In a recent decision in Commissioner of Income Tax vs. Balbir Singh Maini, the Supreme Court of India held that, Capital Gain from a Transaction through a Joint Development Agreement (JDA) which never materialised to be considered as Hypothetical Income.
The two judge bench comprising of Justice R.F Nariman and Justice Sanjay Kishan Kaul was considering a batch of civil appeals.
The Respondents are members of the Punjabi Cooperative Housing Building Society Ltd. The society consisted of 95 members and was the owner of 21.2 acres, of which 500 square yards plots were held by 65 members, 1000 square yards plots by 30 members and the remaining 4 plots of 500 square yards each were being retained by it.
The bone of contention in the appeal is a tripartite Joint Development Agreement (JDA) dated 25.02.2007 for development of 21.2 acres of land in the village Kansal. This JDA was entered into between the owner i.e. Punjabi Cooperative Housing Building Society Ltd., Hash Builders Pvt. Ltd., Chandigarh (HASH) and Tata Housing Development Company Ltd. (THDC). Under the JDA, it was agreed that HASH and THDC viz., the developers, will undertake to develop 21.2 acres of land owned and registered in the name of the society.
The two-judge bench observed that, “it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason”.
The Court also said that, there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.
While dismissing the appeal, the Court also held that, “the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act”.
Read the full text of the Judgment below.
