2021 (12) TMI 589 - AT - Income Tax

Validity of reopening of assessment u/s 147 - Assessment of capital gain upon entering joint development agreement - HELD THAT - It is an admitted fact that the Joint Development Agreement was not furnished by the assessee along with return of income and the details of JDA came to the notice of the AO only subsequently - JDA would constitute fresh material. It is a settled proposition of law that the entries made in the books of account will not be deciding factor in so far as Income tax Act is concerned. Hence we are of the view that there was sufficient reason for the AO to entertain the belief that there was escapement of income. Accordingly, we uphold the validity of reopening of assessment. Transfer of capital asset u/s 2(47) - We notice that the assessee has entered into a joint development agreement on 29.12.2005 and on the very same day a supplementary joint development agreement was also entered. Both the agreements have been registered with the registration authorities - the developer is granted irrevocable permission and license to enter the scheduled property for the purpose of construction of residential apartments as per the plan to be obtained. It is specifically been mentioned that the license so granted shall not be considered as possession delivered in part performance of the contract u/s 53(sic. 53A) of Transfer of property Act nor any property right shall be deemed in favour of developer. The transferee should have taken possession in part performance of the contract and has done same act in furtherance of the contract. In the instant case, development agreement clearly specified on the possession of the property was not given and what was given is only license to enter the property. The question whether granting of such kind of license would amount to Possession within the meaning of sec.53A of Transfer of Property Act r.w.s sec. 2(47)(v) of Income tax Act was examined by the Bangalore SMC bench of Tribunal in the case of Smt. Lakshmi Swarupa 2018 (10) TMI 1345 - ITAT BANGALORE In the instant case also, we have noticed that the assessee has given permissive possession and not legal possession as contemplated within the meaning of sec.53A of the Transfer of Property Act. Hence we hold that the provisions of sec.53A of the Transfer of Property Act are not applicable to the impugned Joint Development Agreement. In this view of the matter, the provisions of sec.2(47)(v) of the Act are also not applicable. Hence the tax authorities are not justified in invoking the above said provision and consequently, the capital gains assessed in the hands of the assessee is liable to be deleted - direct the AO to delete the assessment of short term capital gains.

Summary

Issues Involved:
1. Validity of reopening of assessment.
2. Assessment of capital gain of ?1,00,74,435/- upon entering a joint development agreement.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
The assessee filed a return of income for the assessment year 2006-07, declaring a loss of ?83,677/-. The return was processed under section 143(1) of the Income-tax Act, 1961. The Assessing Officer (A.O.) later discovered that the assessee had entered into a joint development agreement (JDA) with M/s. Vastu Structures Pvt. Ltd. on 29.12.2005, transferring 65% of the undivided interest in a land in exchange for 35% of the built-up area and a refundable deposit of ?10 lakhs. The assessee did not declare any capital gain from this transaction in the return filed. Consequently, the A.O. reopened the assessment under section 147 by issuing a notice under section 148 on 30.3.2013.

The assessee contested the reopening, arguing that the land was held as stock-in-trade and not as a capital asset. The A.O. disagreed, treating the land as a capital asset and invoking section 2(47)(v) of the Act, which pertains to the transfer of property under section 53A of the Transfer of Property Act. The A.O. relied on the Karnataka High Court's decision in CIT Vs. Dr. T.K. Dayalu and assessed a short-term capital gain of ?1,00,74,435/-.

The CIT(A) upheld the validity of the reopening and the assessment of the capital gain. The Tribunal noted that the original return was processed under section 143(1), and the JDA was not furnished with the return, constituting fresh material. Thus, the A.O. had sufficient reason to believe there was escapement of income, validating the reopening of the assessment.

2. Assessment of Capital Gain:
The assessee argued that the JDA did not result in a transfer of property under section 53A of the Transfer of Property Act, as possession of the property was not given in part performance of the contract. The JDA explicitly stated that the developer was granted irrevocable permission and license to enter the property for construction, which does not equate to possession. The Tribunal examined the relevant clause of the JDA and concluded that the developer was granted a license, not possession, under section 53A.

The Tribunal referred to the Bangalore SMC bench's decision in Smt. Lakshmi Swarupa vs. ITO, which held that granting a license to enter the property does not constitute possession under section 53A. The Tribunal found that the provisions of section 2(47)(v) of the Act, which include transactions involving possession under section 53A, were not applicable as the developer did not receive legal possession.

The assessee also contended that the land was held as stock-in-trade, not a capital asset, making section 2(47)(v) inapplicable. The Tribunal noted that entries in the books of account are not decisive for income tax purposes. However, since the provisions of section 2(47)(v) were already deemed inapplicable, this contention did not require further adjudication.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the A.O. to delete the assessment of short-term capital gains. The appeal of the assessee was allowed, and the judgment was pronounced on 22nd Nov, 2021.