PCIT Vs Bileshivale Muddanna Govardhana Murthy (Karnataka High Court)
JDA BY ITSELF DOES NOT ESTABLISH “TRANSFER” WHEN ASSESSEE NEITHER RECEIVES THE LAND ON PARTITION NOR PARTS WITH HIS OWN SHARE — KARNATAKA HIGH COURT
The Karnataka High Court upheld the deletion of long-term capital-gains additions arising from an alleged transfer of ancestral lands under a Joint Development Agreement. The subsequent final decree in the family partition proceedings demonstrated that the land covered by the alleged JDA had fallen to the share of other family members and not to the assessee. The assessee continued to hold the lands allotted to him. The Tribunal’s finding that no capital asset belonging to the assessee had been transferred was factual, supported by evidence and not perverse.
Facts
A search under section 132 was conducted in the case of the assessee on 1 October 2013 in connection with the Telecom Employees Co-operative Housing Society Ltd. Group. Notice under section 153A was subsequently issued on 5 November 2014. The assessee requested that his original return be treated as the return filed in response to the notice.
While completing the assessment for AY 2013-14, the AO made the following additions:
- ₹79,61,430 as long-term capital gains relating to 14.5 guntas of land in Survey No. 69/2 situated at Bileshivale Village, Bidarahalli Hobli, Bengaluru East Taluk;
- ₹17,51,16,294 as long-term capital gains relating to 7 acres and 31.5 guntas of land held by the assessee and his family members in different survey numbers; and
- ₹7,75,000 by treating the agricultural income disclosed by the assessee as income from other sources.
The capital-gains additions were based on certain agreements, including a JDA. According to the AO, the developer had been granted possession and extensive rights to enter upon, develop, market and sell the property. The arrangement therefore constituted a “transfer” under section 2(47), particularly section 2(47)(v), read with section 53A of the Transfer of Property Act, 1882.
Since the properties were jointly held, the AO attributed a proportionate share of the alleged capital gains to the assessee.
Proceedings before the CIT(A) and ITAT
The assessee contended before the CIT(A) that the agreements relied upon by the AO did not result in any transfer of the capital asset.
The CIT(A), however, agreed with the AO and held that the lands had been transferred within the meaning of section 2(47) of the Income-tax Act read with section 53A of the Transfer of Property Act.
On further appeal, the Bengaluru ITAT found that the lands were ancestral properties belonging to the Hindu Undivided Family of which the assessee was a member. On examining the relevant agreements and supporting documents, the Tribunal concluded that they did not establish any completed transfer of the capital assets.
The Tribunal also noticed that a subsequent agreement had been executed in relation to the lands. According to it, such a subsequent agreement would not have been necessary if the property had already been effectively transferred under the earlier arrangement.
More importantly, a civil suit for partition of the joint family properties had been filed before the II Additional Senior Civil Judge, Bengaluru Rural. A final decree was passed on 13 July 2019. Under the final decree, the land covered by the JDA relied upon by the AO fell to the share of other family members and not to the assessee.
The assessee continued to hold the lands which were actually allotted to his share. The Tribunal therefore deleted the capital-gains additions as well as the addition relating to agricultural income.
Revenue’s contentions before the High Court
The Revenue argued that transfer for capital-gains purposes could take place even before execution of a registered sale deed. Complete control had been given to the developer to enter upon, develop, market and sell the property, thereby satisfying section 2(47)(v).
It was further contended that a civil court decree and a fresh JDA executed several years later could not retrospectively nullify a transfer and accrual of capital gains which had already taken place during AY 2013-14.
The Revenue also challenged the deletion of ₹7,75,000 of agricultural income, contending that the assessee had not discharged the burden of proving its agricultural character.
High Court’s findings
The High Court found that the Tribunal had examined the agreements, the character of the properties, the family dispute and the final partition decree before reaching its conclusion.
The final decree dated 13 July 2019 established that the lands covered by the alleged JDA did not fall to the assessee’s share. On the contrary, the assessee continued to own and hold the lands which were allotted to him under the decree.
It was also found as a matter of fact that the assessee’s land had not been converted from agricultural use to any other purpose.
The Tribunal’s conclusion that no capital asset belonging to the assessee had been transferred was thus supported by cogent reasons and material on record. It could neither be termed perverse nor treated as a finding based on no evidence.
An appeal under section 260A lies only where a substantial question of law arises. The Revenue’s attempt was essentially to seek reconsideration of factual findings recorded by the Tribunal. No substantial question of law therefore arose.
Decision
The Karnataka High Court dismissed the Revenue’s appeal and upheld the ITAT’s deletion of:
- LTCG addition of ₹79,61,430;
- LTCG addition of ₹17,51,16,294; and
- addition of ₹7,75,000 relating to agricultural income.
Author’s comments
The decision should not be understood as laying down that execution of a JDA can never constitute a transfer. A JDA may result in a transfer under section 2(47)(v) if the requirements of section 53A of the Transfer of Property Act are satisfied, including the existence of an enforceable contract, delivery of possession in part performance and willingness of the developer to perform its obligations.
After the amendment to the Registration Act, an unregistered agreement that is compulsorily registrable may not attract section 53A and consequently may not constitute a transfer under section 2(47)(v). This principle was explained by the Supreme Court in CIT v. Balbir Singh Maini, (2017) 398 ITR 531 (SC). However, Balbir Singh Maini was not cited or discussed in the present judgment.
The present decision rests on a more fundamental factual ground: the Revenue failed to establish that the assessee had transferred a capital asset belonging to him. The final partition decree showed that the land covered by the alleged development arrangement belonged to other family members, whereas the assessee continued to hold the lands allotted to his share.
The later partition decree was therefore not merely used to “retrospectively cancel” an earlier taxable transfer. It was treated as cogent evidence identifying the respective rights of the family members and demonstrating that the assessee had not transferred his own capital asset.
Section 45(5A), which defers capital gains in specified development agreements involving individuals or HUFs until issuance of the completion certificate, was not applicable because the case related to AY 2013-14, whereas that provision applies from AY 2018-19.
Lastly, non-conversion of land from agricultural use is relevant evidence but does not, by itself, prove that the land falls outside the definition of “capital asset”. Its location and the conditions under section 2(14)(iii) must still be independently examined. The High Court did not decide that wider issue in this appeal.
Cases Discussed
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The Department has filed the present appeal under Section 260A of the Income Tax Act, 1961 [Act] impugning the order dated 05.03.2026 passed by the learned Income Tax Appellate Tribunal [Tribunal] in ITA No.2192/Bang/2025.
2. Briefly stated, the facts giving rise to the present appeal are as under:
2.1 A search was conducted under Section 132 of the Act in the case of the respondent [assessee] on 01.10.2013 in connection with M/s. Telecom Employee Co-operative Housing Society Ltd. Group.
2.2 Thereafter, the Assessing Officer [AO] issued a notice under Section 153A of the Act on 05.11.2014, requiring the assessee to file a return of income. The assessee sent a letter requesting that its original return of income be treated as a return filed in response to said notice.
2.3 The AO framed the assessment for the Assessment Year [AY] 2013-2014, inter alia, making an addition on account of long-term capital gains arising from the transfer of 14.5 guntas of land in Survey No.69/2 located in Bileshivale Village, Bidarahalli Hobli, Bangalore East Taluk and the transfer of 7 acres 31.5 guntas of land owned by the assessee and his family members in various surveys numbers.
2.4 In respect of the land measuring 14.5 guntas, an addition of `79,61,430/- was made towards long-term capital gains, while an addition of `17,51,16,294/- was made towards long-term capital gains in respect of the transfer of 7 acres 31.5 guntas of land. In addition, the AO made an addition of `7,75,000/- by treating the agricultural income disclosed by the assessee as income from other sources.
2.5 The said addition was premised on the basis that the assessee had entered into a Joint Development Agreement [JDA], which, according to the AO, constituted a transfer of the capital asset.
3. The assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals), Bengaluru [CIT(A)], inter alia, contending that the agreements relied upon by the AO did not constitute a transfer of the capital asset.
4. The learned CIT(A) did not accept the said contention and found that the capital asset, namely, the subject land, had been transferred within the meaning of Section 2 (47) of the Act, as well as Section 53A of the Transfer of Property Act, 1882.
5. Aggrieved by the said decision, the assessee preferred an appeal to the learned Tribunal. The learned Tribunal found that the subject land was ancestral land belonging to a Hindu Undivided Family [HUF] of which the assessee was a member.
6. After examining the facts and documents relied upon by the AO to conclude that the land had been transferred, the learned Tribunal concluded that the said documents did not evidence any transfer of the capital asset. The Tribunal reasoned that a subsequent agreement had been executed, which would not have been necessary if the land had already been transferred pursuant to the earlier agreement.
7. More importantly, the Tribunal noted that a civil suit for partition of the joint property had been filed before the II Additional Senior Civil Judge, Bangalore (Rural) and a final decree dated 13.07.2019 had been passed. It found that the land which was subject matter of the Joint Development Agreement – which was construed as one of the documents evidencing the transfer of the subject land and resulting in a capital gains – fell to the share of the other members of the family and not to the share of the assessee. Thus, insofar as the assessee is concerned, he continued to hold his share of the lands in question.
8. The finding that there was no transfer of any capital asset is a finding of fact, which is duly supported by cogent reasons and material on record. There is no dispute as to the fact that the assessee continues to hold the land falling to his share by virtue of the final decree dated 13.07.2019 rendered in the context of disputes between the assessee and other joint owners of the lands in question. It was also found that the subject land owned by the assessee had not been converted from agricultural land to any other purpose.
9. In the given facts, the Department has projected the following questions for consideration:
1. “Whether on the facts and in the circumstances of the case, the Tribunal is right in law in deleting the Long-Term Capital Gain (LTCG) addition given that the developer was granted complete control to enter, develop, market and sell property which constitutes a “transfer” under section 2(47)(v)?
2. Whether on the facts and in the circumstances of the case, the Tribunal failed to appreciate that a transfer for capital gains purposes can occur before a registered sale deed if the developer is positioned to exercise ownership rights?
3. Whether the Tribunal failed to appreciate that the subsequent civil court decree and fresh JDA (executed years later) can retroactively negate the “transfer” and accrual of income that occurred upon the execution of the original agreements and handing over of possession during the relevant assessment year?
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in deleting the additions of agricultural income treated as income from other sources in the absence of any contrary evidence and discharge of burden of proof by the assessee?”
10. We find that the said findings of fact are not perverse and cannot be said to be unsupported by any material on record.
11. In our view, no substantial question of law arises for consideration in the present appeal. The appeal is, accordingly, dismissed.
