2015 (8) TMI 363 - AT - Income Tax

Year of taxability of capital gains - Revenue bringing to tax the capital gains on the reason that transfer has occurred during the year - whether there was no transfer of property as per Section 2(47) under Clause-5 and Clause-3(b) of the development agreement dt. 11-02-2004? - Held that - There is no dispute with reference to the fact that the first agreement was dt. 11-02-2014 in which assessee was entitled to 50% of the constructed area. In case, the possession was given as per the contention of Revenue consequent to this agreement, certainly the capital gains was leviable in AY. 2004-05 itself, as the agreement entered has been fulfilled by giving possession if not immediately but after some time. Therefore, following the principles of jurisdictional High Court in the case of Potla Nageswara Rao Vs. DCIT 2014 (8) TMI 636 - ANDHRA PRADESH HIGH COURT , which Ld.CIT(A) relied upon, the capital gains is certainly attracted on entering into development agreement, even if consideration was not received. In that way, assessee s contention that capital gains cannot be brought to tax in this assessment year( AY 2005- 06) is valid. Both AO and CIT(A) are not correct in contending that year of possession or the deemed possession is the year of capital gains, ignoring the year of agreements entered by assessee and the terms of agreement. If this logic of Revenue is accepted, then a situation may arise that parties try to incorporate a clause that possession was handed over much earlier to defeat the levy of capital gains. It also does not answer sale to existing tenant who is in possession of property from a longer period. Therefore taking possession alone in to consideration for levy of capital gains ignoring the date of agreement and terms of agreement is not according to law. - Decided in favour of assessee,

Issues Involved:
1. Reopening of assessment under Section 148 of the Income Tax Act.
2. Taxability of capital gains based on the development agreement and the definition of transfer under Section 2(47) of the Income Tax Act.
3. Year of transfer of property for capital gains tax purposes.
4. Valuation of the superstructure.
5. Deduction under Section 54 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:
The assessee did not challenge the reopening of the assessment before the Commissioner of Income Tax (Appeals) [CIT(A)]. Therefore, the grounds related to the reopening of the assessment were not pressed and treated as withdrawn.

2. Taxability of Capital Gains and Definition of Transfer under Section 2(47):
The core issue was whether the capital gains arising from the development agreement should be taxed in the Assessment Year (AY) 2005-06. The assessee argued that no capital gain accrued during the year as the possession of the property was not completely handed over, and the conditions of the development agreement were not fulfilled. The Assessing Officer (AO) contended that the transfer occurred during AY 2005-06 based on the development agreement dated 03-11-2007, which stated that possession was handed over on 07-12-2004. The CIT(A) upheld the AO's view, relying on clauses of the development agreements and the jurisdictional High Court decision in Potla Nageswara Rao Vs. DCIT.

3. Year of Transfer of Property:
The assessee argued that the capital gains should be considered in AY 2008-09 or later, as the municipal approvals and urban land ceiling clearance were obtained in subsequent years. The Tribunal noted that the first agreement dated 11-02-2004 did not indicate complete possession transfer, and the second agreement dated 03-11-2007 mentioned possession for demolition purposes only after municipal sanctions. The Tribunal concluded that capital gains could not be taxed in AY 2005-06, as the actual transfer did not occur in that year. The Tribunal emphasized that the year of the agreement and the terms of the agreement should be considered for capital gains tax, not just the possession date.

4. Valuation of the Superstructure:
The assessee contended that the AO erred in taking the valuation of the superstructure at market value without considering the information provided by the builder. However, this issue was rendered moot as the Tribunal held that no capital gains could be brought to tax in AY 2005-06.

5. Deduction under Section 54:
The assessee's claim for deduction under Section 54 of the Income Tax Act was considered academic, as the Tribunal held that no capital gains could be taxed in AY 2005-06. Therefore, this issue did not require adjudication.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that capital gains could not be taxed in AY 2005-06. The AO was directed to examine the relevant assessment years in which the capital gains should be taxed, considering the agreements and the terms therein. The Tribunal emphasized that the year of the agreement and the fulfillment of its terms are crucial in determining the year of capital gains tax liability. The appeal was thus allowed, and the order of the AO and CIT(A) was set aside.

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