ITAT: Income Tax Can’t Be Levied on a Transaction Which Never Actualized

The Income Tax Appellate Tribunal (ITAT), Pune Bench passed a ruling that no income tax can be levied on a transaction that has never materialized.

Here, in this case, The assessee filed his income tax return declaring a total income of Rs.2,94,330/-. The Assessing Officer noticed that the assessee ventured into two Development Agreements for a certain piece of land. The Assessee declared that no capital gain had arisen from such transfer of lands. The assessee when called on to clarify his take on, the assessee submitted that the land in question was subject to Urban Land (Ceiling & Regulation) Act, 1976, and covered an area of 22596.80 sq. meters was declared as surplus land out of the total land as per the above-mentioned two agreements.

Consequent to such an order, under the ULC Act, the land was transferred in the name of the Government of Maharashtra. Thereafter, the assessee approached the honourable Bombay High Court for the purpose of deletion of the Government’s name from the 7/12 extract. The Assessee submitted that neither the land in question was transferred to “Messrs Samrat Builders and Developers” consequent to the agreements nor any possession of such land was given.

However, The Assessing Officer rejected the assessee’s claim by emphasizing that the Development Agreements made by the assessee were duly registered with the Addl. Registrar, MABL. This, in turn, indicated that the assessee had transferred the rights in the land to Messrs Samrat Builders and Developers within the ambit of section 2(47)(v) of the Income-tax Act, 1961.

The Coram headed by Parthasarathy Choudhary and R.S.Sayal held that derivation of income from capital gain on a transaction that never materialized was, at best, a hypothetical income. And as the entire transaction of development conceived in the JDA fell through for the want of permissions, it was finally held that no profits “arose” from the transfer of a capital asset so as to consider sections 45 and 48 of the Income Tax Act.

The first point is that no possession was given to the developer under the JDA as an owner. Secondly, a chunk of the land at the material time in 2008 was there that vested in the Government of Maharashtra.

Thirdly, the transaction admittedly came to an end and a part of the land was later on sold to Messrs Akash Erectors Pvt Ltd in the year 2010 and the remaining part to the final buyers in the year 2013. If the transfer did not occur in the assessment year 2008-09, there did not arise any question of any capital gain in such year.

Consequentially and finally, the ITAT gave approval to the viewpoint of the CIT(A) by passing a ruling that no transfer took place in the year and hence no capital gain was subject to tax.