2013 (9) TMI 125 - AT - Income Tax

Tribunal validates tax on land transfer capital gains under Income Tax Act

Sh. Manoranjan Kalia Versus Dy. Commr. of Income Tax, Circle-III, Jalandhar

The Tribunal upheld the validity of jurisdiction under sections 147/148 of the Income Tax Act, dismissing claims that the assessments' reopening was ... Long Term Capital Gain u/s 45 - transfer u/s 2(47) - scope of the terms, accrual or arise - vacant land - Possession given by the society to the developer under joint development agreement (JDA) - Advance Received or Actual Sales – Held that:- As per Section 45 of IT Act, income-tax was to be charged under the head 'capital gain' on transfer of a capital asset and shall be deemed to be the income of the previous year in which transfer took place - The year of transfer was the crucial year and not the time of the receipt - 'Accrue' means 'to arise or spring as a natural growth or result', to come by way of increase' - 'Arising' means 'coming into existence or notice or presenting itself' – both the words were used in contradistinction to the word 'receive' and indicate a right to receive - They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income, which was more or less inchoate and which was something less than a receipt - An unenforceable claim to receive an undetermined or undefined sum does not give rise to accrual. It was not only the money which has been received by the assessee which was required to be taxed but the consideration which had accrued to the assessee was also required to be taxed. Deemed transfer of property u/s 2(47) – Part performance - section 2(47)(v) r.w. section 45 indicates that capital gains was taxable in the year in which such transactions were entered into even if the transfer of immovable property was not effective or complete under the general law – Held that:- Charging an item of income under the head 'Capital gains' require that there should be some profit, Such profit must be arising on account of transfer and there should be capital asset which has been transferred - There was no dispute that a capital asset was involved and there was some profit also – Capital gain would be computed by considering the full value of consideration whether received or accruing as a result of the transfer - relying upon Mysore Minerals Ltd. v. CIT [1999 (9) TMI 1 - SUPREME Court] it was not only the consideration received which was relevant but the consideration which had accrued was also relevant - irrevocable general power of attorney which leads to over all control of the property in the hands of the Developer, even if that means no exclusive possession by the Developer would constitute transfer - It can be said that it had to be construed as 'possession' u/s 2(47). Thus, it is clear that non registration of agreement cannot lead to the conclusion that provision of section 2(47) (v) is not applicable. Non performance of the contract - Held that:- The careful reading of the said clause of the JDA would show this payment was required to be made within a period of six months from the date of execution of this agreement or within two months from the date of approval of plan / sanction and drawing grant of final license to develop where upon the construction can commence, whichever is later. Thus, this installment was dependent on two contingencies first the expiration of a period of six months from the date of agreement or alternatively on the expiration of a period of two months from the date of approval of plans / designs drawing etc. leading to grant of final licenses which can lead to commencement of construction, whichever is later. The matter was taken up by way of PIL by certain citizens and Administration of the Union Territory before the Hon'ble High Court which initially stayed the sanction of such plan etc. This led to situation where construction could not be commenced and hence payment was not required to be made in view of the pending litigation. The clauses of force majeure came into operation and therefore, it cannot be said that the developer is not willing to perform its part of the contract. In any case there is no default on the part of the developer as payment was not yet due as per clause 4(i)(iv) of JDA. - in view of clause 4.1(iv) read with clause 26(v) of the JDA, HASH Builder were not required to make the payment and it cannot be said that they were not willing to perform their part of the contract on this aspect. Therefore, this contention is rejected. Concept of real income - Taxability of pro-rata receipt - Receipt of consideration and registration of property relevant or not - the contention was that if consideration which has not been received was to be taxed then the assessee would be deprived for claiming exemption u/s 54 and 54EC. - Held that:- Section 54 deals with deduction in case the assessee being an individual or HUF, transfers the residential house - the assessee had transferred the plot – thus it cannot be said that deduction u/s 54F and 54 was same - no ground had been raised for deduction u/s 54F. - in some genuine cases the difficulties may arise but it was for the Parliament or the Government to provide remedy in such cases and judicial forums cannot do anything. Ownership of the plot - society or members - When the plots remain unallotted and obviously legal ownership and beneficial ownership belonged to the society. - Held that:- the Society has entered into JDA on behalf of the Members. It is the members who are owning the plots and the Society was only a facilitator. It becomes clear from the JDA that payment for consideration was to be made to an individual plot holder and in fact consideration was mentioned in terms of per Member. - Decided against the assessee. Issues Involved:1. Validity of assumption of jurisdiction under sections 147/148 of the Income Tax Act.2. Taxability of capital gains arising from the transfer of land under a Joint Development Agreement (JDA).3. Whether the possession of the property was handed over to the developer.4. Applicability of section 2(47)(v) and section 2(47)(vi) regarding the definition of 'transfer.'5. Whether the transaction should be taxed in the hands of the individual members or the society.6. Computation of the capital gains, including the consideration of flats to be received.7. Entitlement to deductions under sections 54 and 54F.8. Charging of interest under sections 234A and 234B.9. Initiation of penalty under section 271(1)(c).Issue-wise Detailed Analysis:1. Validity of Assumption of Jurisdiction under Sections 147/148:The Tribunal upheld the validity of the assumption of jurisdiction under sections 147/148, dismissing the assessees' claims that the reopening of assessments was invalid. The Tribunal found that the Assessing Officer (AO) had sufficient reasons to believe that income had escaped assessment, justifying the issuance of notices under section 148.2. Taxability of Capital Gains:The Tribunal confirmed that the capital gains arising from the transfer of land under the JDA were taxable in the year the agreement was executed. The Tribunal relied on the decision of the ITAT Chandigarh Bench in the case of Charanjit Singh Atwal, which held that the transfer of capital assets is deemed to have taken place when possession is handed over to the developer, even if the entire consideration is not received in the same year.3. Possession of the Property:The Tribunal rejected the assessees' contention that possession was not handed over to the developer because the JDA was not registered. The Tribunal found that the irrevocable Special Power of Attorney executed in favor of the developer, which included rights to mortgage, sell, and develop the property, indicated that possession was indeed handed over.4. Applicability of Section 2(47)(v) and Section 2(47)(vi):The Tribunal held that the transactions were covered under section 2(47)(v) and section 2(47)(vi) of the Income Tax Act. These sections include within the definition of 'transfer' any transaction that allows possession to be taken or retained in part performance of a contract and any transaction that enables the enjoyment of immovable property. The Tribunal found that the JDA and the accompanying Power of Attorney satisfied these conditions.5. Taxability in the Hands of Individual Members vs. Society:The Tribunal determined that the capital gains should be taxed in the hands of the individual members of the society who were allotted plots, rather than the society itself. The Tribunal noted that the society acted merely as a facilitator, and the consideration for the transfer was to be received by the individual members.6. Computation of Capital Gains:The Tribunal upheld the AO's computation of capital gains, which included the value of flats to be received by the assessees as part of the consideration. The Tribunal rejected the assessees' argument that the value of the flats should not be included because they had not yet been constructed. The Tribunal found that the right to receive the flats constituted part of the consideration and should be included in the computation of capital gains.7. Entitlement to Deductions under Sections 54 and 54F:The Tribunal dismissed the assessees' claims for deductions under sections 54 and 54F, noting that the assessees had not fulfilled the necessary conditions for these deductions. The Tribunal found that the assessees had not invested the capital gains in specified assets or residential houses within the stipulated time frame.8. Charging of Interest under Sections 234A and 234B:The Tribunal held that the charging of interest under sections 234A and 234B was consequential and should be computed in accordance with the law. The Tribunal directed the AO to charge or withdraw interest as per the provisions of the Income Tax Act.9. Initiation of Penalty under Section 271(1)(c):The Tribunal did not specifically address the initiation of penalty under section 271(1)(c) in the detailed analysis but upheld the AO's actions, implying that the initiation of penalty proceedings was not found to be improper.Conclusion:The Tribunal dismissed all the appeals filed by the assessees, upholding the AO's actions in reopening the assessments, taxing the capital gains arising from the JDA, including the value of flats in the computation of capital gains, and charging interest under sections 234A and 234B. The Tribunal also confirmed that the capital gains should be taxed in the hands of the individual members rather than the society and denied the assessees' claims for deductions under sections 54 and 54F.