Sections 2(47), 28(i), 45 – Gains arising on transfer of development rights held as a business asset are chargeable to tax as ‘business income’ – Only that part of the consideration which accrued, as per terms of the agreement, would be taxable in the year of receipt

22. [117 taxmann.com 637 (Del.)(Trib.)] ITO vs. Abdul Kayum Ahmed Mohd. Tamboli ITA No. 1408/Del/2011 A.Y.: 2006-07 Date of order: 6^th July, 2020

Sections 2(47), 28(i), 45 – Gains arising
on transfer of development rights held as a business asset are chargeable to
tax as ‘business income’ – Only that part of the consideration which accrued,
as per terms of the agreement, would be taxable in the year of receipt

FACTS

The assessment of the assessee was re-opened because the consideration
received for transfer of development rights was not offered for taxation. Since
the assessee had handed over possession of the land and also transferred the
development rights, the A.O. in the course of reassessment proceedings taxed
the amount received by the assessee on transfer of development rights as
business income. The assessee submitted that under the contract with the
developer, he was to perform work on the basis of receipt of funds from the
developer. Accordingly, the assessee had offered only a part of the receipts as
income to the extent that receipts had accrued. The balance, according to him,
were conditional receipts. The developer, in response to a notice sent u/s
133(6), confirmed the position as stated by the assessee.

But the A.O. opined that the said accounting treatment was not in
consonance with the mercantile system of accounting followed by the assessee. Besides, since the transfer had been
completed, the consideration would be taxable in the year of receipt as
business income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended
that the balance amount be considered as capital receipts. The CIT(A)
adjudicated in the assessee’s favour and held that only the part of the amount
accrued as per the agreement would be taxable in the year of receipt. He
estimated an amount of 10% of the gross receipts to be taxable in the year of
receipt. The provisions pertaining to capital gains were also held to be
inapplicable as the development rights were business assets.

Aggrieved, the Revenue filed an appeal to the Tribunal.

HELD

It was evident from
the terms of the joint venture agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was a
conditional receipt and was to accrue only in the event of the assessee
performing certain obligations under the agreement. Since the development
rights constituted the business assets of the assessee, the provisions of
capital gains would not be applicable. The order of the CIT(A) taxing 10% of
the gross receipts was justified. The Tribunal upheld the decision of the
CIT(A) and held that only part of the receipts as estimated accrued to the
assessee were taxable.