2016 (4) TMI 646 - AT - Income Tax

Capital gain - selection of assessment year - whether the transfer of property took place in the year relevant to the assessment year 2003-04 and hence the capital gains assessed in AY 2007-08 was not in accordance with the law? - Held that - The factors such as date of possession, substantial compliance of the contract etc. are not relevant in the case of development agreements. The aim of the builder under the development agreement was to make profits by completing the building and therefore, no interest in the land stands created in their favour under such agreements. Thus the said agreements are only a mode of remunerating the builder for his services of constructing the building. The assessees were entering into development agreements with the builders by conferring privileges of ownership to them and were claiming that the capital gains would arise only after registering the conveyance deed. Accordingly the section 2(47)(v) was brought into the statute to plug this kind of loop hole. Thus by considering the object of the Development Agreements and also the purpose of introduction of section 2(47)(v) of the Act,finally held that the year of chargeability in the case of Development Agreements is the year in which the contract was executed. In view of the foregoing discussions, we are of the view that the assessees herein succeed in the additional ground urged by them. Accordingly we hold that the capital gain arising on entering of development agreement is not taxable in the assessment year 2007-08, but taxable in AY 2003-04. - Decided in favour of assessee

Summary

Issues:
1. Assessment of capital gains for AY 2007-08 based on a development agreement executed in 2002.
2. Interpretation of the term "transfer" under sec. 2(47) of the Income Tax Act.
3. Applicability of the legal position established in the case of Chaturbhu Dwarkadas Kapadia Vs. CIT (260 ITR 491) to the present case.

Analysis:
1. The appeals before the Appellate Tribunal ITAT Mumbai involved the assessment of capital gains for AY 2007-08, challenging the orders passed by the Ld CIT(A). The dispute arose from a development agreement executed in 2002, with the contention that the transfer of property occurred in the year relevant to the assessment year 2003-04, not in 2007-08. Both parties filed additional grounds on this issue, leading to the admission of the same by the Tribunal for further consideration.

2. The crux of the matter revolved around the interpretation of the term "transfer" under sec. 2(47) of the Income Tax Act. The Tribunal analyzed the provisions of sec. 2(47)(v) and 2(47)(vi) in light of the development agreement, which allowed the possession of the land to be taken by the developer in 2002. Citing the decision of the Hon'ble Bombay High Court in the case of Chaturbhu Dwarkadas Kapadia, the Tribunal emphasized that the taxability of capital gains must be considered in the year of the agreement, not the year of possession or substantial compliance, as highlighted in the legal precedent.

3. The legal position established in the case of Chaturbhu Dwarkadas Kapadia Vs. CIT (260 ITR 491) was crucial in determining the outcome of the appeals. The High Court's observations regarding development agreements, the aim of builders to make profits, and the purpose of sec. 2(47)(v) were pivotal in guiding the Tribunal's decision. By aligning with the High Court's interpretation, the Tribunal concluded that the capital gain arising from the development agreement was not taxable in AY 2007-08 but in AY 2003-04, setting aside the assessment made for the former year and rendering all grounds moot.

In conclusion, the Tribunal allowed the appeals filed by the assessees, dismissing those of the revenue, based on the legal principles surrounding the timing of the development agreement and the taxability of capital gains as per the provisions of sec. 2(47) and the precedent set by the Hon'ble Bombay High Court.