No Transfer of Possession in Development Agreement: Supreme Court upholds quashing of Income Tax Notice u/s 148 [Read Order]

The Supreme Court has dismissed a Special Leave Petition (SLP) filed by the Income Tax Department against the Bombay High Court order that quashed the notice issued to assessee under Section 148 of the Income Tax Act, 1961 as the development agreement had no terms for transfer of possession.

“Having regard to the terms of the agreement which has been pointed out by learned ASG to us, we do not think that this is a fit case where the notice under Section 148 of the Income Tax Act should have been issued to the respondent(s) for reopening the assessment”, the Bench of Supreme Court Justices B V Nagarathna and Ujjal Bhuyan noted.

Before the High Court, the petitioner challenged inter alia the notice issued under Section 148 of the Income Tax Act, 1961 dated 22 March 2021 relevant to the assessment year 2013-14. By virtue of the said notice, assessment for the year 2013-14 is sought to be reopened, on the ground that the assessing officer had reason to believe that income chargeable to tax for the assessment year 2013-14 had escaped assessment within the meaning of Section 147 of the Income Tax Act.

In FY 2012-13, Bharat J. Patel and co-owners granted development rights for their land in Village Chikhloli to SaiAshray Developers Pvt. Ltd. The sale consideration was Rs.3 crore, with a market value of 9.5994 crore. A power of attorney was executed, allowing the builder to develop the property. The development agreement specified the developer's obligation to construct, providing 36% of the saleable area to the owners. The developer paid a refundable deposit of 40 crore, with 21 crore going to co-owners.

The transfer of land to the builder, defined under section 2(47) of the Act, occurred in FY 2012-13. Citing a Bombay High Court judgment, the transfer is complete when the builder receives an irrevocable license to enter and construct. The land, located within Ambernath Municipality, qualifies as a capital asset under section 2(14) of the Act, confirmed by a District Collector's order dated April 9, 2012, designating it as non-agricultural land.

“In view of facts mentioned above, it is clear that profit arising from transfer of the land is taxable in hands of assessee during FY 2012-13. Market value of Rs.9.5994 Crore or the market value of constructed saleable area of 541556 sq. ft. constitutes the consideration received by land owners”, the reasons furnished to the assessee for reopening the case stated,

The Bombay High Court had observed that, “The development agreement allowed construction on the land but only as a licensee, without transferring possession under Section 53A of the Transfer of Property Act. If this is the case, the assessing officer would lack jurisdiction to take action for tax evasion since there is no basis to believe that taxable income has escaped assessment.”

In line with the High Court decision, upholding the ratio, the two-judge Bench of the Apex Court upheld the quashing of disallowance.¹

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE & ORS. vs LATE BHARAT JAYANTILAL PATEL , 2023 TAXSCAN (SC) 280 , Mr. Balbir Singh , Mr. Vasudev Ghanashyam Ginde