No Possession, No Taxation: ITAT Deletes Capital Gains Addition u/s 2(47) of Income Tax Act [Read Order]

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has remanded a matter back to the Assessing Officer for fresh verification in a case involving alleged capital gains based on a cancelled development agreement.

The assessee, Sandesh Vasantrao Pawar, a resident of Satara running a small gift article shop, entered into a Joint Development Agreement (JDA) in 2013, along with seven other co-owners, to develop a piece of land. The agreement was executed with M/s Shri Nath Builders Promoters Pvt. Ltd., whereby the landowners would receive a share in the built-up area instead of transferring development rights. The Assessing Officer later reopened the case under section 147, claiming income had escaped assessment, and issued a notice under section 148.

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According to the Revenue, the assessee’s share in the land translated into a notional consideration of ₹46.03 lakh, a portion of the total ₹2.31 crore estimated value of the constructed area. The AO held that execution of the JDA, coupled with the grant of Power of Attorney and peaceful possession of the property, triggered a "transfer" under section 2(47)(v) read with section 53A of the Transfer of Property Act. Consequently, long-term capital gains (LTCG) of ₹42.68 lakh were added to the assessee’s income.

The assessee, however, presented a very different picture. He claimed that although the JDA was executed and registered, no actual possession was handed over to the developer, no construction commenced, and no consideration, monetary or otherwise, was received. The landowners issued a public notice in 2016 canceling the JDA due to disputes with the developer. The developer’s subsequent civil suit was dismissed by the Civil Court, Satara, which concluded that the builder had failed to establish possession.

Despite these developments, the National Faceless Appeal Centre (NFAC) upheld the assessment order, noting that the assessee had failed to submit the valuation report sought under section 142(1). The appellate authority did not enter into a detailed factual or legal analysis but relied on the procedural lapse alone to confirm the addition.

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Before the Tribunal, the authorised representative pointed to the civil court ruling and reiterated that no actual transfer had occurred. He emphasized that both ingredients essential for a transfer, delivery of possession and receipt of consideration, were absent.

ITAT, observing the arguments put forth by both parties, held that the NFAC had not provided a reasoned order, as required under section 250(6) of the Act. It also found that the lower authorities did not adequately verify key facts, such as continued possession of the land by the assessee and non-initiation of construction. The Tribunal held that in such circumstances, a remand was necessary.

The Bench, led by Dr. Manish Borad (Accountant Member), directed the Assessing Officer to conduct a fresh verification by deputing an inspector or through a local report from the ITO in Satara, where the land is located. If it is confirmed that no possession was handed over and that construction did not commence, the addition on account of capital gains would be unwarranted. However, if contrary findings emerge, the AO was asked to proceed by law after affording the assessee a proper opportunity to be heard. As a result, the appeal was allowed.

To Read the full text of the Order CLICK HERE

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