2019 (7) TMI 540 - HC - Income Tax

Capital gain - development agreement entered - nature of transaction between the assessee and the developer would fall within the definition of transfer u/s 2(47) - whether the Tribunal was right in interpreting the terms of development agreement and rejecting the contentions that the entire transfer took place in an earlier year and no portion of capital gains is taxable in the year under consideration viz. 2001-2002? - HELD THAT - The Tribunal was of the view that the assessee was only a licensee. We do not agree with the said finding on account of a crucial fact which cannot be disputed by the Revenue viz. the No Objection Certificate issued by the Appropriate Authority under Section 269-UL of the Act. The approval clearly states the extent of land which has been agreed to be transferred. So far as the development agreement dated 27.03.1994 is concerned the extent of land agreed to be transferred is 47.5% of undivided share in 18675 sq.ft. the extent of built-up area which was agreed to be transferred measure 6500 sq.ft. The apparent sale consideration for the land and building was 98, 99, 100/- which was approved by the Appropriate Authority. So far as the second development agreement dated 24.05.1995 is concerned the extent of land agreed to be transferred was 3997 sq.ft i.e. 45% of undivided share in 8882 sq.ft. However in the said agreement there was no building. These agreements were considered by the Appropriate Authority and noting there is an agreement to transfer property with reasonable certainty and on being satisfied about the apparent sale consideration no objection was granted. Therefore it would be incorrect to state that the development agreement do not contemplate transfer of immovable property but we may say that there is a clear certainty in the extent to be transferred. Therefore in our considered view the transaction would continue to qualify under the definition of transfer as defined under Section 2(47)(v) of Act. Value of cost of construction - appellate authority reckoned the delay in completing the project obtained information from the developer and uniformly fixed the cost at 717/- per sq.ft. for both the agreements as against 450 per sq.ft. and 550/- per sq.ft. respectively as mentioned by the assessee - HELD THAT - In the absence of any material to doubt the cost of construction which was consciously agreed to between the parties question of adding the damages paid by the developer on account of non fulfilment of the condition in the agreement with regard to the time limit of handing over the possession of the constructed area can in no way increase the cost of construction at the hands of the appellant/assessee. Therefore the finding in this regard requires to be set aside and accordingly it is hold that the cost of construction as mentioned in the agreement namely 480/- and 550/- respectively are confirmed and the second substantial question of law is answered accordingly. Inclusion of entire damages deposit and rent free accommodation to be assessed as capital gain - HELD THAT - The development agreement makes it abundantly clear and the first of the covenants states that the developer shall provide free of rent for the owners alternate residential accommodation. Admittedly rents were paid by the developer rental deposit was paid by the developer and the agreement does not provide for any adjustment of these payments as against the consideration payable under the development agreement. Therefore the Tribunal committed an error in including the same to be assesseed as capital gains. Accordingly this finding is set aside and the substantial question of law is answered in favour of the assessee. Exemption u/s 54 - Tribunal rejected the claim of the assessee on the ground that the transfer as per the development agreement dated 27.03.1994 was only land and not building - HELD THAT - So far as the development agreement dated 27.03.1994 is concerned the schedule to the agreement clearly contemplates transfer of not only the land but also building thereon. This is evidently clear from the order of the Appropriate Authority dated 22.06.1994 which shows that the extent of building is 6, 500 sq.ft. This document of transfer was accepted and No Objection Certificate was issued by the Appropriate Authority. Therefore there could be no better document to establish that what was transferred was not only the land but also that the building standing thereon. So far as the development agreement dated 24.05.1995 is concerned we find there is no building thereon and in fact a readjustment of schedule A of the property has been mentioned in the agreement which in fact is the schedule property in the development agreement dated 27.03.1994. Thus the assessee is entitled to exemption under Section 54 of the Act. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Interpretation of development agreement and timing of capital gains taxability.
2. Determination of the cost of construction for capital gains computation.
3. Inclusion of damages, deposits, and rent-free accommodation in capital gains.
4. Eligibility for exemption under Section 54 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interpretation of Development Agreement and Timing of Capital Gains Taxability:
The Tribunal interpreted the development agreement and concluded that the entire transfer did not occur in an earlier year, making capital gains taxable in the year 2001-2002. The Tribunal referred to clause no. 21 of the agreement, determining that the developer was a licensee and did not have absolute possession or control over the property until the undivided share of land was registered to the developer’s nominee in 2001-2002. The Tribunal held that the development agreement was not relevant for deciding the transfer of property. However, the High Court disagreed, emphasizing the No Objection Certificate issued by the Appropriate Authority, which indicated the transfer of property with reasonable certainty. The High Court concluded that the transaction fell within the definition of "transfer" under Section 2(47)(v) of the Income Tax Act, setting aside the Tribunal's order and ruling in favor of the assessee.

2. Determination of the Cost of Construction for Capital Gains Computation:
The appellate authority fixed the cost of construction at ?717 per sq.ft., considering the delay in project completion, as opposed to the assessee's mentioned costs of ?450 and ?550 per sq.ft. The High Court found that the agreed costs of ?450 and ?550 per sq.ft., as per the development agreements, should be upheld. The Court noted that damages paid by the developer for delayed possession should not increase the cost of construction for the assessee. Thus, the High Court set aside the Tribunal's finding and confirmed the costs as agreed in the development agreements.

3. Inclusion of Damages, Deposits, and Rent-Free Accommodation in Capital Gains:
The Tribunal included the entire damages, deposits, and rent-free accommodation provided by the developer as part of the capital gains. The High Court found this to be erroneous, noting that the development agreement clearly stipulated that the developer would provide alternate residential accommodation free of rent, and these payments were not to be adjusted against the consideration payable under the agreement. The High Court set aside the Tribunal's finding, ruling in favor of the assessee.

4. Eligibility for Exemption Under Section 54 of the Income Tax Act, 1961:
The Tribunal rejected the assessee's claim for exemption under Section 54, stating that the transfer involved only land and not building. The High Court examined the development agreement dated 27.03.1994 and the No Objection Certificate, which indicated the transfer of both land and building (6,500 sq.ft.). For the second agreement dated 24.05.1995, the High Court noted there was no building involved. Consequently, the High Court ruled that the assessee was entitled to exemption under Section 54 for the transfer involving both land and building, answering the question in favor of the assessee.

Conclusion:
The High Court allowed the tax case appeal, answering all substantial questions of law in favor of the assessee and setting aside the Tribunal's order. No costs were awarded.