By TIOL News Service

MUMBAI, MAR 20, 2019: THE ISSUE IS - Whether without finalization of transfer of capital assets, the capital gains cannot be taxed in the AY in which only part of the sale considerations is made. YES IS THE ANSWER.

Facts of the case

The individual assessee purchased a two storey residential property in 1999. Consequent to the amendment of D.C regulations, the additional construction became permissible on the land on purchase of TDR. In 2002, the assessee entered into a development agreement and also a supplementary agreement subsequently with one M/s U.S. Magnet Pvt Ltd. As per the agreements, the assessee was entitled to receive certain sum in cash and two flats that were going to be constructed. During the assessment proceedings of relevant AY 2008-09, the AO noticed that the assessee has received allotment letters of flats and took the view that such flats were in exchange of property owned by the assessee. Details of such transaction resulting in capital gain in the relevant to AY was not furnished. Therefore, the AO assessed the value of both flats amounting as LTCG and passed the assessment order u/s 144 r.w.s. 147. The CIT(A) affirmed the order passed by the AO.

On hearing the appeal, the Tribunal held that,

++ the liability to capital gains tax shall arise upon entering development agreement, if the assessee has handed over the possession of property and received part consideration. This was held by the jurisdictional High Court in Chaturbhuj Dwarkadas Kapadia vs. CIT. The copy of occupancy certificate shows that the assessee had handed over the possession as per the development agreement and the construction itself has been completed in the year 2006. All these events have taken place much prior to the FY relevant to AY 2008-09. The assessee has also placed copies of electricity bills to show that he has taken possession of flats in the year 2005 itself. These facts would show that the capital gains liability cannot, in any case, would arise in AY 2008-09. Thus, the capital gains, if any, arising on account of development agreement is not assessable in AY 2008-09. The flats received by the assessee are only a part of total sale consideration receivable by the assessee as per the development agreement. There cannot be any dispute that the capital gains liability shall arise upon completion of transfer of capital asset. Hence, the assessee cannot postpone the capital gains tax liability on account of delay in receipt of sale consideration and on the very same criteria, the AO cannot bring capital gains to taxation in the year of receipt of part of sale consideration. Accordingly the Revenue was not justified in placing reliance on the allotment letter given by the developer to the assessee. Accordingly, CIT(A) order is set aside.

(See 2019-TIOL-653-ITAT-MUM)