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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI JASON P. BOAZ
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
ITA No.2305/Bang/2016 Assessment year : 2007-08
Smt. Uma Narendra, Vs. The Income Tax Officer, Partner, M/s. Sudha Agencies, Ward 2(2), No.94, I Floor, Avenue Road, Bangalore. Bangalore – 560 002. PAN: AADPU 8079N APPELLANT RESPONDENT
Appellant by : Smt. Sheetal, Advocate Respondent by : Smt. Padmameenakshi, Jt.CIT(DR)(ITAT), Bengaluru
Date of hearing : 26.09.2017 Date of Pronouncement : 13.10.2017
O R D E R Per Sunil Kumar Yadav, Judicial Member This appeal is preferred by the assessee against the order of the CIT(Appeals) inter alia on the following grounds:-
“1. The learned CIT (Appeals) erred in passing the order in the manner he did. 2. On the facts and in the circumstances of the case, the learned CIT (Appeals) ought to have appreciated that the condition precedent for reopening of assessment being absent, the re-assessment as made by the learned assessing officer is bad in law and the same is required to be cancelled.
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The learned CIT (Appeals) further ought to have appreciated that legal possession of the property continued with the Appellant and the complete control over the property was never passed on to the developer and therefore transfer of land as contemplated under Section 53A of the Transfer of Property Act never took place. Consequently, the learned CIT (Appeals) ought to have refrained from confirming the capital gain as made by the assessing officer for the relevant assessment year. 4. The learned CIT (Appeals) further ought to have appreciated that there was no transfer as contemplated under Section 2(47)(v) of the Act as on 28.02.2007 and accordingly he ought to have directed the assessing officer to refrain from taxing the assessee under the head capital gain for the relevant assessment year. 5. The learned CIT (Appeals) ought to have appreciated that in the case of transfer, 'transferee' has to be ascertained. However, in the case of the Appellant, 'transferee' is not ascertainable and hence there is no transfer to consider capital gain in the hands of the Appellant in the relevant assessment year. 6. The learned CIT (Appeals) erred in directing the AO to compute the capital gain by taking the value of constructed super built-up area to be received in exchange of land as sale consideration and not the fair market value / guidance value of land. 7. The learned CIT (Appeals) failed to appreciate that the case law relied on by the AO is not applicable to the Appellant's case. 8. Without prejudice, the long term capital gain as determined by the learned assessing officer and confirmed by the learned CIT (Appeals) is excessive, unreasonable and the same is liable to be deleted in toto. 9. The learned CIT (Appeals) erred in confirming the levy of interest under Sections 234A, 234B & 234C of the Act by the AO. 10. For these and such other grounds that are urged during the hearing, it is prayed that the impugned order of the CIT(A) be
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set-aside granting relief to the Appellant, in the interest of Justice.”
Though various grounds are raised, but they all relate to the year of chargeability of capital gain accrued on transfer of the land to the developer.
The facts in brief borne out from the record are that initially assessment was completed u/s. 143(1) of the Act, thereafter the department got the information to the effect that assessee along with others had entered into Joint Development Agreement (JDA) for construction of the building on the land situated at Sy.No.9/1 measuring 4 acres 23 guntas with Skyline Construction Housing Pvt. Ltd. vide JDA executed on 28.02.2017. On the basis of this information, the AO has formed a belief that in view of the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. T.K. Dayalu, 202 Taxmann 531, capital gain has escaped assessment u/s. 147 of the Income-tax Act, 1961 [“the Act”], hence issued a notice u/s. 148 dated 18.03.2014 and assessment was completed u/s. 143(3) r.w.s. 147 assessing the long term capital gains at Rs.2,19,30,430 in the hands of the assessee, having rejected the contention of the assessee that since possession has not been given under the JDA, the ratio laid down by the Hon'ble jurisdictional High Court in the case of T.K. Dayalu (supra) is not applicable.
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Aggrieved, the assessee preferred an appeal before the
CIT(Appeals) with the submission that the assessee has received only a
minor amount on execution of JDA out of the total consideration, but
thereafter the transferee has avoided adhering to the agreement and the
revenue has not brought any evidence on record to show that there was a
transfer of possession of the impugned property in the assessment year
under consideration. Without accrual of the consideration to the appellant,
the appellant is not expected to pay the capital gains on the entire agreed
sale consideration. It was also contended before the CIT(Appeals) that
there was no development activity on the land which is subject matter of
development agreement. The process of construction has not even been
initiated and no approval for construction of building is obtained. Thus, the
sale consideration in the form of developed area has not been received by
the assessee. Mere receipt of refundable deposit cannot be termed as
receipt of consideration.
The CIT(Appeals) was not convinced with the arguments of the
assessee and he accordingly directed the AO to compute the long term
capital gain taking the market value/guidance value of 34% of the super-
built up area to be received in exchange of 66% undivided share in the land
as per the JDA.
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Aggrieved the assessee has preferred an appeal before the Tribunal
with the submission that after execution of JDA, the transferee has not
taken any action in obtaining the approval of plan from the competent
authority. Rather no development activity was undertaken on the land. The
ld. counsel for the assessee further invited our attention to the judgments of the Hon'ble jurisdictional High Court in the case of T.K. Dayalu (supra) and
CIT v. N. Vemanna Reddy in ITA No.519/2008 in which it has been
categorically held that capital gain is payable for the assessment year when
the possession was handed over in terms of the JDA. The ld. counsel for
the assessee further invited our attention to the notice issued by the
transferee for cancellation of the JDA as he has not fulfilled the requisite
conditions mentioned in the JDA. A copy of the notice is placed on record.
The ld. counsel for the assessee contended that since possession has not
been handed over to the transferee till date, there is no question of capital
gain accrued to the assessee. Whatever nominal amount was taken by the
assessee at the time of execution of JDA, it was refundable security
deposit and the same cannot be taxed in the hands of the assessee.
The ld. DR placed reliance upon the order of the CIT(Appeals).
Having carefully examined the orders of lower authorities in the light
of rival submissions, we find that on the basis of information received by
the department with regard to execution of the JDA, assessment was
reopened and capital gain was charged to tax in the hands of the assessee
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in the year of execution of JDA, though assessee has taken a plea that possession of the land was not handed over to the transferee.
Before the CIT(Appeals), the assessee has taken a specific plea that the transferee has not moved further and he has rather not obtained the approval of the plan for construction from the competent authority. The assessee has also taken a specific plea before the CIT(Appeals) that possession has not been handed over to the transferee, therefore capital gains cannot be taxed in the year of execution of JDA. The relevant submissions of the assessee though extracted in the order of the CIT(Appeals), but the CIT(Appeals) did not deal with these contentions of the assessee. For the sake of reference, we extract the relevant submissions made by the assessee as under:-
“It is an erroneous assumption, and on the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute. In the present case the situation is that the Appellant has received only a 'meager amount' out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the Revenue authorities to show that there was actual consideration that has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive entire sale consideration was actually accrued to the Appellant. Without accrual of the consideration to the Appellant, the Appellant is not expected to pay capital gains on the entire agreed sale consideration. When time is the essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property
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Act. It cannot, therefore, be said that the provisions of Section 2(47) (v) will apply. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital-gains could not have been taxed in this assessment year in appeal before us. The other grounds raised by the assesses in their appeals have become irrelevant 01 this point of time as we have held that provisions of section 2(47)(v) will not apply to the assesses in the assessment year under consideration ..... " It is an undisputed fact that as on date, there was no developmental activity on the land which is subject matter of development agreement. The process of construction has not been even initiated and no approval for the construction of the building is obtained. Thus, the sale consideration in the form of developed area has not been received. Mere receipt of refundable deposit cannot be termed as receipt of consideration. Hence, it is clearly an erroneous assumption, as the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute.”
During the course of hearing, the ld. counsel for the assessee has filed a copy of the legal notice issued on behalf of the assessee to the transferee pointing out therein that in terms of agreement dated 28.02.2007, the builder was required to complete the development of the schedule property within 24 months from the date of issue of commencement certificate by the plan sanctioning authority. In that notice it has been mentioned that time and again the transferee was warned with regard to adhering to clauses of JDA. In that notice, the assessee has cancelled the agreement and for resolution of the disputes, he has appointed Hon’ble Mr. Justice Jagannathan, Retired Judge, High Court of Karnataka as the sole arbitrator to arbitrate the dispute between the
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assessee and the transferee. The relevant contents of the notice which depicts that conditions of the JDA was not fulfilled and the building was not constructed, are extracted hereunder:-
“01. Whereas my clients had executed a Memorandum of Understanding dated 12.8.2006 followed by a Joint Development Agreement dated 28.2.2007 and a General Power of Attorney dated 28.2.2007 to develop the property described in the schedule below on terms that were mutually agreed upon. 02. Whereas, as per the terms of the agreement dated 28.2.2007, you were required to complete the development of the schedule property within 24 months from the date of issue of commencement certificate by the plan sanctioning authority. Whereas, you have not completed the development within the time prescribed resulting in unending correspondence. 03. Whereas, instead of complying with the terms of the agreement, you have accused my clients of dragging the issue. 04. The agreement dated 28.2.2007 evidenced the manner of resolution of disputes and in this regard a notice dated 30.4.2014 was caused upon you by my clients in response to which you caused a notice dated 9.8.2014 again reiterating your demand to execute a sharing agreement. 05. My clients have now realized that having regard to the breach of the terms and conditions of the agreement dated 28.2.2007, there is no possibility of resolution of the dispute amicably or through a conciliation mode. Under the circumstances my clients have hereby terminated the agreement dated 28.2.2007 and have invoked the arbitration procedure provided under the agreement dated 28.2.2007 for resolution of the dispute. 06. You are therefore called upon to concur the appointment of Hon’ble Mr. Justice Jagannathan, Retired Judge, High Court of Karnataka as the sole arbitrator to arbitrate the
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dispute between you and my client. This is notwithstanding the requirement under the agreement dated 28.2.2007 for settlement of a dispute through a panel of three arbitrators. If you are insistent upon the settlement of the dispute through a panel of three arbitrators, then you may indicate the arbitrator of your choice who may then in consultation with Mr. Justice Jagannathan appoint a Presiding arbitrator.”
From a careful perusal of the submissions made before the CIT(Appeals) and also from the notice, it is evident that the transferee did not adhere to the terms and conditions of JDA. Even site plan was not obtained from the competent authority. All these documents were confronted to the revenue, but the revenue could not place anything on record to establish that possession of land was handed over to the transferee for constructing the building. Keeping in view the totality of facts and circumstances, we are of the opinion that though the JDA was executed in the impugned assessment year, but no steps were taken by the transferee towards the commencement of construction activities and finally the JDA was cancelled and the matter was sub judice before the Arbitrator for resolution of the dispute. Under these facts, we are of the view that since the possession was not handed over to the transferee, the capital gain cannot be said to have been accrued in the hands of the assessee in the year of execution of the JDA.
In the case of T.K. Dayalu (supra), the Hon'ble jurisdictional High Court has categorically held that the relevant year for taxing the capital gain
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is the year in which the possession was handed over in terms of the JDA to the developer. This view was again concurred by the Hon'ble jurisdictional High Court in the case of CIT v. N. Vemanna Reddy in ITA No.501/2008 dated 18.08.2014. The relevant observations of the Hon’ble High Court in the case of N. Vemanna Reddy (supra) is extracted hereunder for the sake of reference:-
“3. This Court, in the case of Commissioner Vs. D.K. Dayal reported in 202 Taxman 531, after noticing the case law on the point, has held that the date on which possession was handed over to the developer is relevant and therefore, the capital gain tax is payable for the assessment year in which the possession was handed over in terms of the joint development agreement. Therefore, on mere entering into a joint development agreement there is no transfer. The “transfer” in the Income Tax Act takes place on the date the possession of the property is delivered though not a registered document is executed conveying the title. 4. In the instant case, the authorities have held that the capital gain tax is payable in the assessment year 1995-96 when the joint development agreement was entered into by the assessee with the developer for transfer of 66% interest in an undivided immovable property and possession of the land was handed over and not when the built up area was completed and handed over to the assessee in the assessment year 1998-99. Hence, we answer the substantial question of law raised in favour of the assessee and against the revenue ……..”
The view taken by the High Court has now been approved by the Hon’ble Apex Court in the case of CIT v. Balbir Singh Maini in Civil Appeal No.15619 of 2017 vide its judgment dated 04.10.2017 that without acquiring a right to receive income, no profit or gain arises from transfer of
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a capital so as to attract sections 45 & 48 of the Income-tax Act. The relevant observations of the Hon’ble Apex Court are extracted hereunder:-
“23. A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction. 24. The matter can also be viewed from a slightly different angle. Shri Vohra is right when he has referred to Sections 45 and 48 of the Income Tax Act and has then argued that some real income must “arise” on the assumption that there is transfer of a capital asset. This income must have been received or have “accrued” under Section 48 as a result of the transfer of the capital asset. 25. This Court in E.D. Sassoon & Co. Ltd. v. CIT, (1955) 1 SCR 313 at 343 held: “It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson (Inspector of Taxes) [(1946) 1 AER 532 at p. 539], and Webb v. Stenton, Garnishees [11 QBD 518 at p. 522 and 527]. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.” 26. This Court, in Commissioner of Income Tax v. Excel Industries, (2014) 13 SCC 459 at 463-464 referred to various judgments on the expression “accrues”, and then held:
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“14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held as follows: (ITR p. 148) “… 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 bookkeeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income 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.” 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word “accrue” and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) “11. … the date of payment … does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately.” 16. This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”. 17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only
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then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is, therefore, not the income of the assessee.” 27. In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act. 28. In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act.”
Since it has not been established by the revenue that possession was ever transferred to the transferee and now the JDA has been cancelled and the matter has been referred to the Arbitrator for settlement of the dispute, we are of the view that no capital gain has accrued in the hands of the assessee on account of the JDA. Whatever amount was
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received on execution of the JDA, it was only a refundable security which cannot be taxed in the hands of the assessee as long term capital gain. Accordingly the order of the CIT(Appeals) is set aside and the additions confirmed therein are deleted.
In the result, the appeal of the assessee is allowed.
Pronounced in the open court on this 13th day of October, 2017.
Sd/- Sd/-
( JASON P. BOAZ ) ( SUNIL KUMAR YADAV) Accountant Member Judicial Member
Bangalore, Dated, the 13th October, 2017.
/ Desai Smurthy /
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Senior Private Secretary ITAT, Bangalore.