2025 (11) TMI 1305 - AT - Income Tax

Capital gains on JDA to be based on allocable constructed area; profit on unit sales is business income

ITAT Kolkata set aside the order of the CIT(A) and remanded the matter to the AO. It held that consideration for capital gains should be the value of the ... LTCG - JDA - AO allowed 10% of the land cost as purchase cost to the assessee and computed the long-term capital gains - land was transferred to the developer as per the joint development agreement and the capital gains was chargeable in the year of transfer as has been held by the Ld. CIT(A) - assessee contended before the CIT(A) that in the absence of any act in furtherance of contract by the developer, the transfer does not take place as specified in section 2(47)(v) HELD THAT:- The assessee sold the constructed assets which are to be treated as business profit in the year of sale and not as capital gains while the consideration for the purpose of capital gains would be the value of the constructed area to the share of the assessee for the portion of land transferred to the developer, i.e. value of 90% of the land as the assessee along with others continues to be the owner of 10% of the land till the flats or constructed assets are sold to the prospective buyers. AO has not given any categorical finding regarding the date of transfer nor has allowed the benefit of indexation on the cost of land for the portion transferred to the developer as per law despite the assessee having submitted the purchase deed of the land. We deem it appropriate in the interest of justice that the order of the CIT(A) be set aside and the matter be remanded back to the AO to determine the year of transfer as per law in view of the judicial pronouncements relied upon by the assessee and the evidences to be filed by the assessee and charge capital gains accordingly and also to grant benefit of indexation after the assessee furnishes evidence for the cost of purchase of the land and as per the share of the assessee and adopt the value of the constructed property coming to the share of the assessee as the consideration for the purpose of capital gains. AO shall also examine the issue relating to sale of the constructed property, the profit of which is not to be considered as capital gains but as income from business or profession. The same shall be charged in the relevant year as per law in which the sale takes place. AO shall recompute the capital gains as per the direction above and take necessary action and in accordance with law. Appeal filed by the assessee is partly allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether execution and registration of a Joint Development Agreement (JDA) and clauses transferring possession/control to the developer amounts to a 'transfer' under section 2(47)(v)/(vi) of the Income Tax Act, 1961, attracting capital gains in the year of the JDA. 2. Whether part performance/protection under section 53A of the Transfer of Property Act operates in the facts where the JDA is registered and possession/control is put at the disposal of the developer. 3. If a JDA gives landowners a share in constructed saleable area while the developer controls construction and sale, how should (a) the year of transfer, (b) the consideration for capital gains, and (c) indexation of cost be determined; and whether sale of the constructed assets by the landowner is taxable as capital gains or as business income. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the JDA amounts to 'transfer' under section 2(47)(v)/(vi) Legal framework: Section 2(47) defines 'transfer', and sub-clauses (v) and (vi) treat certain alienations of rights or relinquishment/part-performance in favour of a developer as transfers attracting capital gains. Explanation 2 and related provisions clarify the ambit of deemed transfer on handing over possession/control under development agreements. Precedent Treatment: The Tribunal and appellate authority relied on higher court authority holding that a registered agreement which vests possession/control in a developer can satisfy the ingredients of section 2(47)(v)/(vi) and attract capital gains in the year of contract/transfer; the registry/amendments to section 53A were noted as significant to enforceability. Interpretation and reasoning: The JDA contained express clauses (including devolution of possession for development, symbolic possession by developer, prohibition on withdrawal/cancellation, developer's exclusive control of project management and receipts, and right of first refusal) which operate to put the land at the developer's disposal and to deprive the landowners of effective control. The agreement was registered, making it enforceable. On these facts the Tribunal found that the landowner completed part performance and relinquished effective possession/control consistent with the statutory concept of transfer in section 2(47)(v)/(vi). Ratio vs. Obiter: Ratio - where a registered JDA expressly vests possession/control and excludes owners' power to withdraw or interfere, it constitutes a transfer under section 2(47)(v)/(vi) attracting capital gains in the year of transfer. Obiter - observations about specific clause wordings may be illustrative rather than universally prescriptive. Conclusion: The Court of first instance (CIT(A)) conclusion that the JDA constituted a transfer in the year of its execution was legally sustainable on the pleaded clauses and registration; however, see remand on factual particulars under Issue 3 for year determination in this case. Issue 2 - Applicability of section 53A (part performance) where JDA is registered Legal framework: Section 53A protects specific performance rights of a purchaser/assignee who has taken possession under a contract to transfer immovable property; amendments to section 53A and the Registration Act affect enforceability where registration is required. Precedent Treatment: The Tribunal relied on authoritative pronouncements clarifying that a registered contract has enforceability and that part performance under section 53A can operate as a shield where contractual ingredients are satisfied, subject to registration requirements introduced by amendment. Interpretation and reasoning: Given the registration of the JDA and clauses evidencing disposition/possession to the developer, section 53A operates to complete the part performance of the contract and to validate the effective transfer of possessory/control rights for tax purposes. The registration after amendment means the agreement is not merely evidentiary but enforceable for the purposes of section 53A. Ratio vs. Obiter: Ratio - registration of a JDA that satisfies the conditions of section 53A makes part performance effective and supports treatment as a transfer under tax law. Obiter - general commentary on prior law before amendment was not decisive. Conclusion: Section 53A supports the conclusion that part performance was completed on registration and handing over of possession/control, reinforcing the characterization of the transaction as a transfer for capital gains purposes. Issue 3 - Determination of year of transfer, computation of capital gains (consideration and indexation), and characterization of sale of constructed assets Legal framework: Capital gains computation requires determination of (a) year of transfer (triggering taxation), (b).amount of consideration deemed to have been received on transfer, and (c) allowable cost/indexation. Separately, where landowners later receive and sell constructed units, taxation depends on whether sales are capital in nature or business income. Precedent Treatment: Judicial authorities were placed before the Tribunal that treat the question of the date of transfer and quantum of consideration as fact-sensitive, and recognize that where landowners retain a continuing proprietary interest in a land portion (e.g., entitlement to built area), subsequent sale of constructed units may be business income rather than capital gains. Authorities distinguish cases where developer action in furtherance is absent. Interpretation and reasoning: The Tribunal found factual ambiguities in the record: the AO adopted deemed market value and allowed a flat 10% as purchase cost where original purchase documents were available but not given proper weight; there was no categorical factual determination by the lower authorities on precise date of transfer vis-à-vis developer acts in furtherance; and the assessee asserted treatment of its holding as inventory/trading stock (land dealer) with consequent business characterization of subsequent sales. Given these material factual and evidentiary lacunae, the Tribunal held that the matter required remand to the AO to (a) determine the precise year of transfer in light of the JDA clauses and factual acts in furtherance, (b) accept and verify purchase cost documentary proof and allow indexation where applicable, (c) adopt the proper valuation of the constructed property portion attributable to the assessee as the consideration for capital gains calculation, and (d) examine whether sales of constructed assets constitute business income in the year of sale rather than capital gains. Ratio vs. Obiter: Ratio - factual determination of the year of transfer, correct quantification of consideration and allowable indexed cost, and proper classification of subsequent sales (capital gains vs. business income) are prerequisites for correct computation and must be remitted where evidence is incomplete or findings are non-specific. Obiter - procedural directions on specific recomputation formulae are illustrative rather than exhaustive. Conclusion: While the registered JDA and its possession/control clauses can amount to a transfer under section 2(47) and section 53A supports part performance, the Tribunal set aside parts of the appellate order and remanded to the Assessing Officer to determine year of transfer on the facts, verify and allow indexation of documented purchase cost, compute capital gains using the constructed property share attributable to the landowner as consideration, and separately examine taxation of subsequent sales as business income in the relevant year.