BANGALORE, DEC 17, 2014: THE issue before the Bench is - Whether in case of Joint Development Agreement, the transfer of land in lieu of developed area would crystallise only on the day the developer hands over the developed area. And yes is the answer of the Tribunal.

Facts of the case

The assessee is an individual. He had filed his return declaring an income of Rs.3,54,480/-. The case of assessee was selected for scrutiny and notices u/s 143(2), 142(1) were issued. It revealed to the AO that the assessee along with his brother Mr. Nandish Reddy were the owner and in possession of 2 acres and 14 guntas of land. The AO found that both the assessee as well as Nandish entered into a joint development agreement with M/s Akme Project Ltd., wherein they had jointly received refundable deposit of Rs.1.00 crore for allowing the development on their land. The developer was to construct a saleable area of 3.00 lakh square feet at its own cost, wherein the assessee and his brother were entitled for 50% of the built up area. Thus, in the opinion of the AO, transfer of the land had taken place within the meaning of section 2(47)(v) and the assessees were assessable for long term capital gain (LTCG). Accordingly, the AO computed the LTCG at Rs. 5,95,23,974/-. On appeal, the CIT(A) held that there was no transfer of asset in the case of assessee execution of joint development agreement and power of attorney. Finally, the CIT(A) concluded that it was a case of exchange of assets and it was the market value of the built up area that had to be considered as consideration for computation of LTCG in the year in which the built up area was handed over to the land owners.

On further appeal before the Tribunal, the Departmental Representative contended that the assessee and his brother had relinquished the 50% share in the land in favour of the builder by execution of the joint development agreement. The DR contended that delivery of possessions u/s 2(47) of the I.T. Act could not absolve the assessees with the application of statutory provisions.

However, the counsel for assessee submitted that the assessee had given conditional possession to the developer, and the developer could not use the possession according to his choice. In a way, a license was given to enter into land and construct the building, more than that no rights were transferred to the builder. The counsel further submitted that while computing the capital gain, cost of the land transferred to the builder ought to be considered as consideration.

Having heard the parties, the Tribunal held that,

++ it is noted that the dispute between the assessee and the Revenue is that on execution of the joint development agreement, no transfer has taken place. The assessee has just exchanged the assets. He along with his brother has given the land to the developer who will develop that land and provide the developed area to the assessee. On the day when developer would hand over the developed area, only then the transfer of the land in lieu of the developed area would crystallize. It is seen that the assessee has already opted conversion of the land for residential purpose and for further conversion into or for commercial use, the developer will be liable. The reading of the agreement would suggest that the owners i.e. the assessee and his brother have executed an irrevocable license in favour of the builder to enter into the scheduled property and develop the same by putting up the construction. They have also executed the power of attorney. The owner has further authorized the builders to sell, transfer its constructed area to their clients. Thus, the assessee has divested the possession of the land to the developer and in lieu of that, he along with his brother would receive consideration in the shape of 50% constructed area;

++ the contention of the assessee that it is exchange of asset and transfer would materialize when the assessee would receive the constructed portion. In this situation, the assessee and his brother would agree to develop the property jointly with the developer, they would contribute the capital in the shape of land and the builder would contribute the capital in the shape of cost of construction. In such situation, it would be a business income in the hands of AOP. But that is not the case here. They have not agreed for jointly doing the business, neither builder shown such an intention. The assessee had relinquished his rights in the land upon which developer has incurred cost of construction and develop the property. In lieu of the relinquishment of rights in the land which ultimately would vest in the developer, the assessee and his brother would receive 1.50 lakhs sft of the constructed area. The year in which the area would be given to the assessee is immaterial. The moment the owners have handed over the possession to the developer, a right to receive the developed area would accrue to the owners. It is a consideration in kind, which has a value, which can be worked out. It is seen that under the development agreement, the owners have agreed that the developer could sell, transfer the area to its clients;

++ the dispute before this Tribunal is that what is the full value of the consideration. According to the assessee, the full value of the consideration should be a fair market value of the land to be transferred to the developer. Section 48 of the IT Act nowhere talks of fair market value, but it talks of full consideration. Full consideration in this case is the cost of construction incurred by the builder on the assessee's share of constructed area, because the assessee would receive constructed area in lieu of the land share. Whatever is the expenditure incurred for constructing that area is a consideration in kind to the assessee. The AO has estimated this consideration at Rs.800/per sft which is the minimum rate adopted by him on the basis of the expenditure accounted by the developer. Thus, there cannot be any fault in the computation of capital gain made by the AO. Taking into consideration of these facts and circumstances, there seems no merit in the cross objection filed by the assessee, and accordingly, it is dismissed. The CIT(A) is not justified in holding that no capital gain has accrued to the assessee on account of transfer of land in this year. Therefore, the order of the CIT(A) is set aside and that of the AO is restored.

(See 2014-TIOL-966-ITAT-BANG)