PERSONAL TAX: Capital gains liable on accrued income

This week's case is a recent ruling by the Mumbai Tax Tribunal in the case of a taxpayer who had filed his return of income for assessment year 2010-11 on October 15, 2010 and offered income to the tune of Rs 10.19 lakh. The taxpayer was a business man and had submitted his profit & loss account, balance sheet and tax audit report along with his return of income.

The return was selected for detailed scrutiny, during which the tax officer observed that the taxpayer had shown a plot of land in his balance sheet. On further probing, the taxpayer submitted the purchase deed dated February 4, 2009 for the said plot for an amount of Rs 13 lakh, although in his books of account the plot was recorded at a cost of Rs 5,25,000. The taxpayer added that he had purchased the property jointly with two other individuals and claimed his share at 1/3rd of the total amount.

The tax officer further found out that the taxpayer had entered into a joint-development agreement dated July 7, 2009 for a sum of Rs 32.66 lakh with a developer for constructing flats on the plot. The agreement was entered on the basis of the approval plan given by the relevant authorities by virtue of their certificate dated April 6, 2009. On this basis, the tax officer assessed the transaction's Short-Term Capital Gains (STCG) at Rs 19.66 lakh by taking the sale consideration at Rs 32.66 lakh and reducing the purchase cost of Rs 13 lakh. He assessed the taxpayer's share at Rs 6.55 lakh, being 1/3rd of the computed difference. With this addition, the taxpayer's income was assessed at Rs 16.75 lakh. At the first appellate level, the taxpayer's case was dismissed.

When the matter came up for hearing before the tribunal, the taxpayer submitted that the development agreement signed on July 7, 2009 was registered and the value of Rs 32.66 lakh was assessed for the purpose of stamp duty. Further, the taxpayer submitted that capital gains was liable to tax only in assessment year 2015-16 when the said flat was received by him, making the STCG calculations in the current assessment year wrong. Moreover, he contended that nothing was received in lieu of execution of the development agreement and therefore there is no capital gains liable to be assessed in the said year.

The taxpayer relied on various precedents and the same were laid before the Tribunal. On a perusal of these decisions, it was observed that the appellate authorities had accepted the view that capital gain is liable to be assessed in the hands of a taxpayer after the accrual of consideration. In a case where the development activity is not completed and the taxpayer receives no consideration, there can be no instance of capital gains being accrued. Income can be said to be accrued not only when it becomes due, but it must also be accompanied by a corresponding liability of the other party to pay the amount. It is only then that for the purposes of taxability, the income is not hypothetical and has really accrued to the assessee. The long-term or short-term capital gains is liable to be assessed when the income accrues to the taxpayer, such that the real income can be taxed and not hypothetical income. Based on this interpretations, the tribunal ruled in favor of the taxpayer.

The writer is a Sebi-registered investment advisor