2014 (4) TMI 351 - AT - Income Tax

Assessability of capital gain on property - transfer - Whether it is assessable in the year in which the development agreement was entered into or in the relevant subsequent year in which the area duly developed and constructed coming to the share of the assessee-owner has been handed over to the assessee Held that - As on date there was no developmental activity on the land which is subject matter of development agreement - The process of construction has not been even initiated and no approval for the construction of the building is obtained - Thus, the sale consideration in the form of developed area has not been received - Mere receipt of refundable deposit cannot be termed as receipt of consideration - the AO calculated the capital gain on the entire land, even though the assessee has retained 38% share to itself. There is no accrual of income in favour of the assessee as per section 48 of the Act - Due to lapse on the part of the transferee, the construction has not taken place in the year under consideration, and it has not commenced even now - the assessee has fulfilled its part of the obligation under the development agreement, the developer has not done anything to discharge the obligations cast on it under the develop agreement, the capital gains cannot be brought to tax in the year under appeal, merely on the basis of signing of the development agreement during this year Relying upon M/s. Fibars Infratech Pvt. Ltd. Versus The ITO, Ward-1(2), Hyderabad 2014 (1) TMI 344 - ITAT HYDERABAD - the capital gains on the property cannot be brought to tax Decided in favour of Assessee.

Issues Involved:
1. Legality of initiation of proceedings under Section 153C of the Income Tax Act.
2. Determination of capital gains and the timing of its assessment.
3. Estimation of market value of the property.
4. Consideration of the entire property given for development.
5. Adoption of low market value as on 1.4.1981 and improper indexation.

Detailed Analysis:

1. Legality of Initiation of Proceedings under Section 153C:
The assessee contested the initiation of proceedings under Section 153C, arguing that no incriminating documents were on record. The Tribunal noted that the ground contesting the legality of invoking Section 153C was not raised before the CIT(A). Consequently, this issue was not addressed in detail, as the decision on the merits rendered it academic.

2. Determination of Capital Gains and Timing of Its Assessment:
The core issue was whether the capital gains should be assessed in the year of the development agreement or in the year the developed area is handed over. The Tribunal observed that the developer had not performed any obligations under the agreement, and no developmental activity had taken place. The Tribunal referred to the provisions of Section 2(47)(v) and Section 45 of the Income Tax Act, concluding that the capital gains could not be taxed in the year of the agreement if the developer had not acted upon it. The Tribunal cited the case of Smt. K. Radhika and others, emphasizing that the transferee must demonstrate willingness to perform its obligations for Section 53A of the Transfer of Property Act to apply. Since the developer had not commenced construction or obtained necessary approvals, the capital gains could not be assessed in the year under appeal.

3. Estimation of Market Value of the Property:
The assessee challenged the market value estimation of Rs.3000 per sq. yard by the CIT(A), arguing it was too high. The Tribunal did not directly address this issue, as the primary focus was on the timing of capital gains assessment. However, it implied that the valuation should reflect the actual conditions and agreements in place.

4. Consideration of the Entire Property Given for Development:
The assessee argued that the CIT(A) erred in considering the market value of the entire property without accounting for the 30% of the developed area reverting to the landlord. The Tribunal noted that the developer had not undertaken any developmental activity, and the consideration in the form of developed area had not been received. Thus, the capital gains could not be assessed based on the entire property.

5. Adoption of Low Market Value as on 1.4.1981 and Improper Indexation:
The assessee contended that the CIT(A) adopted a low market value of Rs.10000 per acre as on 1.4.1981 and did not index the property correctly. The Tribunal did not delve into this issue in detail, as the primary decision focused on the timing of capital gains assessment. However, it emphasized that the valuation and indexation should align with the actual receipt of consideration.

Conclusion:
The Tribunal set aside the orders of the Revenue authorities, holding that the capital gains on the property could not be taxed in the year under appeal. The addition made by the Assessing Officer and sustained by the CIT(A) was deleted. The assessee's grounds on the merits of the issue were allowed, while the grounds on the legality of initiation of proceedings under Section 153C were rejected as academic. The appeal was allowed in favor of the assessee.

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