2016 (9) TMI 452 - AT - Income Tax

Transfer of land under section 2(47) - Held that - The physical possession was never handedover to the developer in which event it cannot be said that there is a transfer of property within the meaning of section 2(47) of the I.T. Act. ITAT, in the first round of litigation, recorded a finding based on the terms of development agreement but proceeded, on a cautious assumption, that the finding is on account of the fact that the said development agreement was not cancelled. The basis for assumption is disturbed by virtue of a decree of Arbitral Tribunal whereby the development agreement was cancelled. Even going by the order of the ITAT dated 16.12.2011 had the development agreement been cancelled at a later date the Tribunal was willing to accept the proposition that there is no transfer . Consent decree passed in 2014 thus supports the ultimate reasoning of the ITAT while setting the matter for consideration afresh. Under the Income Tax Act what is taxable is the real income and mere hypothetical income should not be taxed. In the wake of the findings and conclusions of the Arbitral Tribunal, we are of the firm view that no transfer took place with regard to the land which was hitherto given for development since physical possession was continuously enjoyed by the assessee and his family members and thus even under the Income Tax Act the transfer cannot be said to have taken place in the year under consideration. We hold accordingly. - Decided in favour of assessee

Summary

Issues:
- Whether there is a transfer of land under section 2(47) of the Act?
- Whether the development agreement amounts to transfer of property attracting capital gains tax?
- Whether the cancellation of the development agreement affects the transfer of land?

Analysis:

Issue 1: Transfer of Land under Section 2(47) of the Act
The case revolves around the transfer of land for development into a colony. The Assessing Officer contended that the possession of the property was handed over to the developer, constituting a transfer attracting capital gains tax. The Appellate Tribunal observed that possession and control were with the transferee, indicating a transfer under section 2(47)(v) of the Act. The CIT(A) upheld the AO's decision, emphasizing that liability for capital gains arises when the transfer occurs, irrespective of subsequent events. However, the Arbitral Tribunal's decree clarified that no physical possession was given to the developer, leading to the conclusion that no transfer occurred as per section 2(47) of the Act.

Issue 2: Development Agreement and Capital Gains Tax
The development agreement between the parties was a crucial point of contention. The AO treated the agreement as a transfer attracting capital gains tax. The CIT(A) and the ITAT initially upheld this view. However, the subsequent cancellation of the agreement by mutual consent, as per the Arbitral Tribunal's decree, indicated that no transfer occurred since physical possession remained with the assessee. This cancellation was pivotal in determining the non-occurrence of a transfer for tax purposes.

Issue 3: Impact of Development Agreement Cancellation
The cancellation of the development agreement played a significant role in the final decision. The ITAT's initial finding was based on the assumption that the agreement was still in force. However, the consent decree by the Arbitral Tribunal altered this assumption, leading to a reconsideration of the transfer status. The Tribunal ultimately concluded that no transfer took place due to the cancellation of the agreement, aligning with the principle that only real income is taxable, not hypothetical income. The continuous physical possession by the assessee further supported the finding that no transfer occurred during the relevant assessment year.

In conclusion, the Tribunal allowed the appeal, emphasizing that no transfer of land occurred under section 2(47) of the Act due to the cancellation of the development agreement and the continuous physical possession by the assessee. The judgment underscores the importance of factual circumstances and legal implications in determining the taxability of transactions involving property transfers.