2018 (3) TMI 138 - AT - Income Tax

Reopening of assessment - gain on arising on transfer of capital asset - period of holding - Held that - Assessee filed return of income without admitting any capital gain nor there is any mention in the return about the development agreement entered by assessee. The information has come to the knowledge of the AO consequent to the survey proceedings in M/s. Diamond Infra which led to the reopening of assessment u/s. 147 not only in assessee s case but also in other cases, where all the owners have entered into development agreement with the said party. After examining the facts, I am of the opinion that the AO correctly invoked the provisions of Section 147 and therefore, the proceedings are valid in law. As far as the issue of bringing to tax the capital gains during the year, it is the common agreement by many people, who has purchased lands/plots in the developed area. It is also noticed that the said assessee went to construct the apartments and hand over the flats as per the schedule to the respective persons, including assessee. Some of the agreement holders also sold the flats in semi-finished condition or in fully developed condition, whereas few like assessee retained the flats as such. Therefore assessee did hand over the possession and provisions of Section 2(47) regarding transfer certainly get attracted. Since there is part performance of the contract in the nature referred to in Section 53 of Transfer of Property Act, 1882, Clause(v) of Section 2(47) is clearly attracted. Therefore, I agree with the stand of AO that the capital gains did arise during the year under consideration as the agreement was entered on 12-05- 2008. Accordingly, the issue of bringing to tax the capital gains during the year is to be upheld. Arguments raised by the Ld. Counsel is that new Section 45(5A) has been introduced which defers the capital gains to the year of completion of the project by the Finance Act, 2017. This being substantive provision, I am of the opinion that this cannot be applied to the development agreement entered into earlier, in which 2(47)(v) would certainly get attracted. Whether property is held for sufficient period so as to attract Short Term Capital Gain or Long Term Capital Gain - Held that - It is the contention of assessee that they have paid advances much earlier and took possession also whereas registration was completed on 10-08-2005. It is not correct on the part of AO to consider the date of registration alone as the date of obtaining the property. There are various judicial principles supporting the contentions that registration is only a conclusive evidence but ownership can be obtained much earlier also. As seen from the purchase deed also, there are recitals that Shri Bala Swamy, father of vendor has himself developed the property and then obtained permissions but later on made four gift settlements to his son and after obtaining HUDA permissions, has registered the property on that date. Even though the receipt of sale consideration date-wise has not mentioned, it is the contention that assessees have paid the amounts much earlier also. This aspect has not been examined by the AO at all. Thus the issue of having possession of the property at the time of purchase of property by assessee, before registration is to be examined in the light of the payments made by assessee, permissions obtained from HUDA etc., so that the issue can be finally concluded on facts whether the property has to be considered as long term capital asset or short term capital asset. Full value of consideration, for computation of capital gains - Held that - AO has taken the cost of construction of the properties which are given in lieu at the time of completion of the project and gave certain discount so that the value is fixed at 1097 per Sft. This is not a correct method. Since the agreement was entered into in May, 2008 either the cost of the land at 50% of 266.66 Sq. Yds., should have been considered for sale consideration or the probable value of the cost of construction on that date has to be considered. It is not proper on the part of the AO to consider the subsequent cost which may involve escalation of cost from 2008 to 2013. Direct the AO to consider the probable cost of construction as on May 2008 or the SRO Value of the land-in-question on the date of agreement should be considered as full value of consideration for the purpose of computation of capital gains on the transfer of 50% of the land holding for development.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147.
2. Determination of whether the property is a Long Term Capital Asset or Short Term Capital Asset.
3. Computation of capital gains and determination of full value of consideration.
4. Applicability of Section 45(5A) for taxation of capital gains in the year of completion of the project.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:

The assessee contested the reopening of the assessment, arguing that it was based on a change of opinion without new tangible material. However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the reopening, noting that the return was processed under Section 143(1) and the development agreement came to the knowledge of the Assessing Officer (AO) through survey operations under Section 133A. The CIT(A) followed the principles laid down by the Supreme Court in ACIT Vs. Rajesh Jhaveri Stock Brokers (P) Ltd., [291 ITR 500] (SC), rejecting the contentions of change of opinion and lack of tangible material. The Tribunal agreed with the CIT(A) that the AO correctly invoked Section 147, as the development agreement was not disclosed in the return, and the information was obtained from survey proceedings.

2. Determination of Long Term Capital Asset or Short Term Capital Asset:

The AO considered the property as a Short Term Capital Asset, reckoning the period of holding from the date of registration. The assessee argued that the property was held for a longer period, having paid advances and taken possession earlier. The Tribunal noted that the AO did not examine the payments made before registration and the permissions obtained. It directed the AO to re-examine whether the property was held for a sufficient period to be considered a Long Term Capital Asset, taking into account the payments and possession before registration.

3. Computation of Capital Gains and Determination of Full Value of Consideration:

The AO computed the Short Term Capital Gain by considering the entire 267 Sq. Yds. of land and the cost of construction at the time of project completion. The Tribunal found this approach incorrect, noting that only 50% of the property was transferred, and the valuation should be based on the probable cost of construction or the SRO value of the land at the time of the development agreement in May 2008. The Tribunal directed the AO to re-compute the capital gains accordingly.

4. Applicability of Section 45(5A) for Taxation of Capital Gains:

The assessee argued that under the amended Section 45(5A) by the Finance Act, 2017, capital gains in case of Joint Development Agreements (JDAs) arise in the year the landowner receives their share of the property. The Tribunal held that this provision, being substantive, is applicable from 01-04-2018 and cannot be applied retrospectively to the impugned assessment year. Therefore, the capital gains were taxable in the year of entering into the development agreement, as per the jurisdictional High Court decision in Potla Nageswara Rao Vs. DCIT [365 ITR 249] (AP).

Conclusion:

The Tribunal upheld the reopening of the assessment and the taxability of capital gains in the year of entering into the development agreement. However, it remanded the issues of determining whether the property is a Long Term Capital Asset and the proper valuation for computation of capital gains to the AO for fresh examination. The appeals were partly allowed for statistical purposes.