2012 (7) TMI 238 - AT - Income Tax

Taxability of income from transfer of development rights - assessee jointly with the trust granted development rights to party in respect of part of the land for a consideration in which the share of the assessee was @ 32% receiving a sum of Rs.92.00 lacs during the assessment year and balance in instalments in subsequent years - assessee offering income from transfer of development rights @ 25% of the receipt taking the transfer as integral part of the development project - Held that - The assessee had development rights in respect of certain piece of land, but instead of developing the land he transferred the development rights in respect of part of the land to a separate construction company and as per the agreement, the assessee jointly with the trust was required to convey the land to the proposed buyers and possession of the land had also been given during the year along with development rights. Thus parting away with the development rights in respect of part of the land forever, conclusion is derived that this was an independent activity having no connection with the development of the remaining part of the land. As the assessee was following mercantile system of accounting as per which income accrues when it becomes due for payment, thus the entire amount became due to the assessee in the relevant year on signing of development agreement and on handing over of the possession of the land - postponement of payment does not stop accrual of income - alternate claim of the assessee that in case the entire income was assessed, the cost of acquisition of development right has to be allowed as deduction is acceptable - partly in favour of assessee.

Summary

Issues Involved:
1. Accrual of income from the sale of land as per the development agreement.
2. Method of income recognition for development rights.
3. Deduction of expenses and proportionate cost of land.

Issue-wise Detailed Analysis:

1. Accrual of Income from Sale of Land as per Development Agreement:
The primary issue in these appeals is the accounting and accrual of income from the sale of land as per the development agreement with the developers. The assessee, engaged in the business of development and construction, was following the mercantile system of accounting and declared income from the development project based on 25% of the Work-in-Progress (WIP). The assessee had entered into an agreement with a trust to obtain development rights on land in exchange for efforts to release the land from the Government and a consideration payment. During the assessment year 2004-05, the assessee and the trust granted development rights to a construction company, receiving a share of Rs.2.52 crores, of which Rs.92.00 lacs was received during the year, and the balance in subsequent years. The AO held that the entire income of Rs.2.52 crores accrued during the year and should be assessed in the assessment year 2004-05, allowing deductions for expenses incurred.

2. Method of Income Recognition for Development Rights:
The assessee contended that the transfer of development rights was part of a single indivisible project, and income should be recognized on the same basis as the development project, i.e., 25% of the receipts. However, the AO and CIT(A) disagreed, stating that the transfer of development rights was an independent activity, and the entire income accrued during the year of transfer. The CIT(A) noted that the possession of the land had been handed over, and the transfer was complete under section 53A of the Transfer of Property Act. The Tribunal upheld this view, emphasizing that the entire income became due in the relevant year, and accrual of income does not depend on the receipt of income.

3. Deduction of Expenses and Proportionate Cost of Land:
The assessee also claimed that if the entire income was assessed in the relevant year, the proportionate cost of land should be allowed as a deduction. The AO rejected this claim, stating that only the interest in the land, not the land itself, was transferred. However, the Tribunal agreed with the alternate claim that the cost of acquisition of development rights should be allowed as a deduction and set aside the CIT(A)'s order on this point.

Separate Judgments for Different Assessment Years:
For the assessment years 2005-06, 2006-07, and 2007-08, the disputes were identical, involving the transfer of development rights and the method of income recognition. The assessments for these years were made under section 143(3) read with section 153A after a search conducted on 22.3.2007. The Tribunal confirmed the CIT(A)'s view that the entire income receivable as per the development agreements should be assessed in the relevant years. The CIT(A) had already allowed the deduction of prorata costs incurred on acquiring development rights, and there was no dispute on this point.

Conclusion:
The Tribunal concluded that the entire income from the transfer of development rights should be assessed in the relevant years of transfer, rejecting the assessee's claim to recognize income on a 25% basis. The Tribunal allowed the deduction of the cost of acquisition of development rights. The appeal for the assessment year 2004-05 was partly allowed, while the appeals for the subsequent years were dismissed.