Wednesday, May 28, 2014

Signing of development agreement couldn’t trigger capital gains tax unless developer discharged his obligations

Capital gains could not be brought to tax in year of signing of development agreement, as developer had not done anything to discharge obligations casted on it.


1)During the relevant year, the assessee gave its land for development and received a refundable deposit from the developer. In terms of development agreement, the developer had to develop the property according to the approved plan and deliver to the assessee 38 per cent of the constructed area in the residential part.

2)The Assessing Officer opined that since the transfer had taken place during the year under appeal, in terms of the development agreement-cum-GPA, the assessee was liable to pay capital gain tax on the date of transfer.

3)The CIT (A) confirmed the order of Assessing Officer. The aggrieved-assessee filed the instant appeal.

The ITAT held in favour of assessee as under:

a)'Development Agreement-cum-General Power of Attorney' indicated that only a 'permissive possession' was handed over by assessee to the developer.

b)It was only upon receipt of consideration in the form of developed area by the assessee, the capital gain becomes assessable in the hands of the assessee.

c)Mere receipt of refundable deposit by assessee from developer could not be termed as receipt of consideration as no developmental activity was carried out on the land and even no approval for the construction of the building was obtained by developer.

d)While the assessee had fulfilled its part of the obligation under the development agreement, developer had not done anything to discharge the obligations cast on it under the development agreement, thus, capital gains could not be brought to tax in the year in which development agreement was signed by assessee- BINJUSARIA PROPERTIES (P.) LTD. V. ACIT [2014] 45 115 (Hyderabad - Trib.)