S. 2(47)(v): Transfer under a development agreement takes place on handing over possession. Capital gains are chargeable to tax even if no consideration is received by assessee

Potla Nageswara Rao vs. DCIT (Andhra Pradesh High Court)

In AY 2003-04, the assessee entered into an agreement with Bhavya Constructions pursuant to which he agreed to transfer the land in consideration of the developer giving him four flats in the developed area. The assessee received a token advance and handed over possession of the land. The developer obtained the approval of the municipality to the plan for construction on the property. The AO held that the capital gains was assessable in AY 2003-04 while the assessee claimed that the same was assessable in AY 2004-05 when the consideration was received. The CIT(A) upheld the claim of the AO. The Tribunal (included in file), relying on Chaturbhuj Dwarkaddas Kapadia 260 ITR 491 (Bom), Dr.T. K. Dayalu 202 Taxman 531(Kar) & Maya Shenoy 124 TTJ (Hyd) 692, held that as the assessee had handed over possession of the property to the developer, it was a clear case of transfer by exchange within the meaning of s.2(47)(v) read with s. 53A of the Transfer of Property Act. It was held that the fact that the consideration was received in a later year was not relevant. On appeal by the assessee to the High Court, HELD dismissing the appeal:

The assessee’s contention that no transfer takes place on the date of the agreement and handing over of possession if consideration is not received by the assessee is not acceptable because s. 53A of the Transfer of Property Act, 1882, which is engrafted in the definition of “transfer” in s. 2(47) of the Income-tax Act does not contemplate any payment of consideration. Payment of consideration on the date of agreement of sale is not required. It may be deferred for a future date. The element of factual possession and agreement are contemplated as transfer within the meaning of the aforesaid section. When the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. Here, factually it was found that both the aforesaid aspects took place in the previous year relevant to the assessment year 2003-04. Hence, the Tribunal has rightly held that the appellant is liable to pay tax on the capital gain for the assessment year.

Contrast with the view taken in Binjusaria Properties (ITAT Hyd), Fibars Infratech (ITAT Hyd), General Glass 108 TTJ 854 (Mum) etc that if the willingness of the developer to perform his obligations cannot be ascertained, there is no “transfer” u/s 2(47)(v) r.w.s. 53A. See also Charanjit Singh Atwal (ITAT Chd)