Bombay High Court: 'Possession' integral ingredient To Levy Income Tax for Capital Gain

Bombay High Court: 'Possession' integral ingredient To Levy Income Tax for Capital Gain

The Bombay High Court observed that there was neither any tangible material nor any reason for the assessing officer to believe that 'any income chargeable to tax had escaped assessment', since the development agreement permitted construction on the land only as a licensee, which did not have the effect of transmitting possession in favor of the licensee as per Section 53A of the Transfer of Property Act.

The petitioner, Late Bharat Jayantilal Patel (since deceased) through Legal Heir Smt. Minal Bharat Patel in the petition had challenged inter alia the notice issued under Section 148 of the Income Tax Act, 1961 ('the Act') dated 22 March 2021 relevant to the assessment year 2013- 14. By virtue of the said notice, assessment for the year 2013-14 was sought to be reopened, on the ground that the assessing officer (AO) had reason to believe that income chargeable to tax for the assessment year 2013-14 had escaped assessment within the meaning of Section 147 of the Income Tax Act, 1961.

The petitioner argued that Section 2(47)(v), which was invoked for the purpose of reopening, had no application. Granting a license to the developer, who entered into the assessee's land for the purpose of development, did not amount to 'allowing the possession of the land' as per Section 53A of the Transfer of Property Act, 1882 (T.P. Act). Therefore, the petitioner contended that Section 2(47)(v) would not apply.

The petitioner asserted that the agreement between the petitioner and other owners and developers was a development agreement, according to which the developer was given the status only as a licensee. A licensee could not be said to be in 'possession' within the meaning of Section 53A of the T.P. Act, and that 'possession' was otherwise necessary and an integral ingredient for purposes of bringing a transaction within the purview of Section 2(47)(v) of the Act.

Objections raised by the Petitioner were, however, rejected by the Assessing Officer vide Order dated 27 January 2022. Reliance was placed on a judgment rendered by the Bombay High Court in the case of Dwarkadas Chaturbhujdas Kapadia Vs. Commissioner of Income Tax which held that transfer of property under Section 2(47)(v) of the Act was complete in the year in which the builder is given irrevocable license by the land owner to enter upon the land to carry out construction.

The division bench comprising of Justices Kamal Khata and Dhiraj Singh Thakur referred the decision passed by the Apex Court in the case of Seshasayee Steels (P.) Ltd. vs. Assistant Commissioner of Income Tax Vs. Company Circle VI(2), Chennai, held that Section 53A of the Transfer of Property Act, 1882 would not be attracted in a case where a license was given to another for purposes of development of the flats and selling the same and that granting such a license could not be said to granting possession within the meaning of Section 53A of T.P. Act.

The Court applied the principle as crystallized by the Apex Court to the facts of the present case and observed, "it can be seen that the development agreement permitted construction on the land in question only as a licensee which did not have the effect of transmitting possession in favour of the licensee within the meaning and spirit of Section 53A of T.P. Act. If that is so, then there would be neither any tangible material nor any reason for the assessing offcer to believe that 'any income chargeable to tax had escaped assessment' and the action of the assessing offcer, therefore, would be without jurisdiction."

Thus, the Court, while allowing the petition, set aside the notice under Section 148 of the Income Tax Act. 1961 and the order.