The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the tax liability for capital gain cannot arise in the year in which the assessee entered into a development agreement where there was only a promise of allotment of flats was made. The Tribunal clarified that no such tax liability can be imposed when there was no actual allotment was took place.
The assessee claimed that the assessee has received the part consideration as per the development agreement and has handed over the possession of the property in the year 2002. The assessee further relied on the decision of the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia vs. CIT and contended that the capital gains liability, if any, shall arise only in AY 2003-04 and not in AY 2008-09.
On appeal, the CIT(A) held that, under the development/supplementary agreement, there was only “promise of allotment” of the flats in the new building. He held that the flats were actually allotted to the assessee only on 15-04-2007 and hence the assessing officer was right in assessing the capital gains in AY 2008-09.
On second appeal, the Tribunal observed that the assessee has entered into development agreements in the year 2002.
“As per the supplementary agreement, the assessee was to receive Rs.49.50 lakhs and two flats from the developer. Hence the flats received by the assessee are only a part of total sale consideration receivable by the assessee as per the development agreement. There cannot be any dispute that the capital gains liability shall arise upon completion of “transfer” of Capital asset. Hence the assessee cannot postpone the capital gains tax liability on account of delay in receipt of sale consideration and on the very same criteria, the AO cannot bring capital gains to taxation in the year of receipt of part of sale consideration. Accordingly, we are of the view that the tax authorities are not justified in placing reliance on the allotment letter given by the developer to the assessee.”
The Tribunal, therefore, held that the capital gains, if any, arising on account of the development agreement is not assessable in assessment year 2008-09.
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