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Facts
The assessee, a non-resident individual, and five co-owners entered into a Joint Development Agreement (JDA) in November 2015 for a property. The Assessing Officer initiated reassessment proceedings for AY 2016-17, treating the JDA as a transfer and computing Short Term Capital Gain of Rs. 40,35,000/-. The assessee contended that no monetary or in-kind consideration was received, nor was any municipal sanction for construction obtained in the assessment year, hence no capital gains accrued.
Held
The Tribunal held that no transfer under Section 2(47)(v) occurred in the year under consideration as no consideration was received by the assessee and no development activity commenced due to lack of municipal approvals. Relying on judicial precedents and the legislative intent behind Section 45(5A), it concluded that capital gains cannot be taxed when no consideration has been received. The AO was directed to delete the addition made towards Short Term Capital Gain.
Key Issues
Whether capital gains accrued on the execution of a Joint Development Agreement in the absence of receipt of consideration and commencement of development activity in the relevant assessment year, and the applicability of Section 144C provisions.
Sections Cited
147, 144C, 144C(13), 139, 148, 2(47)(v), 45(5A), 54, 54F, 92CA
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by Shri Raju Suryanarayana Alluri (“the assessee”), feeling aggrieved by the order passed by the Learned Assessing Officer (“Ld. AO”) u/s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (“the Act”) dated 14.03.2024 for the A.Y. 2016-17.
The assessee has raised the following grounds of appeal :
The brief facts of the case are that, the assessee is a non-resident individual, had not filed any Return of Income (“ROI”) u/s.139 of the Act. From the available record, the Learned Assessing Officer (“Ld. AO") came to know that the assessee along with five other co-owners entered into Joint Development Agreement (“JDA”) on 27.11.2015 with M/s. ARMSBURG Reality (“developer”) in which the market value of the outline property was taken at Rs.5.87 Crores. Accordingly, the Ld. AO initiated reassessment proceedings u/s.147 of the Act. In response to the notice u/s.148 of the Act, the assessee filed his ROI on 24.03.2023 declaring total income of Rs.1,89,600/-. After going through the submission of the assessee, the Ld. AO contended that the transfer of property take place in the year of JDA and the assessee is liable for capital gains. Finally, the Ld. AO computed Short Term Capital Gain (“STCG”) of Rs.40,35,000/- in the hands of the assessee and completed the assessment u/s.147 r.w.s. 144C(13) of the Act on 14.03.2024 at total income of Rs.42,24,600/-.
Aggrieved with the order of Ld. AO, the assessee is in appeal before us. The Learned Authorised Representative (“Ld. AR”) submitted that, the assessee had merely entered into an agreement with the developer and did not receive any consideration neither monetary nor in kind during the year on execution of JDA, therefore, no capital gain arises in the hands of the assessee in the year of execution of JDA. In support of their submission, the assessee relied on the decision of the co-ordinate bench of Tribunal in the case of Mrs. Aarti Sanjay Kadam Vs. ITO for A.Y. 2014-15 in dated 21.08.2018, wherein it was held that in the absence of actual receipt of consideration, capital gain could not be said to have accrued. It was further submitted that, no municipal or building plan sanction was obtained during the year of execution of JDA. Necessary sanction for construction was obtained only in subsequent year, therefore, the JDA has not fructified into a development activity capable of triggering a transfer within the meaning of section 2(47)(v) of the Act in the year under consideration.
4.1 The Ld. AR further contended that, although section 45(5A) of the Act was introduced w.e.f. 2018-19 and is not applicable to the year under consideration, but it reflect the legislative intent behind it, to differ capital gain taxation to the year of receipt of consideration in JDA cases. He, also submitted that the same may be taken as guide for the interpretation in pre-amendment year as well. As a beneficial provision, it indicate the correct year of taxation in such development agreement, particularly where no consideration was received during the year of the JDA. Finally, the Ld. AR prayed before the bench to delete the addition made by the Ld. AO.
4.2 Per contra, the Learned Department Representative (“Ld. DR”) supported the order of Ld. AO. It was argued that sectin 45(5A) of the Act is applicable prospectively and hence it is not applicable to the case of the assessee. Before the insertion of section 45(5A) of the Act, a settled position of law has laid down by Hon'ble Bombay High Court in the case of Chaturbhuj Dwarakadas Kapadia Vs. CIT (2003) 260 ITR 491 (Bom), wherein the Hon'ble Court has held that capital gain arises in the year in which possession is handed over in part performance of the contract. The Ld. DR invited our attention to para no.7 of the JDA placed at page no.30 of the paper book and submitted that, possession of the property had already handed over by the assessee to the developer. The Ld. DR also invited our attention to para no.36 of the JDA placed at page no.44 of the paper book wherein the JDA was stated to be irrevocable. It was therefore, argued by the Ld. DR that transfer u/s.2(47)(v) was completed in the year of JDA and the addition made by the Ld. AO was valid. Accordingly, the Ld. DR prayed before the bench to upheld the order of Ld. AO.
4.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. It is not in dispute that the assessee had not received any consideration i.e. monetary or in kind in the year under consideration. The only right conferred under the JDA was to receive completed flats by the assessee upon completion of the project. It is also not disputed that, no municipal approval or building plan sanction was obtained during the year under consideration. The development activity itself has not commenced during the year under consideration and the necessary permission was obtained only in a later year. We have gone through para nos.8 & 9 of the decision of co-ordinate bench of ITAT in the case of Mrs. Aarti Sanjay Kadam Vs. ITO (supra), which is to the following effect :
“ 8. We have considered the rival contentions and perused the material on record. The facts emanating from record reveal that on 05.09.2013 the assessee had entered into a development agreement with two persons for construction of a housing project over the land owned by the assessee. It is also clear from the facts on record that as per the terms of the development agreement the assessee would not be paid any monetary consideration but would receive 35% of the built up residential area on completion of the housing project. Thus, it is a fact on record that at the time of entering into the development agreement the assessee has not received any monetary consideration from the developers. It is also evident from the orders of the department authorities that the assessee, in the course of proceedings, has specifically submitted that though in terms of the development agreement the housing project was supposed to be completed within 18 months, however, the developer did not stick to the time schedule, therefore, the assessee had to initiate legal proceedings against the developer. The aforesaid facts clearly reveal that the consideration to be received by the assessee in terms of development agreement on transfer of the land was 35% of the built up residential area. Therefore, until the project is complete and the assessee receives 35% of the built up residential area as per the terms of the development agreement, it cannot be said that the assessee has received consideration towards transfer of immovable property. It is a matter of record that there was some dispute between the parties with regard to completion of the project and the assessee has initiated legal action against the developer. Therefore, when there is uncertainty with regard to the fact whether assessee would be receiving even 35% of the built up residential area in terms of the agreement, there is no question of accrual of long term capital gain in the impugned assessment year, particularly when nothing has happened with regard to development of project in the impugned assessment year. Merely because the assessee has entered into a development agreement, it does not presuppose transfer in terms of Section 2(47)(v) of the Act. As per Section 53A of the Transfer of Property Act, 1882, which has been referred to in Section 2(47)(v) of the Act, one of the conditions of transfer is that the developer should also by willing to perform his part of the contract. In the present case it appears from the record that the developer has not fulfilled his part of the contract. Therefore, the conditions of Section 53A of the Transfer of Property Act are not fulfilled. In any case of the matter, since the assessee has not received the consideration in terms of the development agreement in the impugned assessment year, question of accrual of capital gain in the year under consideration does not arise. As regards the reference by the CIT(A) to the decision of the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is relevant to observe, the Hon'ble Jurisdictional High Court while dealing with an issue identical to the case of the assessee has explained the true import of the decision rendered in the case of Chaturbhuj Dwarkadas Kapadia (supra) by observing that the ratio laid down in the said decision would not be applicable, since, there is no dispute with regard to the transfer of property taking place as a result of development agreement. The dispute is with regard to quantum of sale consideration to be taken for the purpose of computing capital gain. Proceeding further, the Hon'ble Jurisdictional High Court held that when the terms of development agreement did not provide for any monetary consideration but of built up area on completion of the project, it cannot be said that capital gain has accrued on execution of development agreement even before the project was complete. In this context it will be profitable to look into the observations of the Hon'ble Jurisdictional High Court as extracted below: - “7. Grievance of the revenue is that the decision of this Court in Chaturbhuj Dwarkadas Kapadia (supra) should apply to the present facts. As pointed out by the Tribunal, the issue before the Court in the above case was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset. Thus, reliance upon Chaturbhuj Dwarkadas Kapadia (supra) does not assist the revenue. We specifically asked the revenue whether the decision of the Tribunal in Kalpataru Construction Overseas (P) Ltd has been appealed to this Court and to which the answer was “we do not know”.
We find that on facts the impugned order of Tribunal has held that no income has been accrued or received of the value of 18000 sq.feet of constructed area under the development agreement dated 16.6.2006. This on account of the fact that the agreement dated 16.6.2006 was not acted upon as it came to be superseded/modified by the Tripartite agreement dated 6.7.2007. This was the position when the return of income was filed. The income accrued and earned under the subsequent agreement dated 6.7.2002 was offered as capital gains in the subsequent years. Therefore, on the application of the real income theory, the Tribunal held that on these facts there would be neither accrual nor receipt of income to warrant bringing to tax to the constructed area of 18,000 sq.ft which has not been received by the respondent-assessee. As observed by the Apex Court in CIT vs Shoorji Vallabhdas 46 ITR 144 : “Income-tax is a levy on income. No doubt, the Income-Tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a 'hypothetical income' which does not materialise. Where income tax, has in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.” (emphasis supplied)
Thus no income has either accrued or received in the form of 18000 sq.feet of constructed area. No occasion to tax the same can arise. The Tribunal on consideration of facts has reached a finding of fact that no income in respect of 18000 sq.ft of constructed area has been accrued or received. This finding cannot be said to be perverse or arbitrary. According to us no substantial question of law arises to warrant interference with the order of the Tribunal. Thus, question nos.1 and 2 are dismissed.”
Further, in the case of Smt. Najoo Dara Deboo (supra) the Hon'ble Allahabad High Court, while considering identical nature of dispute held that until the assessee receives her share in the built up area of the project on completion, it cannot be said that capital gain has accrued in the year of agreement. The same view has been expressed by the Coordinate Bench in the case of M/s. Ronak Marble Industries (supra). Even otherwise also capital gain cannot be said to have accrued in the impugned assessment year as at the time of entering into the development agreement the housing project has not been conceived or implemented. So, until the project comes into existence it cannot be said that the consideration, which the assessee is to receive in terms of the development agreement exists. That being the case, in the absence of any consideration received by the assessee in the impugned assessment year the assessee cannot be subjected to long term capital gain on execution of development agreement. In this context we rely upon the decision of the ITAT Hyderabad Bench in the case of Fibars Infratech Pvt. Ltd. (supra). Thus, on overall consideration of facts and materials on record in the light of the ratio laid down in the decisions referred to above, we are of the view that the assessee cannot be charged to long term capital gain in the impugned assessment year. Hence, the addition made on account of long term capital gain is deleted.” 4.4 On perusal of above, we found that the Tribunal has held that, in the absence of receipt of any consideration or commencement of development activity, capital gain could not be said to accrue in the year of JDA. We also found that, the Tribunal after considering the decision of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia Vs. CIT (supra) and held that the principle therein does not apply when possession is handed over for development purposes and no consideration is received. In the present case before us, no consideration has been received by the assessee during the year under consideration. Further, although it has been submitted by the Ld. DR that possession has been handed over by the assessee, as no sanction for construction activity has been obtained during the year under consideration, it cannot be said that, the possession has been handed over for development purposes.
4.5 Further, after the decision of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarakadas Kapadia Vs. CIT (supra), section 45(5A) has been inserted in the Act, which is related to calculation of capital gain in case of JDAs in some specified cases. We have gone through section 45(5A) of the Act, although it is applicable from A.Y. 2018-19, we derive persuasive strength from its legislative intent. It reflects a fair and just approach to tax capital gain in the year in which the assessee received consideration in the form of constructed property. Being a beneficial provision intended to address the practical difficulty in executing JDAs, it supports the view that capital gain should not be taxed in the year when no consideration is received.
4.6 In view of the above, we hold that, no transfer u/s.2(47)(v) took place during the year under consideration and no capital gain arose to the assessee. Accordingly, we direct the Ld. AO to delete the addition of Rs.40,35,000/- made under the head ‘STCG’.
The assessee has also challenged the validity of notice issued u/s.148 of the Act. Since we have already decided the appeal in favour of the assessee on merits, we do not propose to decide on the validity of issue of notice u/s.148 of the Act and it is left open.
In the result, the appeal of the assessee is allowed.