2018 (9) TMI 111 - HC - Income Tax

Revision u/s 263 - capital gain addition - Held that - It was only after the apportionment of the areas upon the construction on the land being completed that the developer could have rightfully retained possession of the developer s 61% share and resisted dispossession by discharging his obligation under the agreement and seeking refuge in terms of Section 53A of the Act of 1882 despite the formal conveyance pertaining to the developer s entitlement not having being executed. In any view of the matter, the right of the developer to retain possession and protect such possession under Section 53A of the Act of 1882 could never have arisen prior to the construction being completed and the apportionment effected. There is also a minor matter of the opening words of Section 45 of the Act of 1961 being given some effect while reading such provision. In terms of Section 45(1) of the Act, the expression chargeable to income tax under the head Capital gains , operates on Any profits or gains arising from the transfer of a capital asset . There can be no tax payable unless there is any profit or gain that has arisen. It could never have been the Revenue s case that there was any monitory profit or gain that accrued to the assessee at the time of the execution of the agreement of February 7, 2007. In the light of the discussion above, the first ground urged by the Revenue does not appeal and the order of the Appellate Tribunal does not call for any interference as it set aside the erroneous view taken by the Commissioner in the order passed under Section 263 of the Act. Claim of depreciation - whether the land had to be regarded as a current asset which could be dealt with by the assessee in its usual course of business or it had to be treated as a fixed asset of the assessee, probably deriving income - Held that - CIT (Appeals) passed an order on such aspect of the matter on August 20, 2010 and on September 8, 2011 the Tribunal passed its order, holding that the immovable property had to be regarded as a fixed asset of the assessee and depreciation calculated accordingly. Since such issue in respect of the same immovable property had been conclusively dealt with in orders passed by authorities superior to the Commissioner, the Commissioner, in exercise of his powers u/s 263could not have reop ened the same issue. It was a closed chapter and the Assessing Officer s acceptance of the quantum of depreciation based upon the assessee s representation that such asset had to be treated as the assessee s fixed asset could not have been questioned.

Summary

Issues:
1. Capital gains tax liability on transfer of land to developer.
2. Treatment of constructed area as current or fixed asset for depreciation.

Issue 1: Capital gains tax liability on transfer of land to developer

The Revenue contended that under Section 2(47)(v) of the Income Tax Act, 1961, the transfer of land to a developer for construction purposes constituted a taxable event, triggering capital gains tax liability in the assessment year 2007-08. The Revenue emphasized that possession of the land by the developer upon execution of the agreement amounted to a transfer. The Commissioner, invoking Section 263, sought to correct what was perceived as an erroneous view by the Assessing Officer regarding the timing of capital gains tax liability. The Commissioner's order was based on the interpretation that possession transfer occurred at the agreement's execution, therefore necessitating tax payment at that point.

The High Court analyzed the provisions of Section 2(47)(v) and the legislative intent behind its insertion, focusing on preventing tax avoidance through certain transactions. The Court highlighted that not all possession transfers constitute a taxable event under this provision, specifically emphasizing the protection under Section 53A of the Transfer of Property Act, 1882. The Court elucidated that the crucial factor determining transfer is the actual transfer of possession for ownership enjoyment, not mere construction facilitation.

The Court further examined the specific agreement in question, where the developer was entitled to a portion of the land and constructed area, while the assessee retained the rest. The Court concluded that possession transfer, as contemplated in Section 2(47)(v), did not occur until the completion of construction and apportionment of areas as per the agreement terms. Therefore, the Revenue's argument for immediate tax liability was dismissed.

Issue 2: Treatment of constructed area as current or fixed asset for depreciation

The second issue revolved around the classification of the constructed area retained by the assessee for depreciation purposes. The Commissioner, under Section 263, questioned the treatment of the constructed area as a fixed asset by the Assessing Officer, contending that it should be considered a current asset. The Commissioner's basis for intervention was the perceived prejudice to Revenue due to incorrect depreciation calculation.

The High Court delved into the history of the matter, noting previous decisions by the CIT (Appeals) and the Tribunal classifying the immovable property as a fixed asset for depreciation. Given the conclusive nature of these prior determinations, the Court held that the Commissioner's attempt to revisit the depreciation issue under Section 263 was unwarranted. The Court emphasized that the matter had been settled in superior authorities' orders, precluding the Commissioner's interference.

Consequently, the Court dismissed the Revenue's contentions on both issues, affirming the Tribunal's order and rejecting the Revenue's appeals. The Court concluded that the Revenue's arguments lacked merit, leading to the dismissal of the appeals without costs.

This detailed analysis of the judgment from the High Court of Calcutta provides a comprehensive understanding of the issues surrounding capital gains tax liability and asset classification for depreciation, offering insights into the legal interpretation and application of relevant tax laws in the context of the specific case.