2012 (10) TMI 666 - AT - Income Tax

Scope of Transfer u/s 2(47)(v) - chargeability of capital gains in respect of the land not transferred but only given for development - Held that - In present case, owners have entered into an agreement for development of the property and certain rights were assigned to the developer who in turn had made the substantial payment and consequently entered into the property and thereafter if the transferee has taken steps in relation to construction of the flats, then it is to be considered as transfer u/s. 2(47)(v). The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of S2(47)(v). If the transferee was undisputedly willing to perform its part of the contract, and if the possession and control of the property is already vested with the transferee and the impugned development agreement has been duly acted upon and it is still in operation, it has to be decided that there is a transfer u/s. 2(47)(v). Entering into the property and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of S. 45 on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. Accordingly, issue relating to transfer of property u/s. 2(47)(v) is decided in favour of the Department See Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT 2003 (2) TMI 62 - BOMBAY HIGH COURT Dis-allowance of interest expenditure on ground of fund being used for non-business purpose diverted to sister concern - Held that - Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. There should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii). That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed Decided against assessee.

Issues Involved:
1. Violation of provisions of law by CIT(A).
2. Consideration of the grant of right to construct as a transfer under Section 2(47) of the Income Tax Act.
3. Possession of the property not handed over to the developer.
4. Assessment of capital gains on entering into a development agreement.
5. Transfer of legal possession on entering into a development agreement.
6. Double taxation of capital gains.
7. Disallowance of interest expenditure in M/s. R.S. Arora Rubber Corp.
8. Disallowance of interest expenditure in M/s. Fixo Seal Stoppers and Profiles.
9. Adoption of cost of land by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Violation of Provisions of Law by CIT(A):
The assessee contended that the CIT(A)'s order was in gross violation of the provisions of law and hence invalid. However, the judgment did not provide a specific analysis or ruling on this contention.

2. Consideration of Grant of Right to Construct as Transfer under Section 2(47) of the Income Tax Act:
The CIT(A) upheld the Assessing Officer's finding that the development agreement constituted a transfer under Section 2(47). The Tribunal agreed with this interpretation, citing that the development agreement allowed the developer to enter the property and exercise general control, which amounted to legal possession. The Tribunal referenced several case laws, including the decision in the case of Dr. Maya Shenoy, to support this conclusion.

3. Possession of the Property Not Handed Over to the Developer:
The assessee argued that possession was not handed over as per Clause 15 of the development agreement. The Tribunal dismissed this argument, stating that the developer's right to enter and control the property for construction purposes constituted possession under Section 2(47). The Tribunal emphasized that the intention of the parties and the actual control exercised by the developer were crucial factors.

4. Assessment of Capital Gains on Entering into a Development Agreement:
The Tribunal upheld the assessment of capital gains in the year the development agreement was entered into, despite the developer not completing construction or making full payment. The Tribunal referenced the case of Chaturbhuj Dwarkadas Kapadia, which held that capital gains arise when the developer is allowed to enter and control the property.

5. Transfer of Legal Possession on Entering into a Development Agreement:
The Tribunal concluded that entering into a development agreement and allowing the developer to undertake construction amounted to the transfer of legal possession under Section 2(47). This was based on the interpretation that possession need not be exclusive and that concurrent possession by the owner and developer was sufficient to constitute a transfer.

6. Double Taxation of Capital Gains:
The assessee claimed double taxation as capital gains were offered in subsequent years when semi-finished apartments were received. The Tribunal did not find merit in this argument, stating that the capital gains were taxable in the year the development agreement was executed, as per the provisions of Section 2(47).

7. Disallowance of Interest Expenditure in M/s. R.S. Arora Rubber Corp:
The Assessing Officer disallowed interest expenditure on the grounds that loans were diverted for non-business purposes. The Tribunal upheld this disallowance, emphasizing that the onus was on the assessee to prove that loans were used for business purposes. The Tribunal noted that the assessee failed to provide sufficient evidence to justify the use of borrowed funds for business purposes.

8. Disallowance of Interest Expenditure in M/s. Fixo Seal Stoppers and Profiles:
Similar to the previous issue, the Tribunal upheld the disallowance of interest expenditure in M/s. Fixo Seal Stoppers and Profiles. The Tribunal reiterated that the assessee did not provide adequate evidence to support the claim that the loans were utilized for business purposes.

9. Adoption of Cost of Land by the Assessing Officer:
The Revenue challenged the CIT(A)'s direction to adopt the cost of land at Rs. 22,000 per sq. yard instead of Rs. 25,000. The Tribunal found no infirmity in the CIT(A)'s finding and confirmed the adoption of the cost at Rs. 22,000 per sq. yard based on the SRO's record.

Conclusion:
The Tribunal dismissed the appeals of both the Revenue and the assessee, upholding the CIT(A)'s order with minor modifications related to the valuation of the land. The key takeaway was the affirmation that the development agreement constituted a transfer under Section 2(47), leading to the assessment of capital gains in the year the agreement was executed.

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