LTCG or STCG to be assessed when income accrued to assessee

Raju Shantaram Mandavkar Vs ITO (ITAT Mumbai)

Conclusion: Long term/short term capital gain is liable to be assessed when the income will accrued to assessee for the relevant period.

Held: Assessee was basically contractor for carrying on business under the name and style M/s. P Construction. During proceedings, AO found that assessee had entered into a development agreement with M/s. V Associates on 07.07.2009 upon the market value of the property of Rs.32,66,000/- for the purpose of registration stamp duty. AO assessed this consideration under the head ‘short-term capital gain’. Assessee argued that the transaction was liable to tax in the A.Y. 2015-16 only when assessee received the flat, therefore, assessing the short term capital gain in the present assessment year was wrong against law and facts, therefore, the same was liable to be set aside. In the case of M/s. Bindusaria properties Pvt. Ltd. Hyderabad Vs. ACIT Central Circle-4, Hyderabad in ITA. No.157/Hyd/2011 dated 04.04.2014 and CIT Vs. Balbir Singh Maini Civil Appeal No.15619 of 2017 (Arising Out of SLP (Civil) No. 35248 of 2015), dated 04.10.2017, it was held after the accrual of consideration, the capital gain was liable to be assessed in the hands of assessee and income from short term capital gain/long term capital gain was only liable to tax when it accrued to assessee. In the present case, assessee in pursuance of execution development agreement dated 07.07.2009 received no consideration if any. In view of law mentioned above, it was concluded that long term/short term capital gain is liable to be assessed when the income will accrued to assessee. It is settled law that it is the real income that is to be taxed and not the hypothetical income.

FULL TEXT OF THE ITAT JUDGEMENT

The assessee has filed the present appeal against the order dated 14.12.2015 passed by the Commissioner of Income Tax (Appeals)-3, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y. 2010-11.

2. The assessee has raised the following grounds: –

“1.Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that the appellant is liable to pay capital gain tax

2. Whether on the facts and in the circumstances of the case and m law the Ld. CIT(A) was justified in holding that the transfer of asset has taken place as per section 2 (47) of the Income tax Act, 1961 r.w.s 53A of the Transfer of Property Act, when, in fact, there is no such transfer, hut, handing over of property for development in lieu of some construed portion to be received in future.

3. Whether on the facts and in the circumstances of the case, the Ld. CJT(A) was justified in concluding that the appellant had transferred the property situated at Badlapur during the previous year relevant to the assessment year 2010-11

4. Whether on the facts and in the circumstances of the case, the Ld. C1T(A) was justified m holding that the action of the AO not allowing registration and other expenses capitalized by the assessee. is correct

5. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in holding that capital gain has arisen as per section 45 of the Income tax Act, 1961. 

6. Whether on the facts and in the circumstances of the case, the assessee is not hearing deprived of doling exemption u/s 54F of the income tax Act, 1961.”

3. The brief facts of the case are that the assessee filed its return of income declaring total income to the tune of Rs.10,19,000/- on 15.10.2010. The return was accompanied by statement of total income, audited Trading, Profit & Loss account, capital account and Balance-sheets along with tax audit report in prescribed Form No. 3CB & 3CD and enclosures thereto. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny under CASS. Notices u/s 143(2) & 143(2) of the Act were issued and served upon the assessee. The assessee was basically contractor for carrying on business under the name and style M/s. Prathamesh Construction. The assessee’s work includes collection of garbage from the houses and also from the streets and to dump the same in the dumping area. The assessee was also the partner in M/s. Neha Construction, Badlapur. The assessee had shown the purchase of plot at Belvali, Ambernath in sum of Rs.5,25,000/-. The source of acquisition was not on record. The notice was given. The assessee replied that the assessee purchased the plot on 08.07.2008 in sum of Rs.5,25,000/- and the assessee purchased the said plot along with Shri Arun Tamboli & Shri Sharad Gaikwad, therefore, the assessee was having his share to the extent of 1/3rd in the said property. Subsequently, the assessee along share-holder handed-over the possession of the land to the M/s.Vastusiddhi Associates, Kalyan in view of the Development Agreement dated 07.07.2009. The Assessing Officer noticed that the contention of the assessee is not supported by documents because the sale-deed dated 04.02.2009 obtained from sub-registrar speaks about that the assessee purchased the flat along with share-holder in sum of Rs.13,00,000/- and the assessee’s shares comes to the tune of Rs.4,33,333/-. The assessee entered into the development agreement dated 07.07.2009 in sum of Rs.32,66,000/- with M/s.Vastusiddhi Associates, Kalyan for the construction of the flats and agreement was executed between parties on 07.07.2009 for development of the building as per the approval given by authorities by virtue of certificate dated 06.04.2009. Since the assessee entered into the development agreement with M/s.Vastusiddhi Associates, Kalyan on 07.07.2009 upon the market value of the property of Rs.32,66,000/- for the purpose of registration stamp duty, therefore, the Assessing Officer assessed this short term capital gain in following manner.: –

Thus, assessee’s STCG will be 1/3rd of Rs.6,55,333/-

4. Thereafter, the said capital gain was added to the income of the assessee and the income of the assessee was assessed to the tune of Rs.16,74,330/-. The assessee filed an appeal before the CIT(A) who dismissed the appeal of Assessee, therefore, the assessee has filed the present appeal before us.

5. All the issues are inter-connected, therefore, are being taken up together for adjudication. In fact, all the issues leads to this controversy that the Short term capital gain/long term capital gain is liable to be assessed on 07.07.2009 when the assessee entered into the development agreement with M/s.Vastusiddhi Associates, Kalyan for developing the property or not. The assessee purchased the property along with other share-holders namely Shri. Arun Tamboli & Shri Sharad Gaikwad on 04.02.2009 in sum of Rs.13,00,000/- in view of the sale-deed registered before the Sub-registrar concerned. The assessee was having 1/3rdin the said property, therefore, assessee’s share in purchase comes to Rs.4,33,333/-. The assessee took the plea that the property was purchased on 08.07.2008 in sum of Rs.5,25,000/- which was not dealt with by AO in view of the sale-deed registered before the Sub-registrar concerned. Undoubtedly, the property was purchased on 04.02.2009 in sum of Rs.13,00,000/- in which the assessee was having 1/3rd share to the tune of Rs.4,33,333/-. Subsequently, the assessee along with other share-holder entered into development agreement 07.07.2009 and the market value of the property was assessed to the tune of Rs.32,66,000/- for the purpose of stamp duty. It is also argued that the transaction was liable to tax in the A.Y. 2015-16 only when the assessee received the flat, therefore, assessing the short term capital gain in the present assessment year is wrong against law and facts, therefore, the same is liable to be set aside. In support of these contentions, the Ld. Representative of the assessee has also placed reliance upon the law settled in M/s. Bindusaria properties Pvt. Ltd. Hyderabad Vs. ACIT Central Circle-4, Hyderabad in ITA. No.157/Hyd/2011 dated 04.04.2014 and CIT Vs. Balbir Singh Maini Civil Appeal No.15619 of 2017 (Arising Out of SLP (Civil) No. 35248 of 2015), dated 04.10.2017. However, the Ld. Representative of the Department has strongly relied upon the order passed by the CIT(A) in question. On appraisal of the argument advanced by the Ld. Representative of the parties and perusing the record, we noticed that it is required to be decided whether the execution of the development agreement with the developer dated 07.07.2009 in sum of Rs.32,66,000/- upon the market value of the property come rise to the short term capital gain from the date of purchase of the property or not. The assessee has also contended that the assessee received nothing in lieu of execution of the development agreement dated 07.07.2009, therefore, no short term capital gain/ long term capital gain is liable to be assessed in the assessment year. It is also contended that the short term/long term capital gain is liable to be assessed in the hands of the assessee only when the income accrues in favour of the assessee or the liability of any persons to pay the amount to the assessee arises. This question has been dealt by Hon’ble ITAT Hyderabad Bench in the case ITA. No.157/Hyd/2011 dated 04.04.2014 A.Y. 2006-07 titled as M/s. Binjursaria Properties Pvt. Ltd. Vs. ACIT. The relevant finding has been given in below.: –

“9. We heard both sides and perused the orders of the Revenue authorities and other material on record. The short dispute arising for consideration in this case relates to the year of assessability of capital gains arising on the property, which was subject matter of a development agreement, i.e. whether it is assessable in the year in which the development agreement was entered into, as done by the Assessing Officer, or in the relevant subsequent year in which the area duly developed and constructed coming to the share of the assessee-owner has been handed over to the assessee. Though it was initially held by various benches of the Tribunal that capital gains are to be assessed in the year in which development agreement has been entered into between the owner and the developer, considering the fact that in many cases, the development agreement was not acted upon by the developer, different views have to be expressed, as to the year of assessability, based on the facts and circumstances of each case. This position has been examined at length in the light of case-law on the point, in the case of Smt. K.Radhika and others (supra) and it was ultimately held by the coordinate bench of this Tribunal as follows-

“48. We are in considered agreement with the views so expressed in this commentary on the provisions of the Transfer of Property Act. It is thus clear that ‘willingness to perform’ for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have ‘performed or is willing to perform’ its obligations under the agreement. 49. Even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the assessment year under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 11.05.2005 but this agreement was not adhered to by the transferee. The transferee originally made a payment of Rs.10 lakhs on 11.5.2005 and another payment of Rs.90 lakhs on the same day as refundable security deposit. However, out of this a sum of Rs.50 lakhs was said to be refunded by the landlord to the developer on 5.3.2009. As such, the assessee has received only a meager amount as refundable security deposit which cannot be construed as receipt of part of sale consideration. Admittedly, there is no progress in the development agreement in the assessment year under consideration. The Municipal sanction for development was obtained not in this assessment year and it was obtained only on 17.09.2006 from the Hyderabad Urban Development Authority. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties. Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. In fact, the building plan was not got approved by the builder in the assessment year under consideration. Until permission is granted, a developer cannot undertake construction. As a result of this lapse by the transferee, the construction was not taken place in the assessment year under consideration. There is a breach and break down of development agreement in the assessment year under consideration. Nothing is brought on record by authorities to show that there was development activity in the project during the assessment year under consideration and cost of construction was incurred by the builder/developer. Hence it is to be inferred that no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer. In the assessment year under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agreement. The developer has not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredient that make a person eligible and entitled to make the construction. The act and conduct of the developer in this assessment year shows that it had violated essential terms of the agreement which tend to subvert the relationship established by the development agreement. Being so, it was clear that in the year under consideration, there was no transfer of not only the flats as superstructure but also the proportionate land by the assessee under the joint development agreement. As per clause no. 12.11 and 19.1 of Development Agreement-cum Power of Attorney, time is the essence of the contract and as per clause No.12.11 the said property is to be developed and hand over the possession of the owners’ allocation to the owners’ and or their nominees within 24 months from the date of receiving the sanction of the plan from HUDA and Municipality/Gram Panchayat with a further grace period of 3 months. But the fact remains that the transferee was not only failed to perform its obligations under the agreement, but also unwilling to perform its obligations in the assessment year under consideration. Even otherwise, the assessing authorities has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction work at any time during the assessment year under consideration or any development has taken place in the project in the relevant period. He went on to proceed on the sole issue with regard to handing over the possession of the property to the developer in part performance of the Development Agreement-cum-General power of Attorney. In our opinion, the handing over of the possession of the property is only one of the condition u/s 53A of the Transfer of Property Act but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was ‘willing to perform’ its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in Section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under Section 53A of the Transfer of Property Act was not satisfied in this assessment year. Once we come to the conclusion that the transferee was not ‘willing to perform’, as stipulated by and within meanings assigned to this expression under Section 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present assessment year, it is only a corollary to this finding that the development agreement dt. 11.5.2005 based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a “contract of the nature referred to in Section 53A of the Transfer of Property Act” and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case Chaturbhuj Dwarkadas Kapadia v. CIT’s case (supra) undoubtedly lays down a proposition which, more often than not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as ‘willingness to perform’ has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue’s case is thus devoid of legally sustainable basis. 50. That is clearly an erroneous assumption, and an the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has received only a ‘meager amount’ out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital gains could not have been taxed in the in this assessment year in appeal before us. The other grounds raised by the assessees in their appeals have become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessees in the assessment year under consideration. ….”

10. In the present case, admittedly, what has been executed by the assessee is a ‘Development Agreement-cum-General Power of Attorney’. A reading of the said agreement indicates that what was handed over by the assessee to the developer is only a ‘permissive possession’. Clause 5 of the said agreement dated 2nd February, 2006, on page 3 thereof, specifically provides that ‘First party on signing of this agreement has permitted the developer to develop the scheduled land’ (emphasis added). As per Clause 9 of the said agreement, consideration receivable by the assessee from the developer is ‘38% of the residential part of the developed area…’ (which was later reduced to 33%, by virtue of a supplementary agreement executed on 18.10.2007). That being so, it is only upon receipt of such consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee. We are supported in this behalf by the decision of the Third Member Bench of the Tribunal in the case of Vijaya Productions Pvt. Ltd. V/s. Addl. CIT (134 ITD 19)TM. 11. Even though the assessee in terms of recital on page 2 of the supplementary agreement dated 3rd February, 2006, was to receive ‘a refundable deposit of Rs.2,00,00,016, through two cheques, the said deposit was to be refunded on the complete handing over of the area falling to the share of the first party, viz. the assessee; and in the event of failure on the part of the assessee in refunding such deposit, the same shall be adjusted at the time of final delivery, by the developer against the area to be handed over to the assessee applying a mutually agreeable rate. Considering these specific clauses and peculiar facts and circumstances of the case, we are of the considered view that the capital gains in the case on hand, are liable to be taxed only in the year, in which the developed area, coming to the share of the assessee, has been handed over to the assessee, in terms of the development agreement. In the present case, as the undisputed facts on record reveal, the developer has not undertaken any developmental activity to execute the construction work even today, even though in the final supplemental agreement dated 18th October, 2007 provided extension of time for the execution of the construction, by stating that the construction activity should be completed and developed area coming to the share of the assessee should be handed over within a further time of 48 months from the date of that supplemental agreement. 12. It is an undisputed fact that as on date, there was no developmental activity on the land which is subject matter of development agreement. The process of construction has not been even initiated and no approval for the construction of the building is obtained. Thus, the sale consideration in the form of developed area has not been received. Mere receipt of refundable deposit cannot be termed as receipt of consideration. Further, as submitted , the Assessing Officer calculated the capital gain on the entire land, even though the assessee has retained 38% share to itself. The valuation was also disputed. There is, therefore, no accrual of income in favour of the assessee as per S.48 of the Act. Due to lapse on the part of the transferee, the construction has not taken place in the year under consideration, and it has not commenced even now. In the facts and circumstances of the present case, wherein while the assessee has fulfilled its part of the obligation under the development agreement, the developer has not done anything to discharge the obligations cast on it under the develop agreement, the capital gains cannot be brought to tax in the year under appeal, merely on the basis of signing of the development agreement during this year. We are supported in this behalf by the decision of the Tribunal dated 3rd January, 2014 in the case of Fibars Infratech Pvt. Ltd. (supra), wherein it was held as follows

59. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under Section 53A of the Transfer of Property Act was not satisfied in this assessment year. Once we come to the conclusion that the transferee’s ‘willing to perform’ the contract is ascertainable in the assessment year, as stipulated by and within the meanings assigned to this expression under Section 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present assessment year, it is only a corollary to this finding that the Development Agreement dt. 15.12.2006, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a “contract of the nature referred to in Section 53A of the Transfer of Property Act” and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case. The judgement in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (supra) undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as ‘willingness to perform’ has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. The Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue’s case is thus devoid of legally sustainable basis. 60. That is clearly an erroneous assumption, as the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the Revenue authorities to show that there was actual construction taken place at the impugned property in the previous year relevant to the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on the reason that the capital gains could not have been taxed in the in this assessment year in appeal before us.”

13. In the light of the foregoing discussion, we set aside the impugned orders of the Revenue authorities and hold that the capital gains on the property in question cannot be brought to tax in the year under appeal, and consequently delete the addition made by the Assessing Officer and sustained by the CIT(A). Assessee’s grounds on this issue are allowed.

14. In view of our decision on the merits of the issue involved, viz. assessability of capital gains in the year under appeal, we are not inclined to go into the grounds raised in this appeal on the legality of initiation or proceedings under S.153C of the Act, as they have become only of academic interest. They are as such, rejected.

6. On appraisal of the above mentioned finding, we noticed that the Hon’ble ITAT was of the view that after the accrual of consideration, the capital gain is liable assessable in the hands of the assessee. However, in the said case the activity of development was not completed and basically the assessee did not receive any consideration. At the time of argument, the Ld. Representative of the assessee has also relied upon the case Balbir Singh Maini (supra) in which it is specifically held that the income short term capital gain/long term capital gain is only liable to tax when it accrued to the assessee. The finding has been specifically mentioned in para no. 10-17 below.: –

“(x)This court, in commissioner of Income Tax Vs. Excel Industries, (2014) 13 SCC 459 at 463-464 referred to various judgments on the expression “accrues”, and then held: –

“14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT Vs. Shoorji Vallabhdas and Co. (CIT Vs. Shoorji Vallabhdas and Co., (1962) 46 ITR (SC) it was held as follows: (ITR p. 148)

“.. Income tax is a levy on income. No doubt, the Income tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.

’15. The above passage was cited with approval in Morvi Industries Ltd. vs. CIT (Morvi Industries Ltd. Vs. CIT, (1972) 4 SCC (Tax) 140: (1971) 82 ITR 835) in which this court also considered the dictionary meaning of the word “accrues” and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11)

“11, ,., the date of payment … does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately.”

16. This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”.

17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.”

7. Now, coming to the facts and circumstances of the present case, the assessee in pursuance of execution development agreement dated 07.07.2009 received no consideration if any. In view of law mentioned above. The long term/short term capital gain is liable to be assessed when the income will accrued to the assessee. It is settled law that it is the real income that is to be taxed and not the hypothetical income. Therefore, in the said circumstances of the case, the finding of the CIT(A) is not justifiable on this issue, therefore, we set aside the finding of the CIT(A) on this issue and delete the said addition.

8. In the result, the appeal of the assessee is hereby ordered to be allowed.

Order pronounced in the open court on 30.11 .2018.