INCOME TAX ACT, 1961

Section 2(47) Section 53A

Capital gains - Transfer under section 2(47) - Addition on sale of development rights -

Assessee was engaged in the business as builder and developer. AO reopened the assessment on the basis of information received from investigation wing of the income tax department, to the effect that the assessee had transferred development rights, for a consideration of Rs. 5.40 crores, to S Ventures Pvt. Ltd., and out of the above sum, assessee had already received Rs. 86.40 lakhs during the relevant previous year. Assessee submitted that it was paid Rs. 86.40 lakhs at the time of entering into the joint venture agreement, Rs. 226.80 lakhs was to be paid on 'obtaining IOA and commencement certificate' by the joint venture, and Rs. 226.80 lakhs was upon 'all the slum dwellers vacating said property and shifting to alternate temporary transit accommodation thus, Rs. 86.40 lakhs was to be treated as an advance until the point of time when at least 25% of the slum dwellers occupying the said property vacate the promises. This explanation, however, did not satisfy AO. He was of the view that the 'assessee was following mercantile method of accounting' under which 'the transactions were recognized as and when they take place' since assessee had transferred the development rights and handed over the possession of the property, the transfer, therefore, qualified to be treated as 'transfer' under section 53A of the Transfer of Property Act, 1872 and, therefore, the income was earned when transfer was complete, i.e., in the relevant previous year. Held: What was to be received by assessee was from a joint venture, in which assessee itself was a participant, but, under the said arrangement, it was to be entirely funded by S Ventures Pvt. Ltd. The essence of the arrangement was the performance of obligations by the assessee so far as the above obligations were concerned. When an assessee had an obligation to perform something, and assessee had not performed those obligations nor did he even seem to be in a position to perform these obligations, it could not be said that a partial payment for fulfilling these obligations could be treated as income in the hands of the assessee. Even under mercantile method of accounting, the relevant point of time was not the actual receipt of income but the point of time when right to receive that income, in income character, crystallized. When obligations of the assessee under the joint venture agreement were not yet performed, there could not be any occasion to bring the consideration, for performance of such obligations, to tax. Thus, the taxability of Rs. 5.40 crores, on account of what was alleged to be, transfer of development rights, was wholly devoid of merits.

REFERRED : Anil Rai v. State of Bihar 2009 TaxPub(EX) 0022 (SC), CIT v. Messrs. Shoorji Vallabhdas and Company (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC), ED. Sassoon and Company Ltd. & Ors. v. CIT (1954) 26 ITR 27 (SC) : 1954 TaxPub(DT) 0103 (SC), Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC) : 1953 TaxPub(DT) 0120 (SC), Otters Club v. DIT & Ors. (2017) 392 ITR 244 (Bom) : 2017 TaxPub(DT) 0689 (Bom-HC), Shivsagar Veg. Restaurant v. Asstt. CIT (2009) 317 ITR 433 (Bom) : 2009 TaxPub(DT) 1040 (Bom-HC), Dy. CIT v. JSW Ltd. (2020) 116 taxmann.com 565 (Mumbai-Trib.) : 2020 TaxPub(DT) 2142 (Mum-Trib), R. and A. Corporate Consultants India (P) Ltd. v. Asstt. CIT [ITA No. 222/Hyd/2012, dt. 30-5-2014], ACIT v. Mahindra Holidays & Resorts (India) Ltd. (2010) 3 ITR(T) 600 (Chennai) : 2010 TaxPub(DT) 1965 (Chen-Trib) and KK. Khullar v. Dy. CIT 2008 TaxPub(DT) 1484 (Del-Trib).

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