2016 (6) TMI 175 - AT - Income Tax

Capital gain - transfer of capital asset - change of the physical characteristics of the land from agricultural to non-agricultural - Held that - The JDA was also finally cancelled vide Deed of Cancelation dated 5.5.2015 and copy of which is available at pages 240 to 254 of the compilation and the refundable security received by the assessee was returned back to the developer. Through JDA, though it was agreed to hand over possession of land to the developer, but in fact possession was never handed over to the developer for further activities of development. Therefore, there was no transfer of asset in favour of the developer at any point of time. In the instant case, undisputedly agricultural activities are being undertaken on the disputed land till date. Therefore, from any angle, it cannot be said that there is any transfer of capital asset on which capital gain has accrued to the assessees. In light of these facts, we are of the view that the CIT(Appeals) has properly adjudicated the issue and we do not find any mistake therein. We accordingly confirm the order of the CIT(Appeals). - Decided in favour of assessee.

Issues Involved:
1. Validity of CIT(A)'s order and reliance on ITAT judgment.
2. Classification of land as agricultural or non-agricultural.
3. Taxability of capital gains under section 45 of the Income Tax Act.
4. Legal implications of Joint Development Agreement (JDA) and possession transfer.
5. Consistency in Wealth Tax and Income Tax assessments.

Issue-wise Detailed Analysis:

1. Validity of CIT(A)'s Order and Reliance on ITAT Judgment:
The Revenue challenged the CIT(A)'s order for being opposed to law and facts, particularly criticizing the reliance on an ITAT judgment that the Department had not accepted and had appealed to the High Court of Karnataka. The CIT(A) had deleted additions made by the Assessing Officer (AO) based on the Tribunal's earlier decision, which held that the land in question was agricultural and not a capital asset under section 2(14) of the Income Tax Act.

2. Classification of Land as Agricultural or Non-agricultural:
The core issue was whether the land subject to the Joint Development Agreement (JDA) was agricultural or non-agricultural. The Tribunal had previously determined that the land, despite being converted for non-agricultural purposes, retained its agricultural character as the conversion was intended solely for sale or development, and no physical changes were made to alter its agricultural characteristics. The land continued to be used for agricultural purposes, evidenced by the cultivation of fruit-bearing trees.

3. Taxability of Capital Gains Under Section 45:
The Tribunal examined whether the income from the JDA was taxable as capital gains. It concluded that since the land remained agricultural and was not a capital asset under section 2(14), no capital gains tax could be levied. The Tribunal also noted that the JDA was eventually canceled, and the refundable security deposit was returned to the developer, indicating no transfer of possession or capital asset occurred.

4. Legal Implications of Joint Development Agreement (JDA) and Possession Transfer:
The Tribunal scrutinized the legal implications of the JDA, noting that possession of the land was never transferred to the developer, and the JDA was canceled before any development began. The Tribunal referenced the case of CIT v. Dr. T.K. Dayalu, where the High Court held that capital gains tax is applicable when possession is transferred and non-refundable consideration is received. However, in this case, the Tribunal found that the refundable deposit and lack of possession transfer negated the applicability of capital gains tax.

5. Consistency in Wealth Tax and Income Tax Assessments:
The Tribunal highlighted the inconsistency in the AO's approach, where the same land was treated as a capital asset for wealth tax purposes but not for income tax purposes. The Tribunal emphasized that such dichotomy is not permissible under law, reinforcing the CIT(A)'s decision that the land was agricultural and not subject to capital gains tax.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the land in question was agricultural and exempt from capital gains tax under section 2(14) of the Income Tax Act. The Tribunal dismissed the Revenue's appeals and the assessees' cross-objections, concluding that no transfer of capital asset occurred, and the land retained its agricultural status despite the JDA and subsequent conversion orders.

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