2019 (3) TMI 391 - AT - Income Tax

Long term capital gain - additional construction on pre owned property - completion of transfer of Capital asset - development agreement entered with developer wherein assessee was entitled to receive a sum in cash and two flats that are going to be constructed - taken possession in earlier year - completion certificate also issued in earlier year - Only allotment letter of flat already in possession was issued in relevant financial year. HELD THAT - The assessee has entered into development agreements in the year 2002. As per the supplementary agreement, the assessee was to receive ₹ 49.50 lakhs and two flats from the developer. Hence the flats received by the assessee are only a part of total sale consideration receivable by the assessee as per the development agreement. No dispute that the capital gains liability shall arise upon completion of transfer of Capital asset. Hence the assessee cannot postpone the capital gains tax liability on account of delay in receipt of sale consideration and on the very same criteria, the AO cannot bring capital gains to taxation in the year of receipt of part of sale consideration. The tax authorities are not justified in placing reliance on the allotment letter given by the developer to the assessee. As per the decision rendered in the case of Chaturbhuj Dwarkadas Kapadia 2003 (2) TMI 62 - BOMBAY HIGH COURT the liability to capital gains tax shall arise upon entering development agreement, if the assessee has handed over the possession of property and received part consideration. The copy of occupancy certificate show that the assessee had handed over the possession as per the development agreement and the construction itself has been completed in the year 2006. All these events have taken place much prior to the financial year relevant to AY 2008-09. The assessee has also placed copies of electricity bills to show that he has taken possession of flats in the year 2005 itself. These facts would show that the capital gains liability cannot, in any case, would arise in AY 2008-09. Thus the capital gains, if any, arising on account of development agreement is not assessable in assessment year 2008-09. - Decided in favour of assessee.

Summary

Issues:
Assessment of long term capital gain for AY 2008-09 based on the transaction date of allotment of flats.

Analysis:
The appellant challenged the assessment order on various grounds before the Ld CIT(A). Firstly, it was argued that the liability to capital gains did not arise in AY 2008-09 as the development agreement was entered in 2002, citing the decision in Chaturbhuj Dwarakadas vs. CIT. Secondly, it was contended that the right to additional FSI obtained due to amended D.C regulations did not have an attributable "cost," making the transfer of FSI rights not assessable to capital gains. Thirdly, the appellant claimed eligibility for deduction under sections 54/54F of the Act for acquiring new flats against the development rights granted. Lastly, the argument was made that if the developer acted as a contractor only, there was no transfer at all.

The Ld CIT(A) upheld the AO's order, stating that development rights are capital assets and the transfer of development rights falls within the scope of the Income Tax Act. It was noted that under the development/supplementary agreement, there was only a "promise of allotment" of the flats, which were actually allotted on 15-04-2007, leading to the correct assessment of capital gains in AY 2008-09.

During the appeal, the Ld AR argued that as per the development agreement, the possession of the property was handed over in 2002, and capital gains liability, if any, should arise in AY 2003-04, relying on legal precedents. The AR emphasized that the occupation certificate was received in 2006, and possession of the flats was taken even earlier. Therefore, the capital gains should not be assessed in AY 2008-09, regardless of the allotment letter issued by the developer.

After considering the arguments and evidence presented, the Tribunal found that the capital gains arising from the development agreement were not assessable in AY 2008-09. It was established that the possession was handed over earlier, and all relevant events occurred before the financial year in question. The AO's reliance on the allotment letter was deemed unjustified, and the order passed by the Ld CIT(A) was set aside. Consequently, the Tribunal directed the AO to delete the capital gains for AY 2008-09, allowing the appeal of the assessee.