Development Agreement Not To Be Treated As Transfer Of Possession Of Land: Bombay High Court Quashes Reassessment Notice

The Bombay High Court has quashed the reassessment notice and held that the granting of a licence for the purpose of development of the flats and selling the same could not be said to be granting possession.

The bench of Justice K. R. Shriram and Justice N.K. Gokhale has relied on the decision of the Supreme Court in the case of Seshasayee Steels (P) Ltd. v. Assistant Commissioner of Income Tax VI(2), Chennai, in which it was held that the assessee had only granted a licence to a developer who entered into the assessee’s land for the purpose of development, and that did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882, and therefore Section 2(47)(v) of the Income Tax Act would not apply.

The assessee/petitioner, along with other co-owners, entered into a development agreement for developing the land. During the assessment proceedings under Section 143(3), the petitioner had filed a copy of the development agreement with the Assessing Officer. The AO asked the petitioner as to why the development agreement should not be treated as a transfer of the land, resulting in capital gains, and taxed accordingly.

The assessee explained that by entering into the development agreement, the petitioner has not transferred the land, and specific reference was made to provisions of Section 2(47)(v) and Section 53A of the Transfer of Property Act, 1882.

The assessee’s explanation was accepted, and the assessment order under Section 143(3) came to be passed without making any addition on account of capital gains. The assessee’s income was, however, determined by other additions to the total income of the petitioner.

The assessee received a notice under Section 148 stating that the respondent had reasons to believe that the assessee’s income chargeable to tax for Assessment Year 2013-14 had escaped assessment within the meaning of Section 147.

The entire basis that prompted the AO to conclude that there was reason to believe escapement of income The petitioner, along with two other co-owners, had granted development rights in respect of land at Chikhloli, Ambernath, to Sai Ashray. According to the AO, it is clear that the petitioner has transferred, as defined under Section 2(47) of the Act, land to Sai Ashray during the Financial Year 2012-13. According to AO, the market value of the constructed saleable area was Rs. 9.5994 crore, and the petitioner has only shown consideration of Rs. 3 crore in the development agreement. Therefore, the petitioner should have offered capital gain during the assessment year 2013–14.

The assessee contended that the reassessment notice had been issued after the expiration of four years. The re-opening of the assessment was not permissible unless there was a failure on the part of the petitioner to fully and truly disclose the material facts required for the assessment.

The court noted that during the assessment proceedings, a query had been raised by the AO, and the petitioner had submitted a copy of an agreement relating to joint development. The assessee explained in detail why there was no ‘transfer of land’. Subsequently, the assessment order has been passed, in which there is even a reference to the Joint Development Agreement between the petitioner and the developer.

The court held that there was no failure to disclose any material fact. On that ground alone, the notice issued under Section 148 has to be quashed and set aside.

Case Title: Darshana Anand Damle Versus DCIT

Case No.: Writ Petition No. 1763 Of 2022

Date: 04/09/2023

Counsel For Petitioner: Devendra Jain

Counsel For Respondent: Suresh Kumar

Click Here To Read The Order