2015 (3) TMI 489 - AT - Income Tax

Tribunal Rules No Capital Gains Due to Developer's Non-Performance; Land Classified as Agricultural, Not Capital Asset.

The Tribunal upheld the CIT(A)'s decision, determining no capital gains arose in the assessment year 2008-09 due to the development agreement, as the ... Capital gains on account of development agreement - whether agreement entered into by the assessee with M/s Amsri Developers Pvt. Ltd. on 04/05/2007 did not arise in AY 2008-09? - CIT(A) deleted addition - Held that:- Unless there is willingness on the part of the developer to perform his part of the contract, there cannot be a ‘transfer’ of capital asset as envisaged u/s 2(47)(v) read with section 53A of the TP Act. Though the assessee had entered into the development agreement in the previous year relating to the AY under dispute, but, as the developer has neither performed nor is willing to perform his part of the contract, the development agreement fails. Even as on date there is no development activity by the developer. The conversion of the land from agricultural to non-agricultural has also not taken place. For this very reason the assessee along with land owners have filed a suit in the city civil court for cancellation of the development agreement, which is pending. In these circumstances, it cannot be said that there is transfer of property giving rise to capital gain. - Accordingly,as relying on case of Bhavya Constructions Pvt. Ltd. and others [2015 (4) TMI 295 - ITAT HYDERABAD] we uphold the order of the CIT(A) and dismiss the grounds raised by the revenue in this regard. - Decided against revenue. Issues Involved:1. Determination of capital gains arising from a development agreement.2. Applicability of Section 2(47)(v) read with Section 53A of the Transfer of Property Act (TP Act).3. Consideration of 'willingness to perform' by the developer.4. Classification of the asset as a capital asset under Section 2(14) of the Income Tax Act.Issue-wise Detailed Analysis:1. Determination of Capital Gains Arising from a Development Agreement:The primary issue in the appeal was whether capital gains arose in the assessment year 2008-09 due to a development agreement entered into by the assessee with M/s Amsri Developers Pvt. Ltd. The Assessing Officer (AO) had computed the capital gains based on the development agreement and the transfer of possession of the property. However, the CIT(A) held that no capital gains arose as the development agreement did not materialize into any development activity, and the agreement was eventually contested in court for cancellation.2. Applicability of Section 2(47)(v) read with Section 53A of the TP Act:The AO argued that the transfer of possession under the development agreement constituted a transfer under Section 2(47)(v) of the Income Tax Act, invoking Section 53A of the TP Act. However, the CIT(A) and the Tribunal found that mere execution of the development agreement and transfer of possession were insufficient to constitute a transfer unless the developer showed willingness to perform its part of the contract. The Tribunal cited previous decisions, emphasizing that the developer's failure to initiate any development activity or obtain necessary approvals indicated a lack of willingness to perform, thus negating the applicability of Section 2(47)(v).3. Consideration of 'Willingness to Perform' by the Developer:The Tribunal extensively discussed the concept of 'willingness to perform' as a crucial criterion under Section 53A of the TP Act. It was noted that the developer had neither performed any development activities nor shown readiness to perform its contractual obligations. The Tribunal referred to the case of Smt. K. Radhika and others v. DCIT, where it was held that the developer's unwillingness to perform its part of the contract negated the applicability of Section 53A, and consequently, Section 2(47)(v) of the Income Tax Act.4. Classification of the Asset as a Capital Asset under Section 2(14) of the Income Tax Act:The CIT(A) also held that the land in question was agricultural and thus did not qualify as a capital asset under Section 2(14) of the Income Tax Act. This finding remained unchallenged by the department, further supporting the conclusion that no capital gains could be taxed for the assessment year in question.Conclusion:The Tribunal upheld the CIT(A)'s decision, concluding that no capital gains arose in the assessment year 2008-09 due to the development agreement, as the developer had not performed or shown willingness to perform its part of the contract. The Tribunal also noted that the land being agricultural did not constitute a capital asset under Section 2(14) of the Income Tax Act. Consequently, the appeals by the revenue were dismissed. The judgment emphasized that each case must be evaluated based on its specific facts, particularly concerning the developer's willingness to perform under the contract.Final Judgment:Both appeals by the revenue were dismissed, and the orders of the CIT(A) were upheld. The Tribunal pronounced the judgment in the open court on 26th February 2015.