2017 (5) TMI 1168 - AT - Income Tax

Tax Tribunal rules on LTCG taxation for AY 2007-08, differentiating long-term and short-term gains

The Tribunal partly allowed the assessee's appeal, dismissing the Revenue's appeal. It concluded that Long Term Capital Gains (LTCG) should be taxed in ... Non-chargeability of capital gains in respect of the land in the assessment year under consideration - year of transfer - Held that:- The capital gain would be taxable in the year in which such transactions are entered into even if the transfer of the immovable property is not effective or complete under the general law. The assessee entered into an agreement with the builder/developer for development of the impugned land and construction of flats thereon. Also, the assessee signed a development agreement dated 27.06.2006 in favour of the builder/developer and gave possession of the property to the builder/developer. Further, the assessee acted on the impugned agreement by accepting from the builder/developer payments by cheques on different dates in the financial year 2006-07 relevant assessment year 2007-08. All the conditions of sub-clause (v) of section 2(47) are satisfied in this case and therefore, it has to be inferred that a 'transfer' did take place within the meaning of section 2(47)(v). The argument that the deeds in respect of the sale of flats were not registered/executed is not a relevant consideration so far as provisions of sub-clause (v) of section 2(47) are concerned. The completion of 'transfer' of an immovable property as per the general law is not a requirement for the applicability of the provisions of sub-clause (v) of section 2(47). Thus, the taxability of long term capital gains only taxed in the F.Y 2006-07 relevant to A.Y 2007-08 and ordered accordingly. Computation of short term capital gains on selling of assessee’s share of residential and commercial constructed area - the gain on the transfer of the asessee’s share in constructed area is to be brought in tax as short term capital gains after giving due deduction as enumerated in sec.48 of the Act. The Assessing Officer has to consider this issue of computation of capital gains on assessee’s share of construction area along with undivided share in land which was actually transferred by the asseseee in this assessment year. In other words, the Assessing Officer cannot bring into tax entire share of constructed area along with undivided share in land only on receipt basis as transferred unless there is actual transfer in terms of Sec.45 of the Act. Accordingly, we direct the Assessing Officer to tax the gains arising from transfer of capital asset effected in the previous year alone in the relevant assessment year 2011-12. Since we have held that there was a transfer u/s.45 in the A.Y 2007-08 and the long term capital gains to be computed in terms of Sec.2(47)(v) of the Act in the A.Y 2007-08 and short term capital gains to be computed in transfer of capital asset in the respective previous years when the transfer of constructed area when it was actually taken place, there is no question of computing any business on the impugned issue. Accordingly, the findings of the CIT(Appeals) on applicability of Sec.45(2) is infractuous. Issues Involved:1. Deduction under Section 24(a) of the Income Tax Act.2. Long Term Capital Loss on the sale of shares.3. Assessment of Long Term Capital Gains (LTCG) related to the Joint Development Agreement (JDA).4. Invocation of Section 45(2) of the Income Tax Act.5. Procedural fairness and principles of natural justice.Detailed Analysis:1. Deduction under Section 24(a) of the Income Tax Act:The assessee claimed a deduction of Rs. 4,20,000 under Section 24(a) for interest on borrowed capital. The Assessing Officer (AO) disallowed this claim, stating that the loan did not relate to the property that fetched rental income. The CIT(A) confirmed this disallowance without providing proper reasons. The Tribunal did not address this issue further as the assessee did not press this ground during the hearing.2. Long Term Capital Loss on the Sale of Shares:The assessee claimed a Long Term Capital Loss (LTCL) of Rs. 1,07,45,847 from the sale of shares of M/s. Paramount Builders (Chennai) Ltd. to relatives. The AO treated the transactions as sham and a colorable device, relying on the Bombay High Court decision in M/s. Killick Nixon Ltd. The CIT(A) agreed with the AO, noting that the assessee failed to provide documentary evidence to prove the genuineness of the transactions. The Tribunal upheld this finding, sustaining the AO's action to ignore the LTCL.3. Assessment of Long Term Capital Gains (LTCG) Related to the Joint Development Agreement (JDA):The assessee, along with 14 other family members, entered into a JDA with M/s. P.S. Srijan Realty for developing a commercial-cum-residential complex. The CIT(A) and the Tribunal examined whether the capital gains should be assessed in the Assessment Year (AY) 2011-12 or AY 2014-15. The Tribunal referred to Section 2(47)(v) and Section 53A of the Transfer of Property Act, concluding that the transfer took place in AY 2007-08 when the agreement was signed, and possession was handed over. Consequently, the LTCG should be taxed in AY 2007-08. The Tribunal directed the AO to tax only the gains arising from the transfer of the capital asset in the relevant previous year.4. Invocation of Section 45(2) of the Income Tax Act:The AO invoked Section 45(2), treating a portion of the gains as business profits. The CIT(A) held that the transaction resulted in LTCG, not business profits, based on the Survey Report of the DGIT (Inv.). The Tribunal found the CIT(A)'s direction to treat the gains as LTCG correct and held that the applicability of Section 45(2) was infructuous.5. Procedural Fairness and Principles of Natural Justice:The assessee argued that the CIT(A) failed to provide a proper opportunity before passing the impugned order, violating the principles of natural justice. The Tribunal noted that the CIT(A) directed the AO to pass reassessment orders for the other co-owners without hearing them, which was beyond the CIT(A)'s jurisdiction. The Tribunal vacated this finding, emphasizing that the CIT(A) cannot decide issues affecting third parties without hearing them.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal as infructuous. The Tribunal concluded that the LTCG should be taxed in AY 2007-08, and the gains from the transfer of the constructed area should be taxed as short-term capital gains in the respective years of actual transfer. The Tribunal also vacated the CIT(A)'s direction to reassess the other co-owners without hearing them.