2018 (5) TMI 1641 - AT - Income Tax

Accrual of capital gain - year of assessment - assessee as co owner - assessee contesting that refundable deposit is not part of sale consideration and when sale consideration has taken up for computation of capital gains deposit does not get taxed separately - Held that - Both the development agreements entered into by assessee and other co-owners did not envisage handing over of the physical possession of the land until the approvals of the building plans and one agreement M/s. Siri Lakshmi Balaji Constructions was even cancelled on 24-09-2012 as the developer failed to proceed with the development activity and no plans were approved by any authority. With reference to agreement with M/s. Siri Balaji Constructions even though the said concern partly fulfilled the agreement it could not complete the construction and ultimately land owners and flat owners completed the project and properties were sold by the committee as per the orders of the Lok Adalat. In the case of Amiantit International Holding Ltd 2010 (2) TMI 123 - AUTHORITY FOR ADVANCE RULINGS it was held that capital gain cannot arise on the basis of uncertain or indefinite future contingencies or hypothetical and imaginary estimations Thus the incidence of capital gains does not accrue or arise in the year under consideration and so the orders of AO and Ld. CIT(A) are liable to be set aside. - Decided in favour of assessee.

Issues Involved:
1. Taxability of capital gains in the year of entering into development agreements.
2. Whether refundable deposits form part of the sale consideration.
3. Applicability of Section 2(47) of the Income Tax Act.
4. Real income vs. hypothetical income.
5. Charging of interest under Section 234B.
6. Addition of unexplained cash credits.

Detailed Analysis:

1. Taxability of Capital Gains in the Year of Entering into Development Agreements:
The core issue revolves around whether the development agreements entered into by the assessee in the financial year relevant to AY 2007-08 resulted in a transfer of property, thereby attracting capital gains tax. The assessee argued that the development agreements did not lead to a transfer of property as stipulated under Section 2(47) of the Income Tax Act because the developers failed to fulfill their obligations, and the agreements were either canceled or subject to litigation. The Tribunal concurred, noting that the agreements did not result in the transfer of control over the property to the developers, and thus capital gains could not be levied.

2. Whether Refundable Deposits Form Part of the Sale Consideration:
The assessee contended that the refundable deposit received from the developers should not be included in the sale consideration for computing capital gains. The CIT(A) agreed with this contention and directed the AO to exclude the refundable deposit of ?55 Lakhs from the taxable amount. The Tribunal upheld this decision, emphasizing that the refundable deposit does not constitute part of the sale consideration.

3. Applicability of Section 2(47) of the Income Tax Act:
The Revenue argued that the development agreements constituted a transfer under Section 2(47)(v) and (vi) of the Act. However, the Tribunal found that the conditions for invoking Section 2(47) were not met, as the developers did not take possession of the property or fulfill the terms of the agreements. The Tribunal cited various judgments, including the Hon'ble Supreme Court's decision in CIT Vs. Balbir Singh Maini, to support the view that no transfer occurred as the agreements were not executed as intended.

4. Real Income vs. Hypothetical Income:
The Tribunal emphasized that only real income, not hypothetical income, is taxable under the Income Tax Act. Since the development agreements did not materialize, no real income accrued to the assessee. The Tribunal relied on the principle that income must be factually and practically realizable to be taxed, as established in various judicial precedents.

5. Charging of Interest under Section 234B:
The assessee challenged the computation of interest under Section 234B. However, this issue became academic as the Tribunal set aside the addition of capital gains, rendering the interest computation moot.

6. Addition of Unexplained Cash Credits:
In the case of ITA No. 1233/Hyd/2016, the AO added ?6,50,000/- as unexplained cash credits, which the CIT(A) upheld. The assessee argued that the amounts were received from family members and friends. The Tribunal directed the AO to re-examine the issue, allowing the assessee an opportunity to substantiate the claims with proper evidence.

Conclusion:
The Tribunal allowed the appeals, setting aside the orders of the AO and CIT(A) regarding the addition of capital gains. The Tribunal ruled that no capital gains arose from the development agreements as they were not fulfilled. The issue of unexplained cash credits was remanded to the AO for re-examination. The appeals were thus allowed in favor of the assessee.

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