2018 (5) TMI 1772 - AT - Income Tax

Reopening of assessment - assessee to show cause as to why the Capital Gains arising on account of transfer of property in question, should not be taxed in view of the provision of Section 50C - whether in the case of JDA transaction, at what point of time, capital gain arises? - Held that - When the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income for the AY when the agreement was entered into and possession was given. The assessee has entered into JDA in the year 10/01/2000 and possession was handed over for development. But due to occupation of the property by the tenants, the developer was able to vacate the tenents only in the year 2003. Hence, it can be construed that the actual vacant possession was handed over to the developer only in 2003. Therefore, the actual transfer took place in the year 2003. The provisions of capital gains are attracted in the year 2003. Hence, the stand of the AO to charge the capital gains in the year 2010-11 is not proper. Secondly, the reason for bringing to tax in the year 2010-11 was the letter of the developer to announce that the building is ready for occupation without complying to the JDA and approval norms. Even though the same was brought to the notice of the AO, according to us, the reason for reopening the assessment is on faulty ground. The income chargeable to tax falls only in the AY 2003-04 and not in AY 2010-11. Therefore, the assessment completed u/s 144 r.w.s. 147 is held to be not in accordance with law, hence, the same is quashed - Decided in favour of assessee.

Issues Involved:
1. Validity of reopening of assessment under Section 147.
2. Determination of the year in which capital gains arise.
3. Calculation of capital gains, including the adoption of the cost of land and structure.
4. Validity of the notice issued under Section 148.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The CIT(A) upheld the validity of the reopening of the assessment made by the AO under Section 147 of the Income Tax Act. The assessee argued that there was no escapement of income to tax in the previous year relevant to the assessment year under consideration, making the reopening invalid. The Tribunal noted that the reopening was based on the builder's letter dated 22/12/2009, which indicated readiness to hand over possession, implying a transfer of property. However, the Tribunal found that the reopening was based on a faulty ground since the possession was not actually handed over as per the terms of the agreement, and the assessment was quashed.

2. Determination of the Year in Which Capital Gains Arise:
The Tribunal examined whether the capital gains should be taxed in the assessment year 2010-11, as claimed by the AO, or in an earlier year. The assessee argued that capital gains should arise either in the year 2000 when the development agreement was entered into or in 2003 when the tenants were vacated and construction started. The Tribunal referred to judicial precedents, including the Bombay High Court's decision in Chaturbhuj Dwarkadas Kapadia, which held that capital gains arise in the year of execution of the development agreement and not in the year of handing over possession. The Tribunal concluded that the actual transfer took place in 2003 when the vacant possession was handed over to the developer, making the assessment year 2003-04 relevant for capital gains, not 2010-11.

3. Calculation of Capital Gains:
The AO adopted the sale consideration based on the stamp duty value of the land or constructed portion, whichever was higher, leading to a calculation of ?5.98 crores. The assessee contended that the sale consideration should be the cost of construction of the structure, which was ?1.93 crores, and not the stamp duty value of the land. The Tribunal agreed with the assessee's contention and noted that the cost of construction should be considered, as held in the case of ITO Vs. N.S.Nagraj. Additionally, the Tribunal found an error in the indexation of the cost of the structure, which should have been indexed from 1981 instead of 2009.

4. Validity of the Notice Issued under Section 148:
The assessee argued that the notice under Section 148 was bad in law and based on a change of opinion, which is not permissible. The Tribunal noted that the AO's reason for reopening was the builder's letter indicating readiness to hand over possession, which was not a sufficient basis for reopening. The Tribunal held that the notice under Section 148 was issued on a faulty ground and quashed the assessment.

Conclusion:
The Tribunal allowed the appeals, quashing the assessment completed under Section 144 read with Section 147, as it was not in accordance with the law. The Tribunal held that the capital gains should be taxed in the assessment year 2003-04, not 2010-11, and directed the AO to recalculate the indexed cost of acquisition and recompute the long-term capital gains accordingly. The Tribunal also found that the reopening of the assessment was based on insufficient grounds and hence invalid.

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