Capital gains on development agreement arise only on effective possession; reassessment and business-income taxation failed on the facts.
Capital gains under a development agreement arise only when possession is handed over in a manner satisfying section 2(47)(v) of the Income-tax Act read with section 53A of the Transfer of Property Act. Here, the agreement deferred possession until sanction of the building plan, and the effective handing over occurred in assessment year 2008-09, not 2007-08; temporary entry for inspection did not constitute transfer, so the reassessment for 2007-08 lacked a valid basis. The land was also not shown to have been converted into stock in trade, and the transfer deeds related only to proportionate land for the shops under the joint development arrangement. On those facts, business income could not be assessed in 2009-10, and only capital gains, if any, would arise in the relevant year of possession.
Issues: (i) Whether the reassessment for assessment year 2007-08 was valid and whether any capital gains arose in that year on the development agreement and alleged transfer of land; (ii) Whether the addition of business income for assessment year 2009-10 could be sustained, or whether only capital gains on the proportionate transfer of land was chargeable.
Issue (i): Whether the reassessment for assessment year 2007-08 was valid and whether any capital gains arose in that year on the development agreement and alleged transfer of land?
Analysis: The development agreement itself provided that possession was to be handed over only after sanction of the building plan. The sanctioned plan and effective handing over of possession occurred in assessment year 2008-09, not in assessment year 2007-08. Temporary entry for inspection and preparation of plans did not amount to possession within the meaning of section 2(47)(v) of the Income-tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882. The reopening was founded on the mistaken premise that capital asset had been converted into stock in trade and that capital gains had accrued in assessment year 2007-08. As no such transfer or sale occurred in that year, the basis of reassessment failed.
Conclusion: The reassessment for assessment year 2007-08 was not sustainable, and no capital gains were chargeable in that year.
Issue (ii): Whether the addition of business income for assessment year 2009-10 could be sustained, or whether only capital gains on the proportionate transfer of land was chargeable?
Analysis: The assessee had not converted the ancestral land into stock in trade. The transfer deeds executed for the four shops were only for the proportionate land attributable to those shops and were part of the joint development arrangement. The land transfer, if any, related back to the handing over of possession in assessment year 2008-09 and not to assessment year 2009-10. Since the assessee was not carrying on a construction business and no stock in trade was proved, the addition as business income could not be sustained. The transaction could not be bifurcated so as to tax business profit in assessment year 2009-10 on the facts found.
Conclusion: The addition of business income for assessment year 2009-10 was deleted, and no tax was chargeable in that year on the impugned transfer as business income.
Final Conclusion: The common development arrangement did not justify taxation in assessment year 2007-08 on a reassessment basis, and the business-income addition for assessment year 2009-10 also failed; the assessee succeeded on both appeals.
Ratio Decidendi: In a development agreement, capital gains arise only when possession is handed over in a manner satisfying section 2(47)(v) read with section 53A, and reassessment cannot stand where it is founded on an incorrect factual assumption that such transfer occurred in an earlier year.