2025 (1) TMI 460 - HC - Income Tax

Capital gain computation - Transfer of capital asset u/s 2(47) - JDA - applicability of Section 53A of the Transfer of Property Act, 1882 - real ownership - assessee handed over the possession of the land to the developer - HELD THAT - Even though there is a contract to transfer the immovable property, which is signed by the parties, yet the contract has not been executed for consideration. A sum of Rs. 2,00,000/- mentioned in paragraph 6 of the development agreement is only the performance guarantee which is refundable. The aforesaid amount has not been paid by way of consideration of the transaction. The developer has been handed over the possession for the limited purpose of carrying out the development work. Therefore, in pursuance of the development agreement, the possession of the immovable property has not been handed over to the developer as contemplated u/s 53A of the Transfer of the Property Act, 1882. Therefore, the same does not fall within the definition of transfer under Section 2 (47) of the Act. Reliance placed by the Revenue in Potla Nageswara Rao 2014 (8) TMI 636 - ANDHRA PRADESH HIGH COURT the same is an authority for the proposition that element of factual possession and agreement are contemplated as transfer within the meaning of Section 2 (47) of the Act. It has further been held that when the transfer is complete, the consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income. In the instant case, under the development agreement there is no transfer and the consideration has also not been paid. Therefore, the aforesaid decision of the Division Bench has no application to the fact situation of the case. Similarly, in the case of Arvind S Phake 2017 (12) TMI 1235 - BOMBAY HIGH COURT , the possession was handed over to the developer and the entire consideration was paid. In the instant case, consideration has not been paid. Therefore, the Division Bench decision of the Bombay High Court also does not apply to the fact situation of the case. The finding has been recorded by the Tribunal that the appellant has handed over the possession of the entire property enabling the developer to enjoy 60% of the constructed area of the building cannot, but be said to be perverse. Similarly, the finding that the assessee is liable to pay capital gains tax during the assessment year 1997-98 also cannot be sustained. Substantial questions of law framed answered in favour of the assessee and against the revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

i) Whether the findings of the Income Tax Appellate Tribunal, that the appellant handed over possession of the entire property enabling the developer to enjoy 60% of the constructed area, are perverse?

ii) Whether the appellate authority was correct in law in holding that the appellant is liable to capital gains tax during the assessment year 1997-98?

2. ISSUE-WISE DETAILED ANALYSIS

Issue i: Possession and Enjoyment of Constructed Area

Relevant Legal Framework and Precedents: The court examined Section 2 (47) of the Income Tax Act, 1961, which defines 'transfer' in relation to capital assets, and Section 53A of the Transfer of Property Act, 1882, which deals with part performance of a contract.

Court's Interpretation and Reasoning: The court noted that the development agreement dated 04.05.1996 did not constitute a transfer under Section 2 (47) of the Act as the possession was handed over for the limited purpose of development and not as a transfer of ownership.

Key Evidence and Findings: The development agreement and the possession letter dated 11.05.1996 were crucial. The agreement specified that 60% of the constructed area would be retained by the developer, but there was no transfer of ownership at that stage.

Application of Law to Facts: The court found that the possession handed over was not in part performance of a sale agreement, as required under Section 53A of the Transfer of Property Act, 1882.

Treatment of Competing Arguments: The court considered the Revenue's argument that possession was handed over, enabling enjoyment of the property. However, it concluded that the possession was for development purposes only.

Conclusions: The court held that the Tribunal's finding regarding possession and enjoyment was perverse.

Issue ii: Liability to Capital Gains Tax

Relevant Legal Framework and Precedents: The court referred to Section 45 and Section 48 of the Income Tax Act, 1961, concerning capital gains tax, and relevant case law, including decisions from the Supreme Court and various High Courts.

Court's Interpretation and Reasoning: The court emphasized that for capital gains tax to apply, there must be a transfer of a capital asset within the meaning of Section 2 (47) of the Act.

Key Evidence and Findings: The court found no evidence of consideration being paid or transfer of ownership occurring in the assessment year 1997-98.

Application of Law to Facts: The court applied the legal principles to the facts, determining that the development agreement did not result in a transfer of a capital asset in the relevant assessment year.

Treatment of Competing Arguments: The court addressed the Revenue's reliance on various precedents but distinguished them based on the lack of consideration and transfer in the present case.

Conclusions: The court concluded that the appellant was not liable to capital gains tax for the assessment year 1997-98.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The developer has been handed over the possession for the limited purpose of carrying out the development work. Therefore, in pursuance of the development agreement, the possession of the immovable property has not been handed over to the developer as contemplated under Section 53A of the Transfer of the Property Act, 1882."

Core Principles Established: The judgment establishes that mere possession for development purposes does not constitute a transfer under Section 2 (47) of the Income Tax Act, 1961, and that consideration must be paid for a transaction to be considered a transfer for capital gains tax purposes.

Final Determinations on Each Issue: The court quashed the orders of the Income Tax Appellate Tribunal, Commissioner of Income Tax (Appeals), and the Assessing Officer, ruling in favor of the assessee on both issues.

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