2017 (10) TMI 323 - SC - Income Tax

Income from capital gain - transfer exigible to tax by reference to Section 2(47)(v) of the Income Tax Act, 1961 read with Section 53-A of the Transfer of Property Act, 1882 - rights emanating from the JDA, legal effect of non registration of JDA, its alleged repudiation etc. - delivery of possession - Held that - As has been stated there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no transfer can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken; whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their part of the bargain. Since we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted on the facts of this case, we need not go into any other factual question. However, the High Court has held that Section 2(47)(vi) will not apply for the reason that there was no change in membership of the society, as contemplated. We are afraid that we cannot agree with the High Court on this score. Under Section 2(47)(vi), any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within its purview. The High Court has not adverted to the expression or in any other manner whatsoever in sub-clause (vi), which would show that it is not necessary that the transaction refers to the membership of a cooperative society. We have, therefore, to see whether the impugned transaction can fall within this provision. A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction. In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act. In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains arose from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act. - Decided in favour of assessee.

Issues Involved:
1. Whether the transactions in hand envisage a "transfer" exigible to tax by reference to Section 2(47)(v) of the Income Tax Act, 1961 read with Section 53-A of the Transfer of Property Act, 1882.
2. Whether the Income Tax Appellate Tribunal ignored rights emanating from the JDA, legal effect of non-registration of JDA, its alleged repudiation etc.
3. Whether "possession" as envisaged by Section 2(47)(v) and Section 53-A of the Transfer of Property Act, 1982 was delivered, and if so, its nature and legal effect.
4. Whether there was any default on the part of the developers, and if so, its effect on the transactions and on exigibility to tax.
5. Whether the amount yet to be received can be taxed on a hypothetical assumption arising from the amount to be received.

Detailed Analysis:

1. Transfer Exigible to Tax:
The Supreme Court examined whether the transactions under the Joint Development Agreement (JDA) constituted a "transfer" under Section 2(47)(v) of the Income Tax Act, 1961, read with Section 53-A of the Transfer of Property Act, 1882. The Court concluded that since the JDA was not registered, it could not have any effect in law for the purposes of Section 53A. Consequently, it was held that no "transfer" could be said to have taken place under the unregistered JDA.

2. Rights Emanating from the JDA:
The Court noted that the Income Tax Appellate Tribunal (ITAT) had incorrectly concluded that Section 2(47)(v) applied despite the non-registration of the JDA. The Supreme Court emphasized that the ITAT's reliance on the expression "of the nature referred to in Section 53A" was misplaced, as it did not account for the necessity of registration post the 2001 amendment. Thus, the ITAT's interpretation was deemed incorrect.

3. Delivery of Possession:
The Supreme Court chose not to delve into the factual question of whether possession was delivered under the JDA. The High Court had previously concluded that no possession was given by the transferor to the transferee in part performance of the JDA, and any possession delivered was merely as a licensee for development purposes. The Supreme Court's decision rested on the legal ground of non-registration, making further examination of possession unnecessary.

4. Developers' Default:
The Court acknowledged that the developers failed to obtain necessary permissions, resulting in the project's failure. The High Court had observed that the developers were not ready and willing to perform their part of the contract. The Supreme Court, however, did not specifically address this issue, focusing instead on the legal implications of the unregistered JDA.

5. Hypothetical Income:
The Supreme Court agreed with the High Court that income tax could not be levied on hypothetical income. The Court cited precedents, emphasizing that income must "accrue" or be "received" to be taxable. Since the JDA did not materialize due to lack of permissions, no real income arose from the transaction. Therefore, the alleged capital gains were deemed hypothetical and not subject to tax.

Conclusion:
The Supreme Court upheld the High Court's judgment, concluding that the unregistered JDA could not constitute a "transfer" under Section 2(47)(v) of the Income Tax Act. Consequently, no capital gains tax could be levied on the hypothetical income from a transaction that never materialized. The appeals were dismissed with no order as to costs.

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