in business income unless the facts clearly demonstrate an intention to carry out trade or commerce. The relevant observations of the Hon’ble Court is extracted as under: The word "business" is defined by section 2(4) of 1922 Act, as including, inter alia, trade, commerce or any adventure or concern in the nature of trade or commerce. "Trade", in the context of the definition, is a wider concept than an adventure in the nature of trade. An adventure in the nature of trade cannot, therefore, by itself be described as trade, but should obviously imply in itself some at least of the elements of trade. A transaction to be an adventure in the nature of trade should be a plunge in the waters of trade but what is trade? Everyone knows what it means but no one has defined it or attempted to define it. The reason perhaps is that it is incapable of a precise definition. Its & 299/Bang/2025

7 Considering the totality of circumstances, we are of the view that the lower authorities erred in treating the transaction as business income. We hold that the capital gains offered by the assessee are correctly computed. The disallowance of the indexed cost of improvement and selling expenses is also unjustified in the facts of the case. Accordingly, the addition made by the AO and sustained by the ld. CIT(A) is deleted and the grounds of appeal of the assessee is hereby allowed.

The next issue raised by the assessee through Ground No. 8 of the appeal is that the learned CIT(A) erred in confirming the view of the AO that the sale proceeds arising from sale of Haroholio plots are taxable as business income.

At the outset, we note that the issue raised by the assessee through Ground No. 8 of this appeal is identical to issue raised by the assessee through Ground No. 3 of this appeal which we have dealt vide & 299/Bang/2025

In the result, the appeal of the assessee is partly allowed.

In the combined results, both the appeals of the assessee are partly allowed.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file