Man gets flats under builder deal, transfers 5 to wife; gets Rs 4.14cr tax notice

The second addition arose after the man transferred five of the six flats to his wife through sale deeds in 2020. (Image for representative purpose only)

You enter into an agreement with a builder for your land and later transfer five flats from it to your wife. Is a capital gains tax applicable?In one such case, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has deleted tax additions of Rs 4.14 crore made against a taxpayer after the income tax department treated a joint development agreement as conversion of land into stock-in-trade and later treated the transfer of five flats to his wife as a sale giving rise to business income.

What the case is about

A man had filed his income tax return for assessment year 2021-22 declaring total income of Rs 1,05,59,170. His case was selected for complete scrutiny.The assessing officer made two major additions. The first, Rs 1,93,78,293, was treated as long-term capital gains on the ground that the man had converted a capital asset into stock-in-trade. The second, of Rs 2,20,98,985, was treated as business income arising from the alleged sale of that stock-in-trade.Also Read | Man sells ancestral agricultural land for Rs 8 crore, buys two properties and claims LTCG exemption; faces Rs 6.36 crore tax additions, why ITAT Chandigarh gave relief under Sections 54B and 54FThe dispute arose from a joint development agreement from 2016. The man had contributed his land to the arrangement, while the developer was to construct a multi-storeyed building at its own cost. In return, the man received six flats.The tax department's position was that the arrangement resulted in the land being converted into stock-in-trade. The man challenged this interpretation before the tribunal.

His argument was that he was an individual and was not carrying on a real estate business. He had contributed the land, but the actual construction was undertaken by the developer.He also pointed out that there was no business infrastructure or accounting record showing that the land had been converted into inventory. There was no stock register, project account, trading account or other contemporaneous record showing that he had entered the business of developing or selling property.The second addition arose after the man transferred five of the six flats to his wife through sale deeds in 2020.The assessing officer treated the transaction as a sale and consequently treated Rs 2,20,98,985 as business income.The man said that no money had actually changed hands. He produced an affidavit from his wife stating that no consideration had been paid and also submitted her bank statement. According to the man, the flats had been transferred to his wife to safeguard the interest in the properties and enable them to be mortgaged with a bank.Also Read | He deposited Rs 14.96 lakh cash during demonetisation; landlord faced unexplained money tax notice under Section 69A, but ITAT Bangalore deletes addition on account of rental income

Why ITAT Delhi ruled in his favour?

The first question before the tribunal was whether the joint development agreement itself was enough to convert the man’s land from a capital asset into stock-in-trade.The tribunal referred to an earlier decision involving Global Health Private Limited, where it had been held that a taxpayer not engaged in real estate business could not be said to have converted land into stock-in-trade merely because it entered into a joint development agreement.The same reasoning applied to this case.The tribunal observed that the man was "not in the business related to real estate". It held that the nature of the joint development agreement did not automatically change the character of the asset.The tribunal put the issue quite directly: "once the issue of a stock in trade is not proved beyond doubt, the section 45(2) cannot [be] invoked in such cases."Section 45(2) deals with capital gains arising when an owner converts a capital asset into, or treats it as, stock-in-trade of a business carried on by him.In this case, the tribunal found that the capital asset had not been shown to have been converted into stock-in-trade. It therefore deleted the Rs 1,93,78,293 addition made as long-term capital gains.The second issue concerned the five flats transferred to the man’s wife.Also Read | He left his BMW locked on the highway after midnight puncture, next morning it was found burnt; insurer rejected claim, but consumer commission orders Rs 70 lakh plus 7% interestThe tribunal considered earlier ITAT decisions in Adilakshmi Srungavarapu v. ITO and Sunil Kumar v. ITO. Both involved situations where property was transferred by a husband to his wife but there was no evidence of actual payment of consideration.The tribunal noted that the man had produced his wife's affidavit and bank statement to support his claim that no payment had actually been made. The Departmental Representative could not rebut the findings in the earlier cases relied upon.The tribunal concluded that the transaction could not be treated as a genuine sale merely because a sale deed had been executed.It observed: "A sale deed might have been executed. But that could be simply for the purpose of some duty consideration and it could not be treated or called as a consideration received by the husband from the wife."The tribunal also accepted that the transfer was made to safeguard the interest in the property, without actual payment from the wife to the husband. On that basis, it held that the transaction could not be treated as a sale giving rise to business income.The Rs 2,20,98,985 business-income addition was therefore also deleted.

Significance of the ruling

According to Sarthak Prashar, Director, Global People Solutions, Grant Thornton Bharat, the ruling reinforces an important tax principle that the character of a property transaction must be determined from its substance and supporting evidence, and not merely from the language used in an agreement.The Delhi ITAT observed that entering into a Joint Development Agreement, by itself, does not establish that a landowner has converted a capital asset into stock-in-trade or commenced a real-estate business.Such conversion must be supported by clear evidence, such as the property being treated as inventory in the books, the taxpayer undertaking organised development or trading activity, and the overall conduct demonstrating an intention to hold the property as business stock rather than as a capital asset.“The ruling also highlights that a value or consideration recorded in a property document cannot, in isolation, establish that such consideration was actually received. The surrounding facts, flow of funds and commercial reality remain relevant in determining the correct tax consequences,” Pathak tells TOI.He believes that the decision assumes greater relevance as property development and family arrangements become more structured.

The Income-tax Act, 2025 specifically addresses conversion of capital assets into stock-in-trade and qualifying development agreements, making correct characterisation of the transaction critical from the outset.“Going forward, the focus should shift from managing tax disputes after a transaction to getting the tax position right when the transaction is structured. Contractual terms, accounting treatment, banking trail and actual conduct should remain aligned.

With greater digitisation and data-led scrutiny, inconsistencies across these records are likely to become easier for tax authorities to identify,” he says.“For property owners, evaluating the tax implications before signing a development or family property arrangement is therefore critical. A well-structured transaction, supported by consistent records and a clear commercial rationale, can provide greater tax certainty and significantly reduce the risk of unexpected tax demands and prolonged litigation,” he adds.Also Read | Wife got late husband’s government job on compassionate grounds, promised to care for in-laws but remarried and left; Court orders 25% salary for mother-in-law and equal terminal benefits