2017 (3) TMI 1168 - AT - Income Tax

Transaction of entering into development agreement as transfer within the meaning of section 2(47)(v) - Capital gain - Held that - We find merit in the argument of the ld.AR that no sale transaction has taken place with the signing of the development agreement as the sale is governed by the provisions of section 54 of the Transfer of Property Act, 1882 wherein the prime determining factor is receipt of monitory consideration. There is no monitory consideration whatsoever in the development agreement entered in to by the assessee and therefore cannot be construed as sale. We also find merit in the argument of the ld. AR that entering development agreement with the Developer, the assessee has not relinquished any interest in the said property as the right in the property continue to belong to the owner. Subsection 3(v)of section 2(47) of the Act is not relevant to the case under consideration and the development agreement nowhere falls under ambit the transaction of allowing possession of immovable property to be taken or part performance of contract of the nature referred to in section 53A of the TPA, 1882 because the development agreement is not an agreement for sale because the assessee executed a contract with the developer and not with the intended purchaser. The development agreement is some sort of business agreement and it basically postulates coming together of two parties only i.e.the developer and the owner of the land. The developer does not have land to develop the land and the assessee did not have sufficient finance to develop the land and therefore they come together i.e. land and finance for the development of project is necessarily business agreement whereby the owner of land allows the developer to enter and exploit the land for the limited purposes of developing the said land. Looking into the provisions of TPA,1882 which clearly shows that allowing the possession to be taken and retained in part performance of the contract could be considered as transfer and not permissible possession or any other kind of possession. We are of the considered view that the order of FAA upholding partly the order of AO levying tax on the LTCG on the basis of development agreement was wrong and cannot be sustained. Accordingly, we set aside the order of the FAA and direct the AO to delete the total addition in the current year. We further hold that the application of provisions of section 50C is also bad in the present scenario as there was no transfer of land or building has taken place. - Decided in favour of assessee.

Summary

Issues Involved:

1. Confirmation of addition by CIT(A) without conclusive evidence.
2. Misinterpretation of terms and facts of the development agreement.
3. Computation of capital gains based on estimated full value of consideration.
4. Application of Section 50C of the Income Tax Act, 1961.
5. Timing of capital gains tax liability.

Issue-wise Detailed Analysis:

1. Confirmation of Addition by CIT(A) without Conclusive Evidence:

The assessee argued that the CIT(A) erred in confirming the AO's order by reducing the addition by 35% without any express reason or conclusive evidence. The CIT(A) failed to consider that the additions by the AO were arbitrary, based on assumptions, and did not consider the facts of the agreement on which the addition was based.

2. Misinterpretation of Terms and Facts of the Development Agreement:

The assessee contended that the CIT(A) erred in confirming the addition of ?3,25,25,220 (65% of ?5,00,38,800) based on a misinterpretation of the terms and facts of the development agreement. The assessee argued that there was no sale or transfer of any property or right on the property owned by the firm to any party. The agreement merely allowed the developer to bear the cost of construction in lieu of 35% rights on the constructed building, without any right of ownership or title of the land. The CIT(A) did not consider that the appellant firm was liable to pay tax only when they sold any portion of the retained 65% of the constructed building.

3. Computation of Capital Gains Based on Estimated Full Value of Consideration:

The assessee raised additional grounds, arguing that the CIT(A) erred in confirming the estimated full value of consideration for the purpose of computation of capital gains, which was speculative and ignored the legal position that full value of consideration cannot be estimated under Section 48 of the Income Tax Act, 1961. The CIT(A) also erred in treating the transaction under the development agreement as a transfer under Section 2(47)(v) as on the date of entering the agreement.

4. Application of Section 50C of the Income Tax Act, 1961:

The assessee argued that the AO and CIT(A) erred in applying the valuation under Section 50C of the Income Tax Act, 1961, on the development agreement and taxing it as capital gains. The assessee contended that the consideration in the form of constructed area of 65% was neither received nor accrued, and hence no occasion to bring it to tax could arise.

5. Timing of Capital Gains Tax Liability:

The assessee argued that the transfer of interest in the plot did not take place with the signing of the development agreement but only when the assessee received possession of 65% of the constructed area. The Tribunal noted that the developer had not carried out any construction during the year under consideration, and the assessee had not received any consideration in the form of 65% of the total constructed area. The Tribunal held that no sale transaction had taken place with the signing of the development agreement as the sale is governed by the provisions of Section 54 of the Transfer of Property Act, 1882, where the prime determining factor is the receipt of monetary consideration.

Conclusion:

The Tribunal found merit in the assessee's arguments and held that the order of the CIT(A) upholding the AO's order was wrong and could not be sustained. The Tribunal directed the AO to delete the total addition in the current year and held that the application of Section 50C was also incorrect as no transfer of land or building had taken place. Consequently, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed as infructuous.