2018 (1) TMI 843 - AT - Income Tax

Tribunal rules on taxability of Joint Development Agreement capital gains

The Tribunal ruled in favor of the revenue, holding that capital gains from a Joint Development Agreement (JDA) are taxable in the year of execution when ... Capital Gains - JDA - Revision u/s 263 - as per CIT AO ought to have held that there was a transfer of a capital asset by the assessee by virtue of agreement dated 11.11.2000 and capital gain had accrued during the previous year - assessee parted with possession of the property as contemplated in Section 53A - taxability of capital gain in the present year because the JDA was executed in the present year - Held that:- Possession was given by these assessees to the builder in the present year because in the present year, the JDA talks about handing over of possession and there is no other document shown as per which, the possession was handed over to the developer in any subsequent year. This is also noted by the AO on page no. 7 of the assessment order in Para no. 9.5 that as per Rider -2 dated 02.02.2009, the parties to the JDA being these four assessees before us had renegotiated clause 13 of the JDAs dated 27.11.2008 and had received a sum of ₹ 2.5 Crores as non-refundable deposit. Since in the present case, not only JDA was executed, but possession was also handed over to the developer and non-refundable deposit was received by the assessee to the extent of ₹ 2.50 Crores, in our considered opinion, this judgment rendered in the case of CIT Vs. Dr. T.K. Dayalu (2012 (6) TMI 405 - Karnataka High Court) is squarely applicable. - Decided against assessee. Issues Involved:1. Taxability of capital gains in the present year due to the execution of the Joint Development Agreement (JDA).2. Validity of reassessment proceedings under Section 147 of the Income Tax Act.3. Allowability of deduction under Section 54F of the Income Tax Act.4. Compliance with Rule 46A regarding the submission of additional evidence.5. Method of accounting followed by the assessee.6. Computation of interest income and its taxability.Detailed Analysis:1. Taxability of Capital Gains:The main issue revolves around whether capital gains are taxable in the year the JDA was executed. The revenue argued that the capital gains should be taxed in the year the JDA was executed and possession was handed over, citing the Karnataka High Court judgment in the case of CIT vs. Dr. T.K. Dayalu. The Tribunal examined the facts and found that possession was indeed handed over to the developer in the year the JDA was executed, and non-refundable deposits were received. Therefore, the Tribunal held that the capital gains are liable to be taxed in the year the JDA was executed, reversing the CIT(A)'s order and restoring the AO's decision.2. Validity of Reassessment Proceedings:The assessee challenged the reassessment proceedings under Section 147, arguing that the mandatory conditions for issuing notice under Section 148 were not met. However, during the hearing, the assessee's representative did not press this issue. Consequently, the Tribunal rejected the grounds related to the validity of reassessment proceedings as not pressed.3. Allowability of Deduction Under Section 54F:The assessee claimed a deduction under Section 54F, which the CIT(A) did not address because he had ruled that the capital gains were not taxable in the present year. Since the Tribunal reversed the CIT(A)'s decision on the taxability of capital gains, it restored the issue of the allowability of the deduction under Section 54F to the CIT(A) for fresh consideration.4. Compliance with Rule 46A:The revenue contended that the CIT(A) decided the issue regarding the sources for mutual fund investments based on additional evidence not presented before the AO, violating Rule 46A. The Tribunal agreed with the revenue and set aside the CIT(A)'s order on this issue, remanding it back to the CIT(A) for fresh decision after obtaining a remand report from the AO.5. Method of Accounting:The AO stated that the assessee followed the mercantile system of accounting, while the CIT(A) concluded that the assessee followed the cash system. The Tribunal found no basis for the CIT(A)'s conclusion, as the AO clearly mentioned the mercantile system in the assessment order. Therefore, the Tribunal reversed the CIT(A)'s decision and restored the AO's order on this issue.6. Computation of Interest Income:The revenue challenged the CIT(A)'s decision to delete the addition of interest income on the grounds that the income was accrued after 31.03.2009. The Tribunal found that the CIT(A) erred in concluding that the assessee followed the cash system of accounting when the AO had stated otherwise. Therefore, the Tribunal reversed the CIT(A)'s order and restored the AO's decision on the interest income.Conclusion:The Tribunal allowed the revenue's appeals, reversing the CIT(A)'s orders on the issues of taxability of capital gains, method of accounting, and interest income. The Tribunal also remanded the issue regarding the sources for mutual fund investments back to the CIT(A) for fresh consideration. The assessee's cross-objections were partly allowed for statistical purposes, with the issue of deduction under Section 54F being remanded to the CIT(A) for fresh decision.