Capital Gains on JDA Taxable in Year of Completion Certificate; Section 54/54F Relief Allowed: ITAT Bangalore in Keshava Reddy Vs DCIT

1. Background and Case Overview

The Bangalore Bench of the Income Tax Appellate Tribunal in Keshava Reddy Vs DCIT examined a cluster of issues arising out of a Joint Development Agreement (JDA) for a residential project and its tax consequences spread over four assessment years: AY 2014-15, 2018-19, 2019-20 and 2020-21.

The assessee had entered into a JDA with M/s Ecstasy Projects Pvt. Ltd. for development of land into a project titled “Trifecta Joli”. Under the agreement, instead of any upfront monetary consideration, the assessee became entitled to a specified built-up portion in the completed project. Ultimately, the assessee received 44 residential flats as consideration for transfer of development rights in the land.

Key transactional facts:

  • Project completed and occupancy certificate issued in June 2017 (relevant to AY 2018-19).
  • Out of 44 flats received:
    • 1 flat was sold in FY 2017-18 (AY 2018-19).
    • 38 flats were sold in FY 2018-19 (AY 2019-20).
    • 5 flats continued to remain unsold into subsequent years.

Consequent to a search under Section 132 on 5 February 2020, assessments were framed under Section 153A for AYs 2014-15, 2018-19 and 2019-20, and a regular assessment under Section 143 for AY 2020-21. The Assessing Officer (AO) taxed:

  • Long-term capital gains (LTCG) on transfer of land under the JDA,
  • Capital gains on sale of flats, and
  • Deemed rental income on unsold flats under Section 23(5).

The CIT(A) sustained the additions. The assessee carried the matter to the Tribunal and also raised technical jurisdictional issues on Section 153A, which the Tribunal chose not to adjudicate, having decided the appeals on the merits.

The Tribunal addressed the following substantive issues:

  1. Year of taxability of capital gains on transfer of land under the JDA

    • Whether transfer occurred in AY 2014-15 (year of JDA and handing over of possession), or
    • In AY 2018-19 (year of completion and receipt of constructed area).

  2. Correct measure of “full value of consideration”

    • Whether the developer’s cost of construction can be taken as consideration, or
    • Whether the stamp duty value of the assessee’s share of the constructed area should govern.

  3. Eligibility for exemption under Section 54 / Section 54F

    • Whether all 44 flats received under the JDA can be treated as a single “residential house” for the purpose of claiming exemption.

  4. Computation of capital gains on sale of flats

    • Determination of the cost of acquisition of flats sold in AYs 2018-19 and 2019-20.
    • Characterisation as short-term or long-term based on the correct holding period.

  5. Levy of deemed rental income under Section 23(5)

    • Whether notional rent on unsold flats can be brought to tax when such flats are held as capital assets, not as stock-in-trade.

  6. Overlap with income originally returned under Section 139(1)

    • Whether capital gains already offered in original returns relate to the JDA and need adjustment before further additions are made.

3. Facts: Chain of Title and JDA Structure

3.1 Origin of Land Ownership

  • In 1951, one Sri Gurappa purchased agricultural land measuring 9 acres 28 guntas in Survey No. 92.

  • He had four sons: Sri Pilappa, Sri Veerappa, Sri Munireddy and Sri Hanumantha Reddy.

  • 22 July 1955 – Sri Pilappa executed a release deed in favour of his father and three brothers, surrendering his rights.

  • Following the death of Sri Gurappa, a registered partition deed dated 30 December 1960 divided the land among the remaining three sons:

    • Sri Veerappa – 2 acres 20 guntas
    • Sri Munireddy – 3 acres 24 guntas
    • Sri Hanumantha Reddy – 3 acres 24 guntas

  • Revenue records were mutated accordingly.

The present assessee is the son of Sri Munireddy, who held 3 acres 24 guntas under the 1960 partition.

3.2 Allotment to the Assessee

  • Upon the death of Sri Munireddy, a partition dispute among his legal heirs resulted in a civil suit.
  • By decree dated 16 May 2011, the assessee was allotted 1 acre 8 guntas out of the original land.
  • Revenue records were mutated to the assessee’s name, and this portion was assigned Survey No. 92/2.

3.3 The JDA with Ecstasy Projects Pvt. Ltd.

  • On 26 October 2013, the assessee executed a Joint Development Agreement with M/s Ecstasy Projects Pvt. Ltd. for development of a residential project called “Trifecta Joli”.
  • The assessee’s wife and minor daughters were also shown as “owners” in the JDA; however, the agreement expressly clarified that the assessee alone is the absolute owner, and they were joined only out of abundant caution.
  • Under the JDA:
    • Development rights over the land were granted to the developer.
    • In consideration, the assessee became entitled to a specified share in the constructed built-up area (44 flats).
    • No cash or advance consideration was paid at the time of execution of the JDA.
  • The project was completed and occupancy certificate was issued in June 2017 (AY 2018-19). The assessee then received 44 completed flats from the developer.

3.4 Returns and Search Proceedings

  • AY 2014-15: No return filed.

  • AY 2018-19:

    • Return under Section 139(1) showing income of ₹23,26,290, comprising:
      • House property – ₹1,68,000
      • Short-term capital gains – ₹11,08,542
      • Long-term capital gains – ₹11,33,953
      • Other sources – ₹1,971
    • Deduction under Chapter VIA – ₹86,173.

  • AY 2019-20:

    • Return under Section 139(1) showing income of ₹1,75,24,910, comprising:
      • House property – ₹1,68,000
      • Short-term capital gains – ₹1,55,59,066
      • Other sources – ₹19,71,844
    • Deduction under Chapter VIA – ₹1,74,000.

  • Search under Section 132 on 5 February 2020 led to notice under Section 153A for AYs 2014-15, 2018-19 and 2019-20. In response:

    • AY 2014-15: Return under Section 153A with nil income.
    • AY 2018-19: Revised total income to ₹83,800, withdrawing earlier declared STCG and LTCG.
    • AY 2019-20: Revised total income to ₹4,000, withdrawing earlier declared STCG and income from other sources.

  • AY 2020-21:

    • Regular return under Section 139 declaring:
      • House property – ₹4,35,085
      • Other sources – ₹20,37,262

4. AO’s Approach and Additions

4.1 Treatment of Transfer under Section 2(47)(v)

The AO proceeded on the basis that:

  • By executing the JDA and handing over possession to the developer, the assessee had effected a “transfer” within the meaning of Section 2(47)(v) read with Section 53A of the Transfer of Property Act.
  • Consequently, capital gains had arisen in AY 2014-15, being the year in which the JDA was signed and possession allowed.
  • Reliance was placed on Dr. T.K. Dayalu (Karnataka High Court) 14 taxmann.com 120.