Transfer of Development Rights of a property would not attract the provisions of u/s 2(47)(v) of the Income Tax Act, if only part payment has been received.

Facts of the case:

  • The assessee, is engaged as civil contractor, determined his income for the reporting period under consideration to be Rs. 2.82 lacs. While the AO determines his income to be Rs. 276.69 lacs.
  • The Department served the notice to assessee u/s 143(2) and 142(1), which reveals that assessee has transferred certain development rights for a consideration of Rs. 336 lacs out of which Rs. 100.80 lacs were stated to be received in the year under consideration.
  • Since the assessee followed the mercantile system of accounting, the entire amount should have been taxed in the year of signing of development agreement. But upon verifying the return, it was observed that the said amount was not offered to tax as business income.

Contention of Assessee:

  • Assessee contended that the development rights were business assets and therefore the definition of transfer as defined in Sec. 2(47)(v), was not applicable.
  • Assessee further contended that, as per the terms of agreement, he has to perform his work on the basis of receipt and the same has been spent on ground level activities and the balance amount was already offered for taxation.

Contention of Income Tax Department:

  • AO contended that the assessee has parted with the development rights and possession of land was also given, thereby completing the transfer, and the taxability would not be dependent on actual receipts.
  • AO further contended that, according to the mercantile system of accounting, entire amount, Rs. 336 lacs, of consideration would be the income accrued to the assessee for reporting period.

Decision held by Tribunal:

  • The Tribunal held the decision in favor of Assessee and stated that Assessee was entrusted with several responsibilities which is spread over the years. Further, he is entitled to recover the consideration in a phased manner and therefore AO is not correct that entire consideration should have been taxed in the impugned year.
  • 2(47)(v) relate to transfer of capital assets, whereas in impugned case, the appellant had offered the income under the head Income from business.
  • Therefore, the transfer of development rights of a property would not attract the said provisions of the Act. Accordingly, the addition made by AO of Rs. 336 lacs cannot be upheld.

Case Law: Income Tax Officer V. Abdul Kayum Ahmed