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

PER WASEEM AHMED, ACCOUNTANT MEMBER:

6. 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.

Subsequently, through supplementary JDA dated 21st January 8. 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).

Karnataka High Court in the case of CIT vs. DR. T.K. Dayalu reported in (2011) 14 taxmann.com 120.

16.1 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.

16.2 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 .

Page 7 of 20 Transfer of Property Act. In this regard we perused the terms of JDA specially clause 5 which reads as under: “5.DELIVERY OF PERMISSIVE POSSESSION : The OWNER has given permission to enter upon the Schedule Property in order to put tip the construction as per sanction obtained by the DEVELOPER over the entire Schedule Property to the DEVELOPER for the purpose of constructing the residential apartments on execution of this agreement. The OWNER has permitted entry to the DEVELOPER into the Schedule property as a pact of the contract granting the DEVELOPER or its nominee/s the right to construct in terms of this agreement for Joint Development. It is specifically understood between the Parties that the permission to enter Schedule Property given to the DEVELOPER is not delivery of possession intended by the OWNER for part performance of this agreement under section 53A of Transfer of Property Act. The permission of construction shall not be construed as delivery of possession referred to under section 53A pf the Transfer of Property Act, read with section 2(47) (V) of the Income Tax act, 1061.”

16.3 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 .

Page 8 of 20 facts were involved had ruled the identical issue in favour of the assessee. The relevant finding of the Tribunal in the above-mentioned case is extracted as under: 7. We have carefully considered the rival submissions. The various clauses in the Development Agreement has to be seen to ascertain what was the Agreement between the parties. The relevant clauses in the Development Agreement are extracted below : ******************* 8. From a reading of the above clauses of the JDA, it is clear that the Developer will take possession of the property for the specific purpose of development only, that too after satisfying the conditions like obtaining approvals etc. The clause also provides that possession given to the develop cannot be regarded as delivery of possession in part performance of Agreement for Sale as contemplated under section 53-A of the Transfer of Property Act, 1882. The Hon’ble Supreme Court in the case of COMMISSIONER OF INCOME TAX vs. BALBIR SINGH MAINI & ORS. (2017) 398 ITR 531 (SC) on identical clause in a JDA held as follows: ****************** 9. In a decision rendered on identical clause in a JDA, Bengaluru ITAT in the case of Dr. Krishna Prasad Mikkilineni Vs. DCIT order dated 31.01.2022, it was held as follows: *************************** 10. In the instant case also we notice that the assessee has given only permissive possession and not legal possession. Accordingly, following the above said decision of the coordinate bench, we hold that transfer has not taken place during the year under consideration. Accordingly, capital gain is not assessable in the hands of the assessee during the year under consideration. We therefore uphold the order of the CIT(A).

16.4 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.

16.5 Before parting, we note the AO has placed reliance on the principles laid down by the Hon’ble Bombay High Court in the case Chaturbhuj Dwarkadas Kapadia (supra), which later on followed by the Jurisdictional High Court of Karnataka in the case of DR TK Dayalu (supra), in this regard, we note that in Chaturbhuj Dwarkadas Kapadia (supra), the Hon’ble Bombay High Court held that if the contract, read as a whole, indicates that the developer has been handed over complete control of the property, such control may amount to 'transfer' under section 2(47)(v) of the Act, even if the legal title has not passed on further.

16.6 However, it is equally important to note that the Hon’ble Supreme Court in the case of CIT vs. Balbir Singh Maini reported in 86 taxmann.com 94 clarified that for a transaction to fall under section 2(47)(v) of the Act, the conditions laid down under section 53A of the Transfer of Property Act must be fulfilled. The transferee must be in possession in part performance of the contract and must have performed or be willing to perform their part of the contract.

16.7 In the present case, we find that the terms of the JDA are materially similar to those examined by the coordinate bench in Sri Sai 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.

16.8 Further, in the instant case as well, the agreement explicitly states that the licence to enter the land does not constitute possession under section 53A of the Act. The developer was not entitled to sell any undivided share in land and had no ownership rights. The refundable interest-free deposit paid by the developer was recoverable against future revenue, which again negates any consideration of absolute transfer.

16.9 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.

16.10 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.

16.11 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.

16.12 In light of the above discussion, and respectfully following the decision of the coordinate bench in Sri Sai Lakshmi Industries Pvt. Ltd. (supra), we hold that no transfer had taken place in A.Y. 2010–11 within the meaning of section 2(47)(v) of the Act. Therefore, the addition made by the AO and confirmed by the ld. CIT(A) is not sustainable and deserves to be deleted. Hence, the ground of appeal of the assessee is hereby allowed.

16.13 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.

19. The issue raised by the assessee through Ground Nos. 1, 2,10 and 11 are general in nature and not requiring any separate . adjudication. Likewise, the issue raised by the assessee through Ground No. 9 pertains to the levy of interest under section 234A, 234B and 234C of the Act which is consequential in nature and therefore not requiring any separate adjudication. Hence, all these grounds of appeal are hereby dismissed as infructuous.

20. 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.

- Selling Expenses Rs. 5,00,000/- - Indexed cost of acquisition on Rs. 1,75,45,594/- Rs. 2,71,30,392/- - Index cost of improvement on Rs. 1,65,20,020/- Rs. 1,65,20,020/- Long term capital gain Rs. 2,41,15,265/-

34.1 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 . deducting indexed cost of acquisition, improvement, and selling expenses.

34.2 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.

34.3 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.

34.4 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 .

Page 18 of 20 details are not recorded in the sale deeds does not mean that no such work was done. These are interior additions commonly treated as part of the flat’s value. Disallowance merely because they are not mentioned in the registered documents is not justified. Similarly, the claim of selling expenses of Rs. 5 lakhs, including commission and legal charges, was supported by TDS deductions and banking records, and hence ought to have been allowed.

34.5 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.

34.6 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 .

Page 19 of 20 identification, however, presents no difficulty except in borderline cases. Where the Court is concerned with a gain made out of purchase and sale of lands, whether it is an accretion to capital or capital profit may depend on particular facts and circumstances. The transaction itself should be looked at to see if it is essentially of a commercial character. A purchase and sale of land may be of that character but not necessarily so. If a person is systematically engaged in a series of transactions of purchase and sale of lands with a view to make profit out of them, that may indicate that he is occupied in a trading activity. But it is well settled that ownership of land by itself is not a trade. And so a person may purchase property, hold and enjoy it, derive income from it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them. Sales of land, in those circumstances, are no more than a realisation of capital or conversion of one form of it into another.

34.7 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.

35. 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.

36. 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 . paragraph No. 16 of this order and held that proceeds from sale of property is taxable under the head capital gain. Hence, following the same, the captioned ground of appeal of the assessee is hereby allowed.

Order pronounced in court on 14th day of August, 2025