JDA Taxation-No capital gain when possession not handed over to builder but only right to enter

JDA taxation-no capital gain when possession not handed over to builder and only right to enter the property given to demolish and re-construction

ABCAUS Case Law Citation:
ABCAUS 2498 (2018) 08 ITAT

The aforesaid appeal was filed by the assessee against impugned order passed by CIT (Appeals) in confirming the order of the Assessing Officer (AO) making addition for capital gain and denial of exemption u/s 54EC and 54F of under of the Income Tax Act, 1961 (the Act) 

The assessee was an individual, who along with his mother owned a residential house. The assessee and his mother entered into Joint Development Agreement (JDA) and made a Power of Attorney to a builder with a proposal to demolish the existing building and construct residential Apartments in the said land.

Consequent to the agreement, the assessee had received part consideration on the date of the JDA. As per the agreement, assessee was to receive 50% of the super-built area along with monetary compensation. The assessee also entered into Supplementary agreement after one year and as per the said Supplementary agreement, the assessee was to receive two flats along with sale consideration.

The assessee filed his return of income for the assessment year in which the supplementary agreement was passed disclosing the long term capital gains (LTCG) on the transfer of the property. The assessee made a claim u/s 54EC of the Act and benefit of deduction u/s 54 in respect of residential flats allotted to the assessee.

The Assessing Officer was of the view that the capital gains was liable to assessed during the preceding assessment year (i.e. when the JDA was executed). Thus, the Assessing Officer had assessed the capital gains for the immediately preceding assessment on the ground that the possession in the scheduled property had been handed over to the joint developer and consequently provisions of the section 53A of the Transfer of Property Act came into play.

The Tribunal observed that the Joint Development Agreement showed that the possession of the scheduled property had 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.

The Tribunal noted that in terms of the JDA, the builder was specifically barred from selling or executing any deed for any portion of the property described in the scheduled property. Thus, it was very clear that neither Joint Development Agreement, nor the power of attorney complied with the conditions specified in Section 53A of the Transfer of Property Act.

The Tribunal further observed that in fact, perusal of the Supplementary agreement showed that the consideration had been clearly determined, 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, power of attorney was been granted to giving the builder the authority to convey, sell, transfer the property to prospective purchasers and to issue valid receipt thereon.

It clearly showed that the transfer took place only when power of attorney was executed in respect of consideration determined in the Supplementary agreement executed in the relevant assessment year.

The ITAT held that the capital gain, if any, was leviable only during the relevant assessment year and not during the preceding assessment year as had been determined by the AO and confirmed by the CIT(A).

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