2018 (8) TMI 2170 - AT - Income Tax

Capital gain - year of assessment - As per the Joint Development Agreement the builder has been granted only a right to enter into the premises for the purpose of demolition of the existing building and re-construction - HELD THAT - Perusal of the Supplementary agreement entered into on 18.07.2012 shows that the consideration has been clearly determined in Clauses 1 2 and in Clause-3 the owners agreed to execute the power of attorney in favour of the developer and registered it authorizing 50% of undivided land in the scheduled property. Consequent to the said Supplementary agreement dated 18.07.2012 power of attorney dated 17.08.2012 has been granted to M/s. Chaitanya Eastlyn giving them the authority to convey sell transfer the property described in the scheduled therein to such prospective purchasers and to issue valid receipt thereon. This clearly shows that the transfer took place only in August 2012 by execution of the power of attorney dated 17.08.2012 in respect of consideration determined in the Supplementary agreement dated 18.07.2012. Consequently the facts clearly show that the transfer has been taken place only during the assessment year 2013-14. Thus the capital gain if any is leviable only during the assessment year 2013-14 and not during the assessment year 2012-13 as has been determined by the Id. AO. Accordingly the levy of capital gains on the above facts for assessment year 2012-13 is unsustainable and consequently deleted.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was the determination of the assessment year in which the capital gains arising from the joint development agreement relating to the residential property was liable to be assessed. Specifically, the Tribunal examined whether the capital gains should be assessed in the assessment year 2012-13 or 2013-14. This central issue involved interpretation of the timing of transfer of property rights under the joint development agreement, the applicability of Section 53A of the Transfer of Property Act, and the relevant provisions of the Income Tax Act, including Sections 2(47)(v), 54EC, and 54.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Determination of the year of capital gains assessment - 2012-13 or 2013-14

Relevant legal framework and precedents: The Tribunal considered the provisions of the Income Tax Act, 1961, particularly the definition of "transfer" under Section 2(47)(v), which includes the transfer of rights in property. The applicability of Section 53A of the Transfer of Property Act, which protects certain rights of the transferee in possession of immovable property, was also examined. The Tribunal also considered the provisions relating to capital gains taxation, including the timing of recognition of capital gains and the applicability of deductions under Sections 54EC and 54.

Court's interpretation and reasoning: The Tribunal analyzed the series of agreements and powers of attorney executed between the assessee and the developer. The initial Joint Development Agreement dated 13.07.2011 granted the developer only a license to enter the property for demolition and reconstruction purposes, without transferring possession or ownership rights. Clause 10 of the agreement explicitly provided for such limited rights, and there was no irrevocable transfer of land rights to the developer.

The power of attorney dated 08.11.2011 further clarified that the developer was not authorized to sell or transfer the property or to give possession thereof. It only authorized the developer to enter the premises for development-related activities and to obtain necessary permissions from authorities. This power of attorney explicitly barred the developer from executing any deed conveying ownership or possession rights.

Subsequently, a Supplementary Agreement dated 18.07.2012 revised the terms of consideration and authorized the developer to sell 50% undivided share of the land, replacing the earlier 33 1/3% share. Following this, a second power of attorney dated 17.08.2012 was executed, granting the developer authority to sell and transfer the flats and to execute sale deeds. The actual sale deeds for flats executed under this power of attorney were dated 23.01.2013 and 02.04.2014.

The Tribunal found that the possession was not handed over to the developer in 2011, and the developer's right was limited to entry for demolition and construction purposes only. The transfer of ownership rights and the right to sell the flats arose only after the execution of the Supplementary Agreement and the second power of attorney in August 2012.

Key evidence and findings: The Tribunal relied on the Joint Development Agreement clauses, the two powers of attorney, the dates of municipal permissions for demolition and construction, the Supplementary Agreement, and the dates of execution of sale deeds. The Tribunal also noted the assessing officer's reliance on a statement from the developer's personnel claiming possession was taken on 01.09.2011, which was done without informing the assessee and contrary to the principles of natural justice. The Tribunal found this evidence unreliable and disregarded it in favor of documentary evidence.

Application of law to facts: The Tribunal applied the definition of "transfer" under the Income Tax Act and the conditions under Section 53A of the Transfer of Property Act. It held that since the developer did not have possession or ownership rights in 2011 and was only authorized to enter for development, the conditions for transfer and consequent capital gains taxation did not arise in the assessment year 2012-13. The transfer took place only after the Supplementary Agreement and the second power of attorney in August 2012, making the capital gains taxable in the assessment year 2013-14.

Treatment of competing arguments: The Revenue argued that the possession was handed over to the developer in 2011 and that capital gains should be assessed in 2012-13. The Tribunal rejected this argument based on the contractual terms and powers of attorney, which limited the developer's rights and possession. It also criticized the assessing officer's reliance on an unnotified statement from the developer's personnel and pointed out the violation of natural justice principles. The assessee's argument that the transfer occurred only in 2012-13 was accepted as consistent with the documentary evidence and legal provisions.

Conclusions: The Tribunal concluded that the capital gains arose only in the assessment year 2013-14 and not in 2012-13. The assessment of capital gains for 2012-13 was therefore unsustainable and was deleted.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Perusal of the Joint Development Agreement dated 13.07.2011 shows that possession of the scheduled property has not been handed over by the assessee to the builder. As per the Joint Development Agreement, the builder has been granted only a right to enter into the premises for the purpose of demolition of the existing building and re-construction. This is very clear as per Clause-10 of the Joint Development Agreement."

"A perusal of the power of attorney dated 08.11.2011 granted by the assessee to the developer clearly shows that as per Clause-8, it is specifically barred from selling or executing any deed for any portion of the property described in the scheduled property."

"Consequent to the said Supplementary agreement dated 18.07.2012, power of attorney dated 17.08.2012 has been granted to M/s. Chaitanya Eastlyn giving them the authority to convey, sell, transfer the property described in the scheduled therein to such prospective purchasers and to issue valid receipt thereon. This clearly shows that the transfer took place only in August, 2012."

"Thus, the capital gain, if any, is leviable only during the assessment year 2013-14 and not during the assessment year 2012-13 as has been determined by the Id. Assessing Officer. Accordingly, the levy of capital gains on the above facts for assessment year 2012-13 is unsustainable and consequently deleted."

Core principles established include that the right to enter property for development does not amount to transfer of ownership or possession for capital gains taxation purposes. The timing of transfer depends on when the owner's rights are effectively transferred, which in this case was after execution of the Supplementary Agreement and the second power of attorney. The Tribunal reaffirmed that assessment of capital gains must align with the actual date of transfer as per contractual and legal rights, not merely on the basis of possession or unilateral statements.