Dheeraj Amin vs. ACIT (ITAT Bangalore)

The assessee was engaged in the business as a builder and was the owner of a piece of land, which was held as stock in trade. The assessee entered into a development agreement with Menorah Realties Pvt Ltd (MRPT) under which MRPT was to construct a residential apartment building at its cost. In consideration of the land of the assessee being used for this project, MRPT was to give 40% of total saleable construed area, parking spaces and undivided interest in the said property. In effect, the assessee was to transfer entire land holding to this project, and, in consideration of the land being used for this housing project, receive 40% of total saleable area, parking space and undivided interest in the property. By way of a subsequent modification to this agreement, in consideration of delay in execution of project, the assessee was to get an additional 2% share in the constructed area, parking space and undivided interest in the property. The assessee claimed that even though the assessee had entered into a development agreement in the relevant previous year, no gains arose as a result of this agreement since the proposed building project was not even cleared by the regulatory bodies. It was pointed out that the licence to construct the building project was received in the subsequent previous year, and, therefore, no capital gains could be said to have been arisen in this year. However, the AO relied on CIT Vs Dr T K Dayalu [(2011) 202 Taxman 531 (Kar)] and Chatubhuj Dwarkadas Kapaida Vs CIT [(2003) 260 ITR 491 (Bom)] and held that there is a transfer u/s 2(47)(v) and capital gains will arise in the year in which full control and possession of the land in question is given. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) Once the land is held to be a part of the stock in trade, it ceases to be a capital asset. The gains on the transfer of this land could only arise by the virtue of the increase of closing stock value in respect of the right to 42% share in the constructed building. Relevance of Section 55A of the Transfer of Property Act is only for the purpose of transfer under section 2(47) which, in turn, is relevant, only for the purposes of capital assets under the Income Tax Act. What holds good for transfer of a capital asset, for the purposes of triggering taxability of capital gains, is in the context of a specific legal fiction, which is introduced in the Act for a limited purpose, cannot be treated as omnibus in effect.

(ii) The business transaction entered into assessee is that the assessee contributed a trade asset consisting of a piece of land on which a group housing project was to be constructed, and what he got in consideration of this transfer is the right to sell 1,28,940.26 sq. ft. constructed area in this project. In his closing stock, even if he is to substitute the part ownership of the land transferred with the value of this right to sell 1,28,940.26 square feet constructed area, it would not make any difference to the profit figures because, as far as this assessee, is concerned the cost of acquiring this right is the same as the cost of giving up the right in the hand, and, as is the settled legal position, the closing stock can only be valued at cost price or market price-whichever is less. Obviously, the cost price of this right to sell 1,28,940.26 sq ft, which has been treated as a trading asset, is less than the market price of these rights, and, therefore, these rights can only be valued at cost in the accounts.

(iii) What the assessee has got today is only a right to sell the 1,28,940.26 fts of constructed area in the Alexandria project and the profits, howsoever certain they may appear to be, will only fructify and be realized, and can even be quantified, only when this right is exercised- in part or in full. That stage has not yet come, and until that stage comes, such profit cannot be taxed. Unlike in a case of a capital gain which arises on parting the capital asset at the first stage itself, it is a case of business transaction which is completed when the rights so acquired by the assessee are exercised; none can make profits by dealing with himself (Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)] and Sir Kikabhai Premchand Vs CIT [(1953) 24 ITR 506 (SC)] followed).