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Capital Gains Tax will not apply to a unregistered joint development agreement

In CIT vs. Balbir Singh Maini, under an unregistered JDA between a co-operative housing society of which the Taxpayer was a member and developers, certain plot of lands were put up for development against consideration in money as also by way of allotment of flats, free of cost to members. After the payment of two instalments, developer defaulted in payment of the balance instalments, which resulted in the termination of JDA. The Tax Authority assessed the Taxpayer to capital gains tax in the year in which JDA was executed with reference to the entire amount, including the amount receivable by the member.

Under Income Tax Act, 1961 (ITA) definition of “transfer” includes a  transaction that allows  the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of Transfer of Property Act, 1882 (‘TOPA’).

SC noted that the provisions of TOPA will apply to a contract that is registered. An unregistered agreement has no legal effect and is not enforceable in law. Basis this, SC held that since JDA was not registered, the contract was not covered by provisions of TOPA and, consequently, there was no transfer for tax purposes within the extended definition of “transfer”.

Further, SC held that no capital gains was chargeable to tax also for the reason that no income accrued or arose to the Taxpayer as the  transaction of JDA did not materialize. SC also observed that mere presence of right to receive income unaccompanied by corresponding debt in favour of the Taxpayer results in hypothetical income and not real income.

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