2013 (9) TMI 685 - HC - Income Tax

Year of chargeability of capital gains tax - Assessee is a widow and 81 years old lady. The assessee is the owner of the premises know as Dady Villa , situated at R.F. Bahadurji Marg (Meera Bai Marg), Lucknow - Assessee entered into an agreement with the builder Shivalik Real Estate Promoters Pvt. Ltd. As per agreement, an area of 18603 sq. ft. was to be developed into a multi story apartment. The builder developed the land and constructed a complex known as Khushnuma Complex . The built up area was 1,670.3147 sq. mtrs. The builder was to give 35% of the built up area to the assessee or its sale value if the assessee wanted it to be sold through the builder. The builder was to get 65% of the built up area along with undivided 65% interest on the land Contended that since assessee had handed over the possession of the plot to the builder in pursuance of an agreement for transfer i.e. in part performance of a contract referred to in Section 53A of the Transfer of Property Act, the transfer took place during the previous year itself in view of the provisions of Section 2(47) of the Act Held that - capital gain can be charged only on receipt of the sale consideration and not otherwise. How can a person pay the capital gain if he has not received any amount - In the instant case, the assessee has honestly disclosed the capital gain for the assessment year 1998-99 to 2000-01, when the flats/areas were sold and consideration was received. During the year under consideration, only an agreement was signed - No money was received. So, there is no question to pay the capital gain Decided against the Revenue.

Summary

Issues:
1. Interpretation of Section 2(47)(ii) of the Income Tax Act, 1961 regarding extinguishment of right in the property.
2. Validity of transfer of property and compliance with Registration Act, 1908.
3. Applicability of CBDT Circular No. 791 on property conversion into stock in trade.

Analysis:

Issue 1:
The Department filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the ITAT's judgment on the extinguishment of right in the property. The agreement between the assessee and the builder for the development of land into a multi-story apartment was scrutinized. The Assessing Officer contended that the transfer occurred during the previous year itself, triggering capital gain tax liability. However, the CIT(A) and the Tribunal ruled in favor of the assessee, emphasizing that capital gain can only be charged upon receipt of sale consideration. The Tribunal's decision was upheld as the agreement did not involve any monetary transaction during the relevant assessment year.

Issue 2:
The validity of the property transfer and compliance with the Registration Act, 1908 were questioned. The Department argued that the agreement constituted a transfer under Section 2(47)(ii) of the Act, despite the absence of registration. The Department contended that the builder acquired an enforceable right to develop the plot, leading to capital gain liability. However, the Tribunal held that since no sale consideration was received during the assessment year, capital gain tax was not applicable. The Tribunal's decision was supported by the High Court, emphasizing that the agreement's non-registration rendered it ineffective for tax purposes.

Issue 3:
The application of CBDT Circular No. 791 regarding property conversion into stock in trade was debated. The Department claimed that the circular did not apply to the case, as it was intended for tax exemptions on capital assets converted into stock in trade for specific deductions under the Act. The Tribunal's ruling in favor of the assessee was maintained by the High Court, highlighting that the circular's provisions were not relevant to the current scenario. The Tribunal's decision to delete the addition for long-term capital gains was upheld, as the capital gain was disclosed and taxed in subsequent assessment years when actual sale transactions took place.

In conclusion, the High Court dismissed the Department's appeal, upholding the Tribunal's decision in favor of the assessee on all substantial questions of law raised, emphasizing the absence of capital gain liability due to the non-receipt of sale consideration during the relevant assessment year.