Capital gains do not accrue under JDA until encumbrances are cleared and possession is handed over.

ORDER

Dr. Dipak P. Ripote, Accountant Member. – This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2016-17 on 29.01.2025, emanating from the Assessment Order u/s 147 r.w.s. 144 r.w.s. 144B of the Act, dated 26.12.2023.

2. There was a delay of 296 days in filing of the appeal before this Tribunal. The assessee filed an affidavit explaining the reasons for delay. We have perused the affidavit of Mr. Rajesh D Gaikwad and convinced that there was sufficient cause for delay. Substantial justice is more important than procedural delay. No assessee is going to gain by filing the appeal belatedly. Accordingly, delay condoned.

3. The assessee has raised the following grounds of appeal :

The Ld. AR filed a paper book containing 107 pages. The Ld. AR submitted that the assessee had entered into a Joint Development Agreement with Map Developers vide registered Joint Development Agreement dated 05.02.2016. The Ld. AR submitted that in the said Joint Development Agreement, there is a specific clause, clause (5) wherein it is mentioned that the assessee owner of the land will hand over the possession of the land to the developer only after removing the encumbrance i.e. MSEB DP box, drainage lines etc. The Ld. AR submitted that thus there was no transfer in AY 2016-17 of the land. Hence, no capital gain has accrued. The written submissions filed by the Ld.AR is as under :

“The assessee is an individual. He entered into JDA with the builder on 05.02.2016. Assessee had not filed income tax return for Assessment Year 2016-17 as there was no taxable income during this assessment year.

On the basis of information received by the Income Tax Department notice under section 148 was issued. Assessee filed income tax return in response to notice issued under section 148. The learned assessing officer completed the assessment on the basis of JDA and made addition of long term capital gain in the assessment year 2016-17.

It was submitted before the Hon. Bench that as per page 15 of the paper book containing 107 pages it is mentioned that there are MSEB Polls, MSEB Lines, Water Line and Drainage lines are passing through the said plot of land and assessee is under obligation to remove all these obstacles before giving possession of the plot. By either of the reasons and delays the said activity could not be completed till the year 2019 and hence assesssee could not give possession of the plot of land till the year 2019-2020 and as a result even the commencement certificate and Registration under RERA was obtained in 2019-20. These certificates were demonstrated before the Hon. Bench on page number 106 and 107 of the paper book.

Again it was submitted that as the assessee has not received any amount of sale consideration during FY 2016-17 and also the land could not be handed over to builder the sale of land transaction is not complete in FY 2015-16 and hence there is no event of any taxable capital gain for Assessment Year 2016-17.

It was also submitted that income tax theory is based on real income. No hypothetical or notional income can be taxed. As during this assessment year assessee has not earned any real income then there can not be any tax liability on him for this Assessment Year.

Again the assessee has submitted in paper book three case laws where the similar issue has been decided in favor of the assessee and relevant paragraph of the order was brought to the attention of the Hon. Bench.

It was also submitted that the assessee has declared income in the subsequent assessment year 2024-25 and has also paid the due taxes thereon.”

The Ld. DR relied on the order of Assessing Officer (AO) and the Ld. CIT(A).

We have heard both the parties and perused the record. In this case, the assessee Rajesh D Gaikawad had not filed return of income for AY 2016-17. The AO had received information on INSIGHT Portal. Based on the information, the AO issued notice u/s 148A(b) of the Act. Then the AO passed an order u/s 148A(d) of the Act dated 27.02.2023 for AY 201617. The AO also issued notice u/s 148 of the Act dated 27.02.2023.

6.1 During the assessment proceedings, the assessee filed copy of Joint Development Agreement and explained that the land was not transferred to the developer, therefore, there is no capital gain. The assessee also submitted that the assessee has paid capital gain on the said transaction in subsequent year. However, the AO in the assessment order held as under :

“1. The assessee has submitted the details of cost of acquisition alongwith date of acquisition of the property. It is also confirmed from the sales deed that the said immovable property was purchased by the assesssee on 03/03/2007 i.e. in F.Y. 2006-07, therefore the holding period the property is more than 36 months, and the capital gain is treated as long term. Further, on perusal of the submission of the assessee, it is seen that the cost of acquisition was Rs. 17,55,600/-, which includes consideration of Rs. 16,72,000/-, stamp duty and registration amount of Rs.83,600/-. Therefore, considering the share of assessee being 75% in the property, the total sales consideration comes to Rs.81,21,600/- (i.e. 3/4th of Rs.1,08,28,800/-).”

6.2 Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the addition. The relevant paragraph 4.3 of the order of the Ld. CIT(A) is reproduced here as under :

“4.3 I have gone through the grounds of appal, assessment order as well as the appellant submissions. The appellant had entered into a development agreement on 5.2.2016 with the builder. On entering into the joint venture agreement of the open land, the appellant has gained the capital gain. Joint Development agreement is a popular arrangement between the land owners and builders. The land owner gives his land to the builder without transferring the ownership. The builder will build apartments or flats on that land and takes care of everything like marketing the property, getting legal permission and registering the flats in the buyer’s name. Year of transfer is the year in which land is transferred under JDA. The gains by receiving flats in exchange of land is known as capital gains. As per the provisions of sec. 45(5A). If assessee transfers his share in such project before completion certificate is issued then he will have to pay taxes in the year in which such transfer took place.

4.3.1 In the instant case, the assessee has entered into development agreement on 5.2.2016 i.e. in the financial year 2016-17 relevant to the A.Y. 2017- 18. Therefore, the appellant is liable to pay the long term capital gain on the transaction. Therefore, the AO has worked out the long term capital gain at Rs. 44,66,499/-. The appellant’s argument that the completion certificate and finalized the project in the year 2024 and builder handed over his share in the FY 2023-24 is not tenable as the first step of long term capital gain arises when the development agreement was entered with the builder and the possession has been given to the builder for construction. Under the circumstances and in view of the above, in my opinion, there is no reason to interfere with the decision of the Assessing officer and hence, the addition of Rs. 44,66,499/- is upheld. All the grounds raised in this appeal are dismissed.”

6.3 Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before this Tribunal. We have perused the Joint Development agreement which is at page Nos. 1 to 43 of the paper book. It is noted that at clause (5) of the said Joint Development agreement it is specifically mentioned that the assessee has to first remove the encumbrance mainly the DP box, electricity lines, drainage lines etc. It is mentioned in the sub-clause (5) that only after removal of these encumbrances the assessee was to hand over possession to the developer. It is an admitted fact that those encumbrances were not removed during AY 2016-17. It is also observed that the assessee has received commencement certificate after four years on entering into the Joint Development agreement. It has been pleaded by the assessee that due to various reasons there was delay in receiving commencement certificate which was received on 01.01.2020. It has been submitted that actual construction started only after January, 2020 after receiving commencement certificate. The developer has registered the project with RERA on 14.12.2020. All these details were submitted by the assessee during the assessment proceedings. Copy of the letter submitted by the assessee during the assessment proceedings is at page Nos. 44 to 46 of the paper book. It was also submitted during the assessment proceedings that even at that point of time the assessee had not received his share of constructed flat. These facts has not been challenged or rebutted by the Revenue. Thus, in this case it is a fact that in the Joint Development agreement there was specific condition regarding removal of encumbrances only after that possession could have been handed over. It is also a fact that commencement certificate was received in January, 2020.

6.4 Capital Gain arises on transfer of immovable property. In this case as per the registered Joint Development agreement the possession of the land was not given to the developer during AY 2016-17. The assessee had not transferred any rights during AY 2016-17 to the developer. In these facts and circumstances of the case, there was no transfer of land during AY 2016-17 as envisaged u/s 2(47) of the Income Tax Act. Since, there was no transfer of capital asset there cannot be any capital gain as envisaged u/s 45 of the Income Tax Act.

7. We find support from the decision of the Hon’ble Bombay High Court in the case of in the case of CIT -9 v. Eastern Ceramics Ltd.  (Bombay)/IT APPEAL NO. 68 OF 2010 vide order dated July 1, 2013 held as under :

Quote, “vi) We find that the CIT(A) as well as the Tribunal had held that during the assessment year 2000-01,no transfer of capital assets by sale of land at Goregaon had taken place. This was not only for the reason that the respondent-assessee was restrained from disposing the factory land in question but also as observed by the CIT(A) and the Tribunal that during subject assessment year, no construction activity took place and even commencement certificate was issued in a sub sequent assessment year. The amount received by the respondent-assessee was only an advance requiring fulfilment of certain obligations. The agreement itself provides that in case the respondent-assessee is not able to fulfil its obligation, then it was required to refund the amount to the developer. Thus, there was no transfer of land during the assessment year 2000-01. The revenue has not challenged the second part of the order of the Tribunal. Moreover, the Assessing Officer has interfered without any evidence that possession of factory land was given to respondent-assessee in the subject assessment year on the basis that construction activity had started. This is erroneous as the commencement certificate was only received from BMC on 7 November 2000 i.e. in the next assessment year. We find that two authorities viz: CIT(A) and Tribunal have rendered a finding of fact that no transfer of land took place in the concerned assessment year is not shown to be perverse. In this view of the matter, we see no reason to entertain question (a).”Unquote.

8. Similarly, the ITAT Pune in the case of Balasaheb Popatrao Phadol v. ITO 212 ITD 280 (Pune – Trib.) held as under :

Quote, “9. We have heard Ld. Counsels from both the sides and perused the material available on record including both the development agreements and commencement certificate of the property subject to development and also gone through the judgement relied on by the assessee. In this regard, we find that the assessee has entered into a development agreement with M/s Shree Yashree Construction Pvt. Ltd. which was registered on 18.05.2011. A supplementary development agreement was again entered into between the assessee and M/s Shree Yashree Construction Pvt. Ltd. and was registered on 23.07.2012 i.e. during the subsequent assessment year 2013-14. We also find that the commencement certificate & the building permission of the subjected property was issued on 20.06.2012 by Nashik Municipal Corporation which is also in subsequent assessment year. We also find that in consideration of said development agreement the assessee has received 22 number of flats of value of Rs.2,23,26,000/- in the subsequent assessment year. These flats were handed over to the assessee in subsequent assessment year i.e. in assessment year 2013-14 and not during the period under consideration. We also find that these flats were sold by the assessee in assessment year 2013-14 and the respective capital gains was also shown in the income tax return of assessment year 2013-14. However, deduction u/s 54F was claimed by the assessee against the said capital gain arising on sale of flats in subsequent assessment year & there is no information on record that the department has rejected the deduction claimed by the assessee in subsequent assessment year. The sole grievance of the assessee in this appeal is that although the development agreement was first entered during the period under consideration i.e. assessment year 2012-13 but subsequently a supplementary development was again entered & also registered in the subsequent assessment year & even the consideration i.e. flats were also received in subsequent assessment year i.e. in assessment year 2013-14 and the Assessing Officer erred in calculating capital gains during the period under consideration whereas according to the assessee the said capital gain was arising in subsequent assessment year i.e. in assessment year 2013-14. In this regard, we also find that the building permission was also given in subsequent assessment year & not during the period under consideration. Considering the totality of the facts of the case and the evidences produced before us, & also in the light of the judgement passed by Hon’ble Bombay High Court in the case of Bharat Jayantilal Patel dated 10-02-2023 (supra), we are of the considered opinion that capital gains income does not arise to the assessee on transfer of development rights in its land to a developer, since assessee had merely granted licence to permit construction on land to such developer but not given any possession in land as contemplated under section 53A of T.P. Act, 1882, there was no transfer as per section 2(47)(v) giving rise to any capital gain in hands of assessee.” Unquote.

9. Thus, respectfully following the decision of Hon’ble Bombay High Court (supra) and ITAT, Pune (supra), we hold that there was no transfer of capital asset during the relevant AY and hence no capital gain was taxable. Accordingly, ground Nos. 3 to 5 raised by the assessee are allowed.

10. It is observed that the assessee had established by evidence that assessee made credit card payments of Rs.2,25,040/- and Rs.444/-through banking channel from the income earned. Therefore, there was no reason to tax these amounts. Accordingly, AO is directed to delete Rs.2,25,040 and Rs.444/-. Accordingly ground No. 6 raised by the assessee is allowed.

11. Ground Nos. 7 and 8 are consequential, hence, do not need any adjudication. Accordingly, the same are dismissed. Ground Nos. 1 and 2 were not argued, hence, the same are dismissed as un-adjudicated.

12. In the result, the appeal of the assessee is partly allowed.