Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A No. 188.Coch/2009, Assessment year: 2003-04

Advocates

Assessee by: Shri D.S Sreekumaran, Adv.
Revenue by: Ms. Vani Raj, Jr. DR

Judges

N.R.S Ganesan, J.M
B.R Baskaran, A.M

Acts

TRANSFER OF PROPERTY ACT 1882
provisions of clause (v) and (vi) of sec. 2(47)
188/Coch/2009 8 Income tax Act,
section 2(47)(v)

See more information ...

Smart Summary

Structured Summary of the Opinion — I.T.A. No. 188/Coch/2009 (28-09-2012)

Factual and Procedural Background

The appeal by the assessee (Shri G. Sreenivasan, represented) challenges the order dated 11-02-2009 of the Commissioner of Income-tax (Appeals)-III, Kochi, for assessment year 2003-04. The assessee had not filed returns earlier. During a search in the case of M/s Nikunjam Constructions Pvt. Ltd. (21-02-2006) it was noted that the assessee entered a development agreement with that company on 14-04-2002 for developing 40 cents of land into a multi-storeyed building. Under the agreement the assessee was to receive 7,800 sq. ft. of constructed area, five car parks and Rs.18,00,000 in cash (received in three installments across FY 2002-03, 2003-04 and 2004-05). The Assessing Officer (AO) issued notice under section 148 on 14-02-2007 for assessment year 2003-04, and completed reassessment determining long-term capital gain at Rs.65,17,513/-. The assessee appealed to CIT(A) and, after failing before CIT(A), appealed to the Income Tax Appellate Tribunal (ITAT) — the present decision.

Legal Issues Presented

Whether the reopening of assessment by notice under section 148 of the Income-tax Act was valid for assessment year 2003-04.
Whether the capital gain arising from the development agreement was correctly assessed in assessment year 2003-04 (i.e., fixation of the year of assessment).
Whether the assessee was eligible for deduction under sections 54 / 54F of the Income-tax Act and whether the claim was properly considered.

Arguments of the Parties

Assessee's Arguments (Appellant)

The AO issued identical notices under section 148 for AYs 2003-04, 2004-05 and 2005-06, but in communications the AO had indicated that capital gain should be assessed in AY 2005-06 because possession was handed over on 21-04-2004; accordingly reassessment in AY 2003-04 was invalid.
The physical possession was given only on 21-04-2004 and therefore capital gain is assessable in AY 2005-06, not AY 2003-04.
Section 53A of the Transfer of Property Act was amended w.e.f. 24-09-2001 to omit words about registration; unregistered agreements no longer operate under section 53A — the development agreement is unregistered — hence clause (v) of section 2(47) could not be invoked to treat the agreement as a transfer in AY 2003-04.
The AO ought to have excluded amounts of sale consideration already declared by the assessee in later assessment years (stated figures: AY 2005-06 — Rs.34,74,839/- and AY 2006-07 — Rs.14,00,000/-) from the assessment for AY 2003-04.
The AO failed to allow deduction under sections 54 / 54F while computing capital gains (this claim was urged before the ITAT for the first time).

Revenue's Arguments (Respondent / Department)

The AO had reasons to believe there was escapement of income spanning AYs 2003-04 to 2005-06 based on the agreement of 14-04-2002 and subsequent factual material (including an affirmation dated 21-04-2004), so issuance of section 148 notices was justified; it is not necessary for the AO to reach a final conclusion at the time of issuing notice if reasons to believe exist.
The transaction falls within clause (v) of section 2(47) (transactions involving possession in part performance of contracts of the nature referred to in section 53A) and clause (vi) of section 2(47) (transactions which have the effect of transferring or enabling enjoyment of immovable property), so capital gain is taxable with reference to the date of the development agreement (14-04-2002).
Even if section 53A was amended regarding registration, clause (v) of section 2(47) relates to the nature of transaction referred to in section 53A and is not negated by the amendment; alternatively clause (vi) applies; and section 292B saves the assessment as being in substance and effect in conformity with the Act's intent.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chaturbhu Dwarkadas Kapadia v. CIT, 260 ITR 491 (Bombay High Court)	In development-agreement cases, the test for year of chargeability is the date on which the transaction (contract) was entered into; if contract as a whole indicates transfer of control, the date of the contract is the relevant date for section 2(47)(v).	The Tribunal relied on the decision to hold that the development agreement dated 14-04-2002 could give rise to a transfer under section 2(47)(v) (and/or (vi)) and therefore capital gain was properly assessable in AY 2003-04; the tribunal applied the principle that substance prevails over form and that the date of the contract may be the relevant date where the contract conveys effective control to the developer.

Court's Reasoning and Analysis

The Tribunal's reasoning proceeds in discrete steps tied closely to the facts and the statutory provisions invoked by the parties:

Validity of notice under section 148:
- The AO issued notices for AYs 2003-04, 2004-05 and 2005-06 on identical reasons. The Tribunal emphasised that an AO need not reach a firm conclusion at the time of issuing a section 148 notice; it suffices that there exist “reasons to believe” escapement of income. The agreement of 14-04-2002 and the affirmation of possession on 21-04-2004 gave the AO material on which to form such reasons for the three years. Therefore the challenge to the validity of the notice for AY 2003-04 was rejected.
Year of assessment (whether capital gain is assessable in AY 2003-04):
- The Tribunal examined the development agreement (14-04-2002) and the surrounding factual material, including a written affirmation dated 21-04-2004. The assessee argued that handing over of vacant land possession occurred only on 21-04-2004, making AY 2005-06 the year of chargeability.
- The Tribunal applied the principle that substance prevails over form: even if a clause in the agreement stated that possession would be handed over only after the assessee received constructed area, in practical terms the builder cannot commence construction without physical possession. Thus, for practical purposes the Tribunal concluded physical possession was handed over after entering into the agreement on 14-04-2002.
- The Tribunal analysed clauses (v) and (vi) of section 2(47). Clause (v) refers to transactions involving allowing possession to be taken/retained in part performance of contracts of the nature referred to in section 53A of the Transfer of Property Act. Clause (vi) covers transactions that have the effect of transferring or enabling enjoyment of immovable property (including by agreements or arrangements).
- The Tribunal relied on the Bombay High Court decision in Chaturbhu Dwarkadas Kapadia (260 ITR 491) which held that in development agreements the relevant date can be the date of the contract if the contract, read as a whole, transfers control to the developer; the Tribunal read that authority to support treating the date of agreement (14-04-2002) as the relevant date for chargeability under section 2(47)(v).
- Regarding the amendment to section 53A (omission of certain words concerning registration w.e.f. 24-09-2001), the Tribunal concluded that clause (v) of section 2(47) refers to the type/nature of transaction referred to in section 53A and is not negated by the amendment about registration; additionally clause (vi) can apply to capture the substance of the transaction. The Tribunal also invoked section 292B as saving the assessment where, in substance and effect, the assessment accords with the intent and purpose of the Income-tax Act.
- On these grounds the Tribunal concluded that the CIT(A) was correct in confirming assessment of capital gain in AY 2003-04 (since the development agreement was entered into on 14-04-2002).
Claim about amounts declared in later years (AYs 2005-06 and 2006-07):
- The assessee argued that amounts declared in later years should be excluded from the AY 2003-04 assessment. The Tribunal held this argument to be inconsistent with the taxation scheme: tax is levied in the year in which income is assessable. Having held the gain is assessable in AY 2003-04, the Tribunal advised the appropriate remedy is for the assessee to approach tax authorities to seek exclusion of amounts wrongly offered in subsequent years; the Tribunal noted tax authorities may consider such requests in the interest of natural justice.
Deduction under sections 54/54F:
- The assessee first raised before the ITAT that deductions under sections 54/54F were not granted. Because this claim was urged for the first time before the Tribunal, the ITAT set aside that part of the matter to the file of the AO directing the AO to examine the claim in accordance with law after affording the assessee an opportunity of hearing.

Holding and Implications

Holding: Appeal partly allowed for statistical purposes.

More specifically, the Tribunal:

Dismissed the assessee's challenge to the validity of the section 148 notice for AY 2003-04 (i.e., the reopening was held valid).
Confirmed that the capital gain arising from the development agreement was properly assessable in assessment year 2003-04 (the development agreement dated 14-04-2002 was treated as giving rise to transfer for income-tax purposes under section 2(47)(v) and/or (vi)).
Remitted the assessee's claim for deductions under sections 54 / 54F to the AO for fresh consideration after affording opportunity of hearing.

Implications:

Direct effect on the parties: the reassessment for AY 2003-04 stands; the assessee may pursue administrative relief with tax authorities regarding amounts he declared in subsequent years; the AO must re-examine the assessee's section 54/54F claim on remand.
The opinion does not purport to lay down an original or novel principle beyond applying existing authorities (the Tribunal relied on established case law, notably Chaturbhu Dwarkadas Kapadia). Therefore, no new binding precedent was announced by this decision beyond its application to the facts of this case.

Disposition (from the text): The appeal of the assessee is treated as partly allowed for statistical purposes. Pronounced on 28-09-2012 by the Cochin Bench of the ITAT (Judicial Member N.R.S. Ganesan and Accountant Member B.R. Baskaran).

Document/Case Identifiers and Parties

Case: I.T.A. No. 188/Coch/2009 — Decision dated 28-09-2012. Appellant: Shri G. Sreenivasan (represented by Dr. Jyothi Kamalam). Respondent: Deputy Commissioner of Income-tax, Central Circle, Trivandrum (and Revenue). Bench: ITAT, Cochin (Judicial Member and Accountant Member).

Notes on Sources and Limits of this Summary

This summary is prepared exclusively from the text of the opinion provided. Nothing has been added that is not supported by the provided opinion; where the opinion did not contain detailed matter (for example other external precedents beyond the one cited), those items are not included.

Show full summary ...

To access the original judgment, please Sign In or Subscribe.

Shri G. Sreenivasan, Rep. By L/H Dr. Jyothi Kamalam, Jyothy Nivas, Moonnamanackal, Pettah, Trivandrum (Assessee-) v. The Deputy Commissioner Of Income-Tax, Central Circle, Trivandrum (Revenue-).

Per B.R.BASKARAN, Accountant Member: The appeal of the assessee is directed against the order dated 11-02-2009 passed by Ld CIT(A)-III, Kochi and it relates to the assessment year 2003-04.

2. The grounds raised by the assessee give rise to the following issues:- (a) Validity of notice issued u/s 148 of the Act for reassessment. (b) Validity of assessment of capital gain in the year under consideration. (c) Eligibility of deduction u/s 54/54F of the Act.

3. The facts relating to the case are stated in brief. The assessee was not assessed to tax earlier. During the course of search proceedings carried out in the case of M/s Nikunjam Constructions P Ltd on 21.2.2006, it was noticed that the assessee had

I.T.A. No. 188/Coch/2009 entered into an agreement with that company on 14.4.2002 for construction of a multi storied building consisting of residential apartments on 40 cents of land owned by him, which was located in Kadakampally Village under survey no.227,228,250 & 251B/4. As per the said agreement, the assessee would receive 7800 Sq. Ft. of the constructed area and five car parking area in addition to a sum of Rs.18.00 lakhs. The said amount of Rs.18.00 lakhs was received by the assessee from the said company as under:- Rs.10,00,000/- during the financial year 2002-03 Rs. 5,00,000/- during the financial year 2003-04 Rs. 3,00,000/- during the financial year 2004-05

4. As the assessee had not filed his return of income, the AO issued notice u/s 148 of the Act on 14.2.2007 for the year under consideration. Thereafter, the AO completed the assessment by determining the long term capital gain at Rs.65,17,513/-. The assessee challenged the said order passed by the AO before Ld CIT(A), but could not succeed. Hence, the assessee is in appeal before us.

5. The first issue relates to the validity of reopening of assessment. According to the assessee, the AO issued notices u/s 148 of the Act simultaneously for the assessment years 2003-04 (the year under consideration), 2004-05 and 2005-06 on identical reasons. In his written submission, the assessee has extracted the reply dated 18.5.2007 given by the AO on the reasons for reopening of the assessment for the assessment year 2005-06. Further, as per agreement dated 14.4.2002 executed by you in favour of M/s Nikunjam Constructions (P) Ltd, you have sold 40 cents of land in Sy Nos. 227, 228, 250 & 252B/4 of Kadakampally village for a consideration of flats area extending 7800 Sq.ft. plus Car park area Rs.1000/- per sq. Ft and cash of Rs.18,00,000/-. Thus total sales consideration comes to Rs.1,01,00,000/-. Though the agreement was executed on 14.4.2002, the possession was handed over to the developers on 21.4.2004. Since the handing over of possession of land took place on 21.4.2004 the capital gain has to be assessed for the assessment year 2005-06. But you neither filed your income tax return nor disclosed any capital gain. Therefore, it is proposed to assess the capital gain on transfer of immovable property in assessment year 2005-06. Your explanation/objection in this regard may be filed.

I.T.A. No. 188/Coch/2009 Based on this letter, the assessee is now contending that the AO, having decided to assess the capital gain in the assessment year 2005-06, he could not have assessed the same in the assessment year 2003-04. However, the assessee has fairly conceded that the AO has recorded identical reasons for the assessment years 2003-04 and 2004-05. It is well settled proposition that it is not necessary for the AO to come to a definite conclusions at the time of issuing notice u/s 148 of the Act so long as he has reasons to believe that there is escapement of income. There is no doubt that the agreement was entered by the assessee with the company on 14.4.2002. In the said agreement, it is averred that the date of possession of land shall be the date on which the company (builder) handed over the possession of the constructed area belonging to the assessee. In another affirmation written on a stamp paper, the assessee has affirmed that the possession of the apartments was handed over to the assessee on 21.04.2004. On examination of the agreement dated 14.4.2002 and also the affirmation letter dated 21.4.2004, it appears that the AO has arrived at the belief that the capital gains would be assessable in the assessment years 2003-04 to 2005-06. These discussions would show that the AO had enough reasons to draw a belief of escapement of income in these three years. As stated earlier, it cannot be said that the AO had reached firm conclusion on the issue of year of assessment of the capital gains at the time of issuing notice u/s 148 of the Act. Hence, we are unable to agree with the contentions of the assessee on this point and accordingly dismiss the grounds raised with regard to the validity of the notice issued u/s 148 of the Act for the year under consideration.

6. With regard to the validity of assessment of capital gains in the year under consideration, i.e., in the assessment year 2003-04, the assessee has raised following contentions:- (a) The possession was given only on 21.4.2004 and hence the capital gain is assessable in the assessment year 2005-06 only. (b) sec. 53A of the Transfer of Property Act has undergone a change with effect from 24.9.2001, i.e. about eight months prior to the date of agreement and according to the said amendment; unregistered agreements shall not have any effect for the purposes of sec. 53A of the Act. Hence the AO was wrong in invoking the provisions of

I.T.A. No. 188/Coch/2009 sec. 2(47)(v) of the Act for the purpose of assessing capital gains during the assessment year 2003-04. (c) The AO ought to have excluded the sale consideration already declared by the assessee in the assessment years 2005-06 (Rs.34,74,839/-) and 2006-07 (Rs.14,00,000) for the very same property.

7. The first point pertains to the fixation of material date for the purpose of assessing the capital gain. There is no dispute with regard to the fact that the assessee has entered the agreement on 14.4.2002. As per clause 1.2 of the said agreement, the builder would commence the development of property on the delivery of the possession of the land. However, in the said clause, it is also mentioned that provided however that nothing herein contained shall be construed as delivery of possession in part performance of this or any agreement of sale. Further as per clause 5.2 of the agreement, the possession of vacant land was handed over the developer only on 21.4.2004, i.e., upon receiving the assessees portion of constructed area. Accordingly, it is contended by the assessee that he has not given possession of the land as contemplated in sec. 53A of the Transfer of Property Act. It is the contention of the assessee that the possession was handed over only on 21.4.2004.

8. In this regard, we may extract below the relevant portion of the affirmation letter entered on 21.4.2004 by the assessee on a stamp paper with regard to the date of handing over of the possession. AND WHEREAS the said company has since completed the construction of the said apartment to my full satisfaction as per the terms and conditions stipulated in the agreement executed on the Fourteenth day of April 2002 and handed over to me formal possession of the said apartments on the Twenty first day of April 2004. Thus, it is seen that the affirmation letter dated 21.4.2004 talks about the handing over of the possession of the constructed apartments to the assessee. There may not be any dispute that the income tax department is concerned with the handing over the possession of the vacant land to the builder under the development agreement. As per the assessee, the possession of vacant land was handed over the developer only on

I.T.A. No. 188/Coch/2009 21.4.2004, i.e., upon receiving the assessees portion of constructed area as per clause 5.2 of the agreement.

9. It is a well settled proposition of law that the substance shall prevail over the form. Though it is mentioned in the agreement that the possession of land shall be handed over only after handing over of the assessees portion of constructed area, yet the builder, under practical circumstances, cannot start construction unless the physical possession of land is handed over to him. Hence, for all practical purposes, we are of the view that the physical possession was handed over to the builder after entering into the agreement dated 14.4.2002.

10. It is also the alternative contention of the assessee that sec. 53A of the Transfer of Property Act shall not apply since the development agreement is not registered. It is pointed out by the assessee that the words though required to be registered has not been registered, which was existing in sec. 53A was omitted with effect from 24.9.2001.

11. The assessee has taken this alternative plea, since the AO has invoked the provisions of sec. 2(47)(v) of the Act for the purpose of assessing the capital gains in the year under consideration. During the course of arguments, the Ld D.R submitted that the provisions of sec. 2(47)(vi) shall also equally apply to the impugned transaction. For the sake of convenience, we extract below the provisions of clause (v) and (vi) of sec. 2(47) of the Act:- 2(47) transfer, in relation to a capital asset, includes,- ......

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in sec. 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of

I.T.A. No. 188/Coch/2009 persons or by way of agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

12. On a careful reading of the agreement dated 14.4.2002 entered between the assessee and the builder, we notice that the said agreement is a development agreement, under which the builder has agreed for the development of the schedule property into multi storied residential building by name Nikunjam Apartments.

13. The year of taxability of the capital gain in the case of development agreements came to be considered by the Honble Bombay High Court in the case of Chaturbhu Dwarkadas Kapadia Vs. Cit ( 260 ITR 491). It is pertinent to note that the High Court also noted both clauses (v) and (vi) of sec. 2(47) extracted above in its decision. We feel it pertinent to extract below the relevant observations made by the Honble Bombay High Court in that case. Before us, it was argued on behalf of the assessee that the date on which possession is parted with by the transferor is the date which should be taken into account for determining the relevant accounting year in which the liability accrues. It was argued on behalf of the assessee that in this case, irrevocable license was given in terms of the contract only during the financial year ending March 31, 1999, and, therefore, there was no transfer during the financial year ending March 31, 1996. On the other hand, it was argued on behalf of the Revenue that one has to go by the date on which the developer substantially performed the contract. It was argued on behalf of the department that since substantial payments were made during the financial year ending March 31, 1996, and since majority of permissions were obtained during that year, the liability to pay capital gains tax accrued during the assessment year 1996-97. In this case, the agreement is a development agreement and in our view the test to be applied to decide the year of chargeability is the year in which the transaction was entered into. We have taken this view for the reason that the development agreement does not transfer the interest in the property to the developer in general law and, therefore, section 2(47)(v) has been enacted and in such cases, even entering into such a contract could amount to transfer from the date of agreement itself. .....At the same time, if one reads the contract as a whole, it is clear that a dichotomy is contemplated between the limited power of attorney authorising the developer to deal with the property vide para. 8 and an irrevocable licence to enter upon the property after the developer obtains the requisite approvals of various authorities. In fact, the limited power of attorney

I.T.A. No. 188/Coch/2009 may not be actually given, but once under clause 8 of the agreement a limited power of attorney is intended to be given to the developer to deal with the property, then we are of the view that the date of the contract, viz., August 18, 1994 would be relevant date to decide the date of transfer under section 2(47)(v) and, in which event, the question of substantial performance of the contract thereafter does not arise..... If the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability. In the instant case also, the builder shall commence construction within 30 days from the date of entering the schedule property for the purpose of construction (clause 6.1). Further it is the responsibility of the builder to obtain necessary approvals. It is also mentioned in clause 2 of the agreement that the assessee has executed a registered general power of attorney in favour of the builder on the very same date, i.e., on 14.4.2002. Hence, the impugned agreement, being a development agreement, a mere mentioning in one of the clauses of the agreement to the effect that there is no handing over of possession, in our view, shall not take away the actual fact that the physical possession was handed over to the builder.

14. According to the assessee, sec. 53A of the Transfer of Property Act has under gone changes and according to amended section, the unregistered documents shall not fall in the purview of sec. 53A of the Transfer of Property Act. If we carefully read clause (v) of sec.2(47) of the Act, we can notice that the reference is to the transactions .... of the nature referred to in section 53A of the Transfer of Property Act, 1882., i.e., clause (v) talks about the type or nature of transaction only and it does not mandate invoking of the provisions of sec. 53A of the Transfer of Property Act fully. Thus, the stress in clause (v) is given to (or) the Income tax Act is concerned with the type or nature of transaction referred to in sec. 53A of the Act and hence the amendment brought into that section with regard to the registration of the document, in our view, shall not have any effect on clause (v) of sec. 2(47) of the Act. Even otherwise the contract entered into by the assessee would be hit by clause (vi) of sec. 2(47) of the Act and as per sec. 292B of the Act, the impugned assessment, being in substance and effect in conformity with or according to the intent and purpose of the

I.T.A. No. 188/Coch/2009 Income tax Act, the assessment order is saved by the provisions of sec. 292B of the Act.

15. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was right in law in confirming the action of the assessing officer in assessing the capital gain in the assessment year 2003-04, since the development agreement was entered into on 14.4.2002.

16. The assessee has taken a plea that he has already declared capital gains in the assessment years 2005-06 and 2006-07 and hence the sale consideration declared in those years are required to be excluded in the assessment year 2003-04. In our view, the said plea is against the scheme of taxation under the Income tax Act. It is a well settled proposition of law that tax can be levied in a particular assessment year only in respect of the income assessable in that year. Hence, it is neither the prerogative of the assessee nor the prerogative of the assessing officer to offer/assess the income of a particular year in any other year. We have already held that the capital gain is assessable in assessment year 2003-04. Hence, the right course for the assessee would be to approach the tax authorities for exclusion of the income, which was wrongly offered by him in the subsequent assessment years. In the interest of natural justice, the tax authorities may consider any such request made by the assessee in a liberal manner.

17. The assessee has taken a ground that the assessing officer has failed to give deduction u/s 54/54F of the Act while computing the capital gains. The assessee is urging this plea for the first time before us. In the interest of natural justice, we set aside this matte to the file of the AO with the direction to examine the claim of the assessee in accordance with the law after affording necessary opportunity of being heard.

I.T.A. No. 188/Coch/2009

18. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes. Pronounced accordingly on 28-09-2012 sd/- sd/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 28th September, 2012 Copy to:

1. Shri G. Sreenivasan, Rep. by L/H Dr. Jyothi Kamalam, Jyothy Nivas, Moonnamanackal, Pettah, Trivandrum.

2. The Deputy Commissioner of Income-tax, Central Circle, Trivandrum.

3. The Commissioner of Income-tax (Appeals)-III, Kochi.

4. The Commissioner of Income-tax, Central, Kochi.

5. D.R., I.T.A.T., Cochin Bench, Cochin.

6. Guard File. By Order (ASSISTANT REGISTRAR) ITAT, COCHIN

Shri G. Sreenivasan,... v. The Deputy Commissio...