The development agreement implied that assessee did permit the developer to enter into the premises and to do all the necessary things for construction of apartments. Some of the agreement holders also sold the flats in semi-finished condition or in fully developed condition, whereas few like assessee retained the flats as such. Therefore, assessee did hand over the possession of the land and provisions of section 2(47) of Income Tax Act, 1961 regarding transfer certainly get attracted because there was part performance of the contract in the nature referred to in section 53 of Transfer of Property Act, 1882, and clause (v) of section 2(47) was clearly attracted.
FULL TEXT OF THE ITAT JUDGMENT
These are two appeals by two assessees against the orders of the Commissioner of Income Tax (Appeals)-5, Hyderabad, for the AY. 2009-10. Since common issues are involved in both of these appeals, these are heard together and decided by this common order. For the purpose of convenience, the facts in ITA No. 1561/Hyd/2016 in the case of Smt. K. Vijaya Lakshmi are adjudicated here under:
2. Briefly stated, assessee is an individual, deriving income from salary. Assessee filed her return of income admitting income from salary at Rs. 2,01,270/- for the AY. 2009-10 on 08-06-2009. She entered into an agreement with M/s. Diamond Infra. She was the owner of 270 Sq.Yds. of land situated at Sy.No. 145 (part), Plot No.9, Hydernagar Village, Balanagar, Kukatpally Municipality, Ranga Reddy District having acquired the same from the owners in the year 2000. There are 17 other persons who acquired plots in the said survey number from the same vendors. All the plot owners including assessee entered into a Development Agreement on 12-05-2008. According to the Development Agreement, each land owner would receive constructed area of 3365.29 Sq. ft. Assessee is of the view that –
a) A perusal of all the transactions would indicate that the development agreement is not a transfer which results in any gain to her;
b) The land is a Long Term Capital Asset as the said land was held by assessee for a period of more than 36 months;
c) The capital gain does not arise on the date of entering into the Development Agreement;
d) The capital gain, if any, would be exempt in view of Section 54F of the I.T. Act;
Assessee also submitted that:
a) Assessee approached the land owners for purchase of land with a view to construct residential house;
b) After the consideration was paid, the land owners and assessee faced problems with regard to mutation in the revenue records and the registration of the plot got delayed;
c) There were disputes with regard to the layout as the approach road could not be provided to the plots;
d) The construction of independent houses became impossible as the approach road to each plot was not available; the plot could not be sold as there was no approach road;
e) All the plot owners and the land owners evolved a method of joining together through development agreement and constructed residential area jointly.
2.1. The entire transaction would indicate that assessee intended to acquire the constructed area and gone through the process. Assessee was of the view that no capital gain arises as the entire process is for acquisition of constructed area. All these facts were pleaded before the AO but the AO did not consider the explanation submitted. He passed the assessment order u/s 143(3) r.w.s. 147 of the Act on 09-03-2015. He held that –
a) The asset was not a Long Term Capital Asset but is only a Short Term Capital Asset. For this purpose he reckoned the period of holding from the date of registration in favour of assessee;
b) The exchange value of the property i.e. the cost of construction would be Rs. 35,97,495/- and that the cost of acquisition of the land was Rs.6,48,450/-
Accordingly, the AO arrived at the Short Term Capital Gain at Rs. 29,49,045/-. Aggrieved by the assessment order, assessee filed an appeal before the CIT(A).
3. Before the Ld.CIT(A), assessee raised various grounds, mainly contesting the reopening of assessment and also bringing to tax the Short Term Capital Gain during the year consideration. Ld.CIT(A) after analyzing the legal position, noticed that the return was processed u/s. 143(1) of the Act only and since development agreement has come to the knowledge of the AO, assessment was property reopened, following the principles laid down by the Hon’ble Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers (P) Ltd., [291 ITR 500] (SC). Ld.CIT(A) rejected the contentions that there was a change of opinion and also the contention that there was no tangible material. Ld.CIT(A) noted that the information has come to the knowledge of the AO as there were survey operations u/s. 133A of the Act in the case of M/s. Diamond Infra, from whom the details of the development agreement and sale of various properties has come to the knowledge. Both on facts and on law, Ld.CIT(A) analysed the issue and upheld the reopening of assessment.
3.1. Coming to the issue of computation of Short Term Capital Gain, Ld.CIT(A) did not accept assessee’s contention and distinguished various case law relied upon and after analyzing the provisions of the Act, upheld the assessment as such thereby dismissing the appeal filed by assessee. In coming to the conclusions Ld.CIT(A) also relied on the jurisdictional High Court decision in the case of Potla Nageswara Rao Vs. DCIT [365 ITR 249] (AP). Aggrieved, assessee is in appeal before us.
4. Before us, Ld. Counsel for assessee argued that the Ld.CIT(A) erred in upholding the re-assessment made u/s. 147 of the Act without there being any new material on record. The Ld.CIT(A) ought to have appreciated the fact that it is a settled position of law that no re-assessment can be made merely on change of opinion without there being any new tangible material on record. The addition is made merely on the basis of development agreement entered by assessee. However, nothing is happened in the year of entering development agreement, even no permission was obtained from GHMC to start construction. Hence, there is no transfer of property which was effected in the year under consideration and tere was escapement of income to reopen the case. Ld. Counsel argued that re-assessment made by AO is not valid and upholding of such assessment by Ld.CIT(A) is not correct. Before us, Ld. Counsel for assessee argued that assessee was under the bonafide impression that capital gains does not arise at the time of entering into the development agreement by relying on the following judgments:
i. Decision of the Hon’ble Allahabad High Court in the case of Commissioner of Income Tax-I Vs. Smt. Najoo Dara Debgoo (2013) [com258] (Allahabad);
ii. Decision of the Hon’ble ITAT, B-Bench, Hyderabad in the case of S. Raghurami Reddy Vs. ITO, Ward-I, Proddatur in ITA No. 296/Hyd/2003, order dt. 30-07-2011;
iii. Decision of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Atam Prakash & Sons [219 CTR 164];
iv. Decision of the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia Vs. CIT [260 ITR 491];
v. Decision of the Hon’ble Bombay High Court in the case of Zuari Estate Development and Investment Co. Pvt. Ltd., DCIT and another [271 ITR 269];
vi. Decision of the Hon’ble ITAT, Delhi Bench in the case of Ashok Kapur (HUF) Vs. ITO [12 ITD 520];
4.1. Ld. Counsel also relied on the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Balbir Singh Maini [86 taxmann.com 94] 323 ITR 588 (SC) to submit that agreement through JDAs does not give rise to capital gains. It was further submitted that assessee purchased the plot as early as 29-03-200 1 with payment of Rs. 3,50,000/- made through her husband. Further, an amount of Rs. 1,50,000/- was paid on 29-08-2005 and substantial purchase consideration was paid much before the registration.
4.2. Ld. Counsel also argued that in the present case, the possession in the property under consideration has not been transferred to the developer and the possession of the impugned land was continuously enjoyed by assessee. Therefore, no capital gain arises in the year under consideration.
4.3. Ld. Counsel also contended that judgment of Hon’ble Jurisdictional High Court in the case of Potla Nageswara Rao Vs. DCIT (supra) is distinguishable. He argued that the facts of the case of the assessee are completely different than that of the facts of case of Sri Potla Nageswara Rao Vs. DCIT (supra). In the case of Sri Potla Nageswara Rao Vs. DCIT (supra), the Hon’ble High Court was only dealing with the question in respect of incidence of capital gains basing on passing of consideration. In the case of Sri Potla Nageswara Rao Vs. DCIT (supra), on the issue of transfer of possession of land and performance of contract there were no disputes. The judgment of the Hon’ble High Court was only restricted in respect of consideration in case of JDA. However, in the present case, the dispute is with respect to transfer of possession of property and performance of the contract. Therefore, the reliance placed by the authorities on the judgment of Hon’ble High Court is completely misplaced.
4.4. Ld. Counsel further contended that in view of the amended provisions of Section 45(5A) by the Finance Act, 2017, the taxation of capital gain in case of Joint development agreement arises in the year in which the land owner receives his share of property from the builder and same is applicable retrospectively. Hence, there is no capital gain arise to assessee in the year under consideration as there is nothing received from the builder. In this regard Ld. Counsel placed reliance on the case law of Ansal Land Mark Township (P.) Ltd vide  61 taxmann.com 45 (Delhi).
5. Ld.DR, however, submitted that assessee has given possession of the property also during the year and by which, the developer has taken possession, obtained permissions and constructed the flats also, therefore, there is no merit in the contentions now raised.
5.1. Ld.DR, however, objected the contentions of Ld.AR and placed reliance on the following case law:
i. Judgment of the Hon’ble High Court of Andhra Pradesh in the case of Potla Nageswara Rao Vs. Dy.CIT [365 ITR 249] (AP);
ii. Judgment of the Hon’ble Punjab and Haryana High Court in the case of Paramjit Singh Vs. ITO [323 ITR 588] (Punjab & Haryana);
5.2. With reference to new provisions introduced in Section 45(5A), it was the submission that the provision is applicable w.e.f. 01-04-2018. Therefore, the same cannot be made applicable for the impugned assessment year as it was not clarificatory provision but a substantive provision introduced for the first time.
5.3. Question was raised with reference to period of holding – It was the submission that assessee has originally entered into agreement and paid advances to the father of seller of the property. But due to internal adjustments between the family, the property was ultimately sold by the Son, Shri Srikanth and the recitals clearly indicate the above nature. It was submitted that advances were paid to Shri Bala Swamy originally and therefore, AO was not correct in holding the period from the date of actual registration, whereas assessee was in possession of the property much before. It was fairly admitted that these aspects were not examined by the AO. Further, it was also contended that the valuation adopted on the basis of the development at the time of completion cannot be considered as value for bringing to tax the capital gain at the time of entering JDA and on transfer of 50% of land, it was also contended that AO wrongly considered the entire value rather than 50% share of the land.
6. I have considered the rival contentions and perused the material placed on record and case law relied on. While completing the assessment, AO considered the period of holding of the property to be less than 36 months and the gains arose in this transaction was considered as short term only. Further, while valuing the property transferred, the AO has considered the entire 267 Sq. Yds., entered into agreement by assessee, ignoring the fact that only 50% of the above was transferred, whereas assessee retained the balance of 50%. To that extent, the order of AO is to be modified.
6.1. Coming to the valuation also, the valuation taken by the AO at the date of his survey and at the time of completion of project cannot be basis for considering the sale consideration on the date of development agreement. These aspects will be considered at a later point of time.
6.2. Coming to the issue of reopening contested by assessee, that is not valid, it is noticed that assessee filed return of income without admitting any capital gain nor there is any mention in the return about the development agreement entered by assessee. The information has come to the knowledge of the AO consequent to the survey proceedings in M/s. Diamond Infra which led to the reopening of assessment u/s. 147 not only in assessee’s case but also in other cases, where all the owners have entered into development agreement with the said party. After examining the facts, I am of the opinion that the AO correctly invoked the provisions of Section 147 and therefore, the proceedings are valid in law. I fully agree with the opinion of the Ld.CIT(A) who elaborately discussed the issue based on various case law also. Consequently, the grounds raised on reopening are rejected.
6.3. As far as the issue of bringing to tax the capital gains during the year, it was the contention of assessee that possession was not given and assessee retained possession of the property thereby the capital gains arises in the year in which the new flats were handed over. Ld. Counsel in his arguments, elaborately read out various portions of the agreement to substantiate assessee’s claim, whereas the Ld.DR relied on various other clauses to state that possession was handed over. As far as the development agreement is concerned, it is noticed that assessee did permit M/s. Diamond Infra to enter into the premises, do all the necessary things for construction of apartments. It is the common agreement by many people, who has purchased lands/plots in the developed area. It is also noticed that the said assessee went to construct the apartments and hand over the flats as per the schedule to the respective persons, including assessee. Some of the agreement holders also sold the flats in semi-finished condition or in fully developed condition, whereas few like assessee retained the flats as such. Therefore, I am of the opinion that assessee did hand over the possession and provisions of Section 2(47) regarding transfer certainly get attracted. Since there is part performance of the contract in the nature referred to in Section 53 of Transfer of Property Act, 1882, Clause(v) of Section 2(47) is clearly attracted. Therefore, I agree with the stand of AO that the capital gains did arise during the year under consideration as the agreement was entered on 12-05- 2008. Accordingly, the issue of bringing to tax the capital gains during the year is to be upheld. Even though Ld. Counsel tried to distinguish the jurisdictional High Court judgment in the case of Sri Potla Nageswara Rao Vs. DCIT (supra) that it applies to a case, where there is no sale consideration and the issue is on non-receipt of sale consideration. I do not agree with that as the issue of transfer in the case of development agreement and consequent levy of capital gain in the year of entering into development agreement has been crystalised by the said judgment of the jurisdictional High Court in the case of Sri Potla Nageswara Rao Vs. DCIT (supra). Ld. Counsel relied on the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Balbir Singh Maini (supra), where the entire transaction of development of land envisaged in JDA fell through. In those facts of the case, the Hon’ble Supreme Court held that no profits or gains arose from the transfer of capital asset so as to attract Section 45 and 48 of the Act. However, in the present case, the agreement has been undertaken and has been completed, therefore the jurisdictional High Court decision still holds good. Accordingly, I agree with the order of the CIT(A), confirming the capital gains during the year.
6.4. One of the arguments raised by the Ld. Counsel is that new Section 45(5A) has been introduced which defers the capital gains to the year of completion of the project by the Finance Act, 2017. This being substantive provision, I am of the opinion that this cannot be applied to the development agreement entered into earlier, in which 2(47)(v) would certainly get attracted. In view of that, I reject the contention and uphold the taxability of the capital gains in the year under consideration.
6.5. However, the matter does not end there. There are two issues which require further consideration. One is that whether property is held for sufficient period so as to attract Short Term Capital Gain or Long Term Capital Gain. The other is the valuation of the full value of consideration. As far as the holding period of the impugned property is concerned, it is the contention of assessee that they have paid advances much earlier and took possession also whereas registration was completed on 10-08-2005. It is not correct on the part of AO to consider the date of registration alone as the date of obtaining the property. There are various judicial principles supporting the contentions that registration is only a conclusive evidence but ownership can be obtained much earlier also. As seen from the purchase deed also, there are recitals that Shri Bala Swamy, father of vendor has himself developed the property and then obtained permissions but later on made four gift settlements to his son and after obtaining HUDA permissions, has registered the property on that date. Even though the receipt of sale consideration date-wise has not mentioned, it is the contention that assessees have paid the amounts much earlier also. This aspect has not been examined by the AO at all. Therefore, in the interest of justice, I am of the opinion that the issue of having possession of the property at the time of purchase of property by assessee, before registration is to be examined in the light of the payments made by assessee, permissions obtained from HUDA etc., so that the issue can be finally concluded on facts whether the property has to be considered as long term capital asset or short term capital asset. Therefore, this issue is restored to the file of AO to examine, after giving due opportunity to assessee.
6.6. Next issue to be considered is the full value of consideration, for computation of capital gains. As per the agreement, assessee has parted with only 50% of the impugned property. However, AO has taken the cost of construction of the properties which are given in lieu at the time of completion of the project and gave certain discount so that the value is fixed at 1097 per Sft. This is not a correct method. Since the agreement was entered into in May, 2008 either the cost of the land [at 50% of 266.66 Sq. Yds.,] should have been considered for sale consideration or the probable value of the cost of construction on that date has to be considered. It is not proper on the part of the AO to consider the subsequent cost which may involve escalation of cost from 2008 to 2013. Therefore, I direct the AO to consider the probable cost of construction as on May 2008 or the SRO Value of the land-in-question on the date of agreement should be considered as full value of consideration for the purpose of computation of capital gains on the transfer of 50% of the land holding for development. Therefore, while upholding the reopening of assessment and also bringing to tax the capital gains in the impugned year, the issue whether the land is short term capital asset or long term capital asset and the value for considering the capital gains computation is restored to the file of AO for fresh examination. Needless to say that assessee should be given due opportunity. For this purpose, the order of AO and CIT(A) on the above issues are set aside to the re-done as per the facts and law. In case the property was held to be long term capital asset, assessee may be eligible for consequent benefit u/s. 54/54F of the Act, which should be considered on the facts of the case. Assessee is free to raise necessary arguments in this regard before the AO. Grounds of assessee are considered partly allowed for statistical purposes.
6.7. In the result, appeal in ITA No. 1561/Hyd/2016 in the case of K. Vijaya Lakshmi is considered partly allowed for statistical purposes.
7. In this appeal, assessee, Smt. N. Sireesha filed return of income admitting income of Rs. 2,72,400/- from salary and house property only. The assessment was reopened u/s. 147 of the Act and incomes were assessed on the deemed transfer of site of 267 Sq. Yds., by the development agreement dt 12-05-2008 which is common along with Smt Vijayalakshmi and others. AO has passed similar order as in the case of Smt Vijayalakshmi, determined the capital gain computation. Ld.CIT(A) has also passed a similar order confirming the reopening u/s. 147 of the Act as well as computation of capital gains during the year under consideration. Similar arguments were raised in the case discussed above. For the detailed discussions made in the above appeal in the case Smt Vijayalakshmi, I agree with the Ld.CIT(A) to the extent of confirming the reopening of assessment and computation of capital gains during the year under consideration, whereas the issue of capital asset being short term or long term and issue of full value of consideration for the purpose of computation are restored to the file of AO. Needless to say that assessee should be given due opportunity. For this purpose, the order of AO and CIT(A) on the above issues are set aside to be re-done as per the facts and law. In case the property was held to be long term capital asset, assessee may be eligible for consequent benefit u/s. 54/54F of the Act, which should be considered on the facts of the case. Assessee is free to raise necessary arguments in this regard before the AO. Grounds of assessee are considered partly allowed for statistical purposes.
7.1. In the result, appeal in ITA No. 372/Hyd/2017 in the case of Smt. N. Sireesha is considered partly allowed for statistical purposes.
8. To sum-up both the appeals are considered partly allowed for statistical purposes.
Order pronounced in the open court on 28th February, 2018