IT : Transfer of possession of property to developer for construction of flats under Joint Development Agreement, as per which assessee was entitled to 50 per cent built up area, is 'transfer' as per section 2(47) and is taxable in year in which agreement, giving vacant and peaceful possession to developer, was entered into by assessee
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[2013] 33 taxmann.com 311 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
Mrs. Durdana Khatoon
v.
Assistant Commissioner of Income-tax, Circle - 6(1), Hyderabad*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
IT APPEAL NO. 449 (HYD.) OF 2012
[ASSESSMENT YEAR 2005-06]
[ASSESSMENT YEAR 2005-06]
MARCH 15, 2013
Section 2(47), read with section 45, of the Income-tax Act, 1961 and section 53A of the Transfer of Property Act, 1882 - Capital gains - Transfer [Immovable property] - Assessment year 2005-06 - Assessee who owned a property, entered into a Joint Development Agreement with a developer for construction of flats on said property, for which assessee was entitled to 50 per cent of built up area - Assessee gave vacant and peaceful possession of property to builder - Whether, where legal ownership continued with assessee, but possession and control of property was transferred to builder, transaction amounted to transfer as per section 2(47) and section 53A of Transfer of Property Act, and was taxable in year in which development agreement, giving vacant and peaceful possession of property to developer, was entered into by assessee - Held, yes [Para 29] [In favour of revenue]
FACTS
| ■ | The assessee owned a property and entered into a Joint Development Agreement with a builder for construction of residential /commercial flats as per which the assessee was entitled to 50 per cent of built up area. The assessee gave vacant and peaceful possession of the property to the builder. | |
| ■ | The Assessing Officer considered the transaction as transfer as per section 2(47)(v) and computed capital gain. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. |
HELD
| ■ | Section 2(47)(v) defines 'transfer' as any transaction involving allowing of 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 the Transfer of Property Act, 1882 (4 of 1882). [Para 23] | |
| ■ | The importance of the word 'transfer' is due to the reason that under the charging section, viz. section 45, capital gain is taxable on 'transfer of a capital asset'. Precisely, this section prescribes that 'any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place. [Para 24] | |
| ■ | Thus, the fundamental features which determine the taxability of capital gain, are that the gain ought to be from the transfer of a capital asset. This phrase can be interpreted in the manner that the total profits may actually be received in any other year, but for the purposes of section 45, the gain shall be the deemed income of the year of transfer of the capital asset. The Authority of Advance Rulings in the case of Jasbir Singh Sarkaria, In re [2007] 164 Taxman 108 (AAR - New Delhi), observed that the expression used in sec. 45 is 'arising', which cannot be equated with the expression 'received' or even with the expression 'accrued' as being used in the statute. Due to the presence of this statutory fiction, the actual year in which the entire sale consideration is received, is beside the point but what needs to be judged is the point of time at which the transfer took place either by handing over of the possession or by allowing the entry into the premises or by making the constructive presence of the vendee nevertheless duly supported by a legal document. [Para 25] | |
| ■ | But the issue does not get settled only by the interpretation of section 45 and section 2(47)(v) because the definition of "transfer" not merely prescribes allowing of possession but also to be retained in part performance of a contract of the nature referred in section 53A of the Transfer of Property Act. |
| ■ | The factual matrix of the case in hand is as follows : |
| (a) | Starting words of section 53A are 'where any person contracts', which means just the existence of a contract. The assessee is the 'person' who has entered into a contract with the developer. | |
| (b) | The term 'transfer' is to be read along with section 45 and section 2(47)(v). In the past there was a long line of pronouncements, while deciding income tax cases, that unless and until a sale deed was executed and that too it was registered, transfer could not be said to have been effected. Thereafter, there were major amendments in the income-tax statute for levy of capital gain. The main objective of those amendments was to enact that for the purposes of capital gains, the transaction involving transfer of the nature referred are not required to be registered under Registration Act. In the present case, the developer has got bundle of rights and thereupon entered into the property. Thereafter, it is to be seen that what happened and what steps the transferee has taken to discharge the obligation on his part. If transferee has taken any steps to construct the flats, undisputedly then, under the provision of Income-tax Act a 'transfer' has definitely taken place. | |
| (c) | The existence of the 'consideration' is the essence of the contract. In this case the amount of consideration has to be paid to the assessee in the form of cash as well as in kind i.e., the flats to be constructed by the developers to be handed over to the owners. | |
| (d) | Next is the important phrase i.e., 'terms necessary to constitute the transfer can be ascertained with reasonable certainty'. In this case, the terms and conditions of the contract were unambiguous and clearly spoke about the rights and duties with certainty of both the signing parties. Mainly two certainties are to be considered; one being passing of substantial consideration and second being passing over of possession. | |
| (e) | The other factor which governs the happening of transfer is the handing over of possession. Retention of possession is one kind of the facet of part performance of contract. The agreement in question can be said to be a distinct transaction that has given rise to the event of allowing the contractor to enter into the property. The possession as contemplated in clause (v) need not necessarily be sole and exclusive possession, so long as the transferee is enabled to exercise general control over the property and to make use of it for the intended purpose. The mere fact that the assessee owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of the agreement, did not restrict the rights of the developer or did not introduce any incompatibility. In a situation like this when there is a concurrent possession of both the parties, even then clause (v) has its full role to play. Any other interpretation i.e., possession means exclusive possession, shall defeat the purpose of amendment even if some part of consideration remains to be paid, the transaction shall not affect the liability of capital gains tax so as to postpone the same indefinitely. | |
| (f) | The last noticeable ingredient is, 'the transferee has performed or is willing to perform his part of the contract'. To ascertain the existence of willingness on the part of the transferee one must not put stop at one event but willingness is to be judged by the series of actions of the transferee. The transferees surveyed the land and to attract purchasers put up hoardings plus sales office and carried out site development work. Landscaping, sales promotion, execution of construction and completion of project are all incidental to demonstrate the willingness of the transferee. Facts of this case thus suggest that the developer had never intended to walk-out of the project. | |
| (g) | From the Development Agreement, it is more than clear that it was an agreement for construction of residential/commercial flats on the property owned by the assessee. In lieu of the right given to the Developer there under, the assessee was to receive 50 per cent of the constructed area of all the floors. Further, even the vacant and peaceful possession of the property had been delivered to the developer on 7-3-2005, as evidenced by the 'Delivery Note' of the same date. Under the circumstances, there was indeed an exchange of property which amounted to a transfer within the meaning of section 2(47)(v) and the gain resulting from such transfer was indeed taxable in the year in which the Development Agreement giving vacant and peaceful possession of the property to the Developer was entered into by the assessee, as held by the Hon'ble Bombay High Court in the case of Chaturbuj Dwarakadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497and in the several decisions of the Jurisdictional ITAT, Hyderabad, including the case of Dr. Maya Shenoy v. CIT [2009] 124 TTJ (Hyd.) 692. Since the Development Agreement in the assessee's case has been executed on 2-8-2004 and the vacant and peaceful possession also was given in 7-3-2005 itself, such gains were indeed to be taxed in the Financial year 2004-05, relevant to the Assessment year 2005-06. | |
| (h) | There is no merit in the contention that the Development Agreement could not have come into force unless and until the builder deposited Rs. 2 crores. As discussed in the assessment order, the assessee had indeed been paid Rs. 50 lakhs by cheques dated 19-7-2004 itself. Further, the assessee was to receive 3 instalments of Rs. 50 lakhs each at different stages. Under the circumstances, it cannot be disputed that there was a promise to pay which has not been shown as having remained unfulfilled. It is an established judicial proposition that the consideration may be futuristic also, as held by the Supreme Court in the case reported in Jugal Kishor v. Raw Cotton Co. AIR 1955 S.C. 376. Accordingly, there is no merit in such contention of the assessee. [Para 28] |
| ■ | Thus, the owners entered into an agreement for development of the property and certain rights were assigned to the developer who in turn made the substantial payment and consequently entered into the property and thereafter the transferee has taken steps in relation to construction of the building, then it is to be considered as transfer under section 2(47)(v). The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of section 2(47)(v). As the transferee was undisputedly willing to perform its part of the contract, there was transfer under section 2(47)(v). Thus, since the possession and control of the property was already vested with the transferee and the impugned development agreement had not been duly cancelled and it was still in operation, there was a transfer under section 2(47)(v). Entering into the property and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of section 45 on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. [Para 29] | |
| ■ | Accordingly, the above issue relating to transfer of property under section 2(47)(v) is decided in favour of the Department. [Para 30] | |
| ■ | In the result, assessee's appeal is dismissed. [Para 31] |
CASES REFERRED TO
Chaturbhujdas Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 (Bom.) (para 3), Dr. Maya Shenoy v. CIT [2009] 124 TTJ (Hyd.) 692 (para 3), Ms. K. Radhika v. Dy. CIT [2011] 13 taxmann.com 92/47 SOT 180 (Hyd.) (URO) (para 7), Baisakhi Bhattacharjee v.Shayamal Bose 2002 (4) CHN 115 (para 7), Smt. Raj Rani Devi Ramana v. CIT [1993] 201 ITR 1032 (Pat.) (para 7), S. Raghurami Reddy [IT Appeal No. 296 (Hyd.) of 2003, dated 30-7-2004] (para 7), Avatar Singh v. ITO [2004] 270 ITR 92/[2003] 132 Taxman 113 (MP) (para 7), Zuari Estate Development & Investment Co. (P.) Ltd. v. Dy. CIT [2004] 271 ITR 269/139 Taxman 209 (Bom.) (para 7), Alapati Venkataramaiah v.CIT [1965] 57 ITR 185 (SC) (para 7), K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) (para 9), Taher Alimohammed Poonawala v.Addl. CIT [2009] 124 TTJ (Pune) 387 (para 20), Jasbir Singh Sarkaria, In re [2007] 164 Taxman 108 (AAR - New Delhi) (para 25) and Jugal Kishor v. Raw Cotton Co. AIR 1955 SC 376 (para 28).
P. Muralimohan Rao for the Appellant. K.E. Sunil Babu for the Respondent.
ORDER
Chandra Poojari, Accountant Member - This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 31.1.2012 for assessment year 2005-06.
2. The grievance of the assessee in this appeal is with regard to treatment of transaction entered by the assessee in Joint Development Agreement (JDA) for development of property situated at Door No. 1-8-5777/1, Chikkadpally, Hyderabad with M/s. Imperial Constructions vide agreement dated 2-8-2004 as transfer by invoking provisions of section 2(47)(v) of the Income-tax Act, 1961 so as to determine the long term capital gain.
3. Brief facts of the issue are that the assessee owned a property situated at Door No. 1-8-5777/1, Chikkadpally, Hyderabad and entered into a JDA with M/s. Imperial Constructions for construction of residential/commercial flats on 2.8.2004. As per the agreement, the assessee is entitled for 50% of built up area. As per agreement and also vide delivery note dated 7.3.2005, the assessee given vacant and peaceful position of the property to the builder. Being so, the Assessing Officer considering the provisions of section 2(47)(v), the assessee said to be exchanged the property for consideration in kind i.e., to receive 50% of the built up area. Accordingly, the Assessing Officer, placing reliance on the judgement of Bombay High Court in the case of Chaturbhujdas Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 and also on the decision of the Tribunal in the case of Dr. Maya Shenoy v. CIT [2009] 124 TTJ (Hyd.) 692 treated this transaction as "transfer of capital asset" and computed the capital gain on this transaction at Rs. 3,88,35,451. On appeal the CIT(A) confirmed the order of the Assessing Officer. Against this the assessee is in appeal before us.
4. The learned AR submitted that the lower authorities wrongly placed reliance on the judgement of Bombay High Court in the case of Chaturbhujdas Dwarkadas Kapadia (supra) and also on the decision of the Tribunal in the case of Dr. Maya Shenoy (supra). He submitted that in the present case there was no transfer of property as enumerated in section 2(47)(v) of the Act, as in this case no possession has been given by the assessee to the developer. Whatever the assessee has given is only a licence to the developer to enter into plot for the limited purpose of construction of building. He submitted that giving symbolic possession of the property for limited purpose of construction cannot be construed as giving of absolute possession of the property. He also filed additional evidences as follows:
| (a) | Agreement between Durdhana Khatoon and M/s. Imperial Constructions dated 2nd August, 2004. | |
| (b) | Memorandum of Understanding (MOU) between Durdhana Khatoon and M/s Imperial Constructions dated 2nd August, 2004. | |
| (c) | Lease Deed with M/s. Pantaloon Retail (I) Ltd. | |
| (d) | Copy of Income-tax Return for the A.Y. 2005-2006 along with computation of Income. | |
| (e) | Copy of Income-tax Return for the A.Y. 2006-2007 along with computation of Income. | |
| (f) | Copy of Income-tax Return for the A.Y. 2007-2008 along with computation of Income. | |
| (g) | Copy of Income-tax Return for the A.Y. 2008-2009 along with computation of Income. | |
| (h) | Details of Capital Gains offered to tax for the A.Ys. 2007-2008 onwards. |
5. He also submitted that the assessee could not produce the documents in Sl. Nos. (c) to (h) before the lower authorities as these are not available at the time of proceedings before the lower authorities and requested to admit these additional evidences. We have gone through the above additional evidences. Considering the nature of documents, in our opinion, these documents have no consequence in deciding the issue. We have to see only Development Agreement and Delivery Note for handing over the possession of the property for construction. Further the assessee has paid the taxes on capital gain in subsequent years, it cannot lead to conclusion that there is no transfer in this A.Y. 2005-06. The right amount has to be taxed in right assessment year.
6. The AR, on applicability of section 2(47)(v) of the income tax Act, 1961, submitted that the provisions of section 2(47)(v) of the Income Tax Act, 1961, do not apply to the case of the assessee's case or to any development agreement for that matter of fact. He submitted that the ratio of following case-law was wrongly applied by the Assessing Officer:
| (a) | Chaturbhuj Dwarakadas Kapadia (supra) | |
| (b) | Dr Maya Shenoy (supra) |
7. According to him, the following judicial decisions and interpretation have not been brought to the notice of the Courts/Appellate Authorities in the course of the presentation/ arguments:
| (a) | Ms. K. Radhika v. Dy. CIT [2011] 13 taxmann.com 92/47 SOT 180 (Hyd.) (URO) | |
| (b) | Baisakhi Bhattacharjee v. Shayamal Bose 2002 (4) CHN 115 | |
| (c) | Smt. Raj Rani Devi Ramana v. CIT [1993] 201 ITR 1032 (Pat.) | |
| (d) | Order of ITAT, Hyderabad in the case of S. Raghurami Reddy in ITA No. 296/Hyd/2003 dated 30.7.2004. | |
| (e) | Avatar Singh v. ITO [2004] 270 ITR 92/[2003] 132 Taxman 113 (MP) | |
| (f) | Zuari Estate Development & Investment Co. (P.) Ltd. v. Dy. CIT [2004] 271 ITR 269/139 Taxman 209 (Bom.) | |
| (g) | Alapati Venkataramaiah v. CIT [1965] 57 ITR 185 (SC) |
8. The AR submitted that in all the cases the arguments before the appellate forums was that the amendment to section 2(47) of the Act was brought in to plug the loop hole of transferring the property without registering a conveyance deed. It was presented to the courts that the transfer of property was being done through General Power of Attorneys and that through this devise though the real owner of the property changes the registered owner remains the same and that this kind of transactions were outside the purview of the definition of the word "transfer" under section 2(47) of the Income Tax Act. The AR submitted that the following extract from the case of Chaturbhuj Dwarakadas Kapadia shows the line of arguments before the Hon'ble Court:
"Section 2(47)(v) was introduced in the Act from assessment year 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance. Consequently, assessees used to enter into agreements for developing properties with the builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loop hole, section 2(47)(v) came to be introduced in the Act. It was argued by the assessee that there was no effective transfer till grant of irrevocable licence. [Para 5]"
9. The AR further submitted that the fact that the subject matter of taxation being the consideration for transfer does not exist on the date concluded by the department to be the date of transfer has not been brought to the notice of the adjudicating authorities in any of these cases. The Apex Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) laid down that it is not very fictional accrual or receipt of income which has never accrued nor never received, which could be brought to tax for the purpose of taxation of capital gain. The provisions seek to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset.
10. The learned AR submitted that this issue has been considered by the co-ordinate Bench of the Tribunal in the case of K Radhika (supra) wherein held that handing over of the possession of property is only one of the conditions u/s. 53A of the Transfer of Property Act but it is not the sole and isolated condition and it is necessary to go into whether or not transferee was "willing to perform" its obligation under the consent terms; on the facts of the case, provisions of section 2(47)(v) of the Act will not apply in the assessment year under consideration and capital gains could not be charged in the assessment year under consideration.
11. The AR submitted that the method of computation of full value of consideration itself throws open so many anomalies that the very basis of taxation goes against the principles of Income Tax Act which seeks to tax real and certain income.
12. According to the AR, this being the case an agreement being out of the scope of section 53 A of the Transfer of Property Act, the AR submitted that the assessing officer as well as the learned CIT (Appeals) erred in law in holding that the transaction is within the meaning of transfer under section 2(47)(v) of the Act. As stated earlier the case and the course of arguments before the Hon'ble Bombay High Court is that the amendment to the section 2(47) which defines "Transfer" has been made with a view to plug the loop hole of the assesses entering into development with builders and evading taxes. Accordingly, the AR submitted that this is not the actual legal position nor is it the intention of the legislature. Further he submitted that section 2(47) as originally introduced was substituted by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1985. The section with effect from 1-4-1985 had four sub clauses as under:
["transfer", in relation to a capital asset, includes,-
| (i) | the sale, exchange or relinquishment of the asset; or | |
| (ii) | the extinguishment of any rights therein; or | |
| (iii) | the compulsory acquisition thereof under any law; or | |
| (iv) | in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;] | |
| Vide Taxation Laws (Amendment) Act, 1984 two new sub clauses have been introduced and these are as under; | ||
| (v) | any transaction involving the allowing of 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 the Transfer of Property Act, 1882 (4 of 1882) ; or | |
| (vi) | any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. |
Explanation.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA;]
13. These two new sub clauses were introduced by the Finance Bill 1987. The Hon'ble Finance Minister in his budget speech stated as under; (para 77 of the speech as published)
"77. I understand that for the purpose of taxation of income from houses, our tax laws make a distinction between the real owner who is not a legal owner and a legal owner who is not a real owner. Following the well established revenue tradition, when it comes to taxing, we tax both the real owner who is not a legal owner and the legal owner who is not a real owner. Concessions available to a house owner are, however, given to a real owner, who is also a legal owner. I propose to simplify the law by clarifying that the real owner, even if he is not the legal owner, will pay the tax and avail of the concessions available to the legal owner. I hope this proposal is abundantly clear to Hon'ble Members."
14. He drew our attention to the relevant clause (clause 27) of the Memorandum Explaining Provisions in Finance Bill 1987 which states the objective and purpose of the amendment as under:
Simplification and Rationalization of Provisions
Enlarging the meaning of "owner of house property"
"27. Under the existing provisions of section 22 of the Income Tax Act, any income from house property is chargeable to tax only in the hands of the legal owner. As per section 27 of the Income Tax Act, certain persons who are not otherwise legal owners are deemed to be owners for the purposes of these provisions.
Under the Transfer of Property Act, the transfer of ownership can be effected only by means of a registered instrument. However, in the recent times various other devices are sought to be employed to transfer one's ownership in property. As a result, there are situations in which the actual owner, say, of an apartment in a multi-storeyed building, or a holder of a power of attorney is not the legal owner of a property. In some cases, pending resolution of disputes, the legal owners as well as the beneficial owners are assessed to tax in respect of the same income.
As a measure of rationalization, the Bill seeks to enlarge further the meaning of the expression "owner of house property", given in clause (iii) of section 27 by providing that a person who come to have control over the property by virtue of such transaction as are referred in clause (f) of section 269UA will also be deemed to be the owner of the property. The amendment also seeks to enlarge the applicability of this clause to a member of a company or other association of persons. Corresponding amendments have also been proposed in regard to the definition of "transfer" in section 2(47) of the Income Tax Act" section 2(m) of the Wealth Tax Act defining "net wealth" and section 2(xii) of the Gift Tax Act defining "gift". These amendments will take effect from 1st April 1988, and will, accordingly, apply in relation to assessment year 1988-89 and subsequent years.
[Clauses 3(9), 6, 77 and 92]
15. The AR submitted that from the above it is clear that the intention of the legislature was to plug the loop hole in escapement of income from being taxed under the head "House Property" and also to avoid double taxation and complexities between the real owners and the legal owners when it comes to taxation of property income. The AR placed reliance on the judgment and principles laid down by the Hon'ble Apex Court in the case of K.P. Varghese (supra). In this case weight was given to Finance Minister's speech at the time of introduction of a Bill by the Supreme Court, where even violence to the plain meaning of the language of statute was found permissible with reference to the declared objective of the provision on the basis of the Finance Minister's assurance that the deeming provisions under section 52(2) (now deleted by the Finance Act, 1987 w.e.f. 1-4-1988) may not be invoked in the case of bona fide transactions. It was found to be clearly in the nature of contemporanea expositio furnishing legitimate aid to construction. Such a view was sought to be supported by the rule admitted in Crawford on Statutory Construction described as "practical construction", although non controlling, is nevertheless entitled to considerable weight and is highly persuasive.
16. The AR further submits that the provisions of section 2(47)(v) of the Income Tax Act do not apply to the case of the assessee nor is it the intention of the legislature that they be so intended. Therefore, he prayed that the determination of capital gains in his case be quashed. Without prejudice to the above, regarding computation of capital gains, the AR submitted that the assessing officer acted arbitrarily in taking the sale price.
17. The AR submitted that whatever the sale price may be, a standard measure of profit is not a criteria to determine cost. On this count both the assessing officer as well as the learned first appellate authority erred on law and on facts. It is not necessary that every business venture should result in profit. What the assessing officer and the learned CIT (Appeals) did was to estimate income from an asset that did not exist and this is contrary to the principles of real income and against the law laid down by various judicial pronouncements.
18. The learned AR further submitted that on this count alone the assessment order deserves to be quashed. The assessing officer, while not taking the real cost (that did not exist) on the date of the agreement applied the imaginary cost to the built up area as well as to the parking area uniformly in arriving at the full value of consideration. This act of the assessing officer is arbitrary and against principles of accounting and costing as well as determination of real income taxable under the Income Tax Act. The AR submitted that, had the development agreement not been cancelled, there is no denial that transfer of his land has taken place and that he would have gained from it. The issue is how much is the real gain that is to be taxed and what is the criteria in arriving at the real capital gain, whether short tern or long term, that is to be taxed. The issue is how to determine this amount and what is the scientific and evidentially based way of determining it.
19. The AR submitted that the assessment is based on imaginary income, arising out of wild estimates, not stemming up from facts and therefore deserves to be quashed. The AR submitted that, on the basis of the above submissions and further submissions that may be permitted by the Tribunal to be made in the course of the appellate proceedings, the assessment of capital gains in his case for the assessment year 2005-06 be held to be untenable and contrary to the provisions of law and that the same may be directed to be deleted otherwise it amounts to double taxation as the assessee has offered the capital gain in subsequent assessment year.
20. The DR submitted that the Assessing Officer was justified in bringing to tax the transaction relating to the development agreement in view of the provision of sec. 2(47) of the I.T. Act. He relied on the decision of ITAT Pune Bench in the case of Taher Alimohammed Poonawala v. Addl. CIT[2009] 124 TTJ (Pune) 387 wherein the Tribunal observed as under:
"Where owners (assessees) had entered into an agreement for development of property and certain rights were assigned to developer who in turn had made substantial payment and, consequently, entered upon property and constructed flats, fact that legal ownership continued with owners to be transferred to developer at a future distant date really would not affect applicability of section 2(47)(v) and capital gain would arise in year in which agreement for development of property was entered into .... "
21. The learned DR relied on the decision in the case of Dr. Maya Shenoy (supra) wherein the Hon'ble ITAT Hyderabad observed as under:
"Development agreement under which developer was to hand over 45 per cent of constructed area as consideration to assessee could not merely amount to granting of licence to builder to carry on development activities but would be a case of transfer under section 2( 47)."
The ITAT after analysing the issue further held that
"In the instant case, on facts, the assessee had, in fact, exchanged her present property for consideration in kind which was in the nature of 4-1/2 flats to be given to her by the developer. Thus, it was a case of exchange as understood in clause (i) of section 2(47). There was no force in the argument that the handing over of the possession was not in pursuance of part performance of the contract. Possession of the land being one of the interests in property had been transferred to the developer who also would be enjoying the usufruct of the land. If the shield of section 53A was available to the developer, it obviously meant that handing over of the possession was pursuant to the transfer contemplated under the Transfer of Property Act and hence under clause (v) of section 2(47}. In the present case, this was not a sale transaction as money was not the consideration but some other valuable consideration was passing to the assessee in the form of 4-1/2 flats. Therefore, the transfer in the present case was for consideration and it was immaterial that the consideration may be received in future. Therefore, the development agreement in the present case had the effect of transfer as contemplated in section 2(47). (Head Note)"
22. The learned DR submitted that the case of the assessee is identical to that of Dr. Maya Shenoy (cited supra). Accordingly, the assessee was liable for capital gains in respect of the Development Agreement by virtue of which the assessee was liable to get 50% of the constructed area.
23. We have heard both the parties and perused the material available on record with reference to the contentions of the assessee with regard non-chargeability of capital gains in respect of the land. We have also gone through the various case-law cited by the parties and considered the additional evidence filed by the assessee. According to AR which was not 'transferred' but only given for development. We may refer to the provisions of S. 2(47)(v) which reads as follows:-
| "2 and (47)** | ** | ** |
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act, 1882 (4 of 1882)"
24. The importance of the word "transfer" is due to the reason that under the charging section, viz. S. 45, and the capital gain is taxable on "transfer of a capital asset". Precisely, this section prescribes that "any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place".
25. Thus the fundamental features which determine the taxability of capital gain, are that the gain ought to be from the transfer of a capital asset. This section has a large scope of its operation due to the presence of deeming provision which says that the gain shall be the deemed income of that previous year in which the transfer took place. This phrase can be interpreted in the manner that the total profits may actually be received in any other year, but for the purposes of S. 45, the gain shall be the deemed income of the year of transfer of the capital asset. It shall not be out of context, at this juncture, to mention an observation of the Hon'ble Authority of Advance Rulings in the case of Jasbir Singh Sarkaria, In re [2007] 164 Taxmann 108 (AAR - New Delhi), that the expression used in sec. 45 is "arising", which cannot be equated with the expression "received" or even with the expression "accrued" as being used in the statute. The point which deserves notice is that the amount or the consideration settled may not be fully received or may not technically accrue but if it arises from the agreement in question, then the deeming provisions shall come into operation. Another point is also equally noticeable that by the presence of the deeming provision, the income on account of arousal of the capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place. Due to the presence of this statutory fiction, the actual year in which the entire sale consideration is received, is beside the point but what needs to be judged is the point of time at which the transfer took place either by handing over of the possession or by allowing the entry into the premises or by making the constructive presence of the vendee nevertheless duly supported by a legal document.
26. But the issue do not get settled only by the interpretation of s. 45 and s. 2(47)(v) because the definition of "transfer" not merely prescribes allowing of possession but to be retained in part performance of a contract of the nature referred in s. 53A of the Transfer of Property Act. Therefore, it is further requisite to deal with the relevant section contained in Transfer of Property Act. Transfer of Property Act contains S. 53A under the heading "Part performance" and, for deciding the case in hand, it is necessary to quote the impugned section verbatim as follows:
"Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,
And the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,
And the transferee has performed or is willing to perform his part of the contract,
Then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transfer or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
Provided that nothing in this section shall effect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."
27. The doctrine of "part performance" is undoubtedly based upon the doctrine of equity. If one party has performed his part of duty then equity demands that the other party shall also perform his part of the obligation. If one party stood by his words then it is expected from the other party to also stand by his promise. Naturally an inequitable conduct of any person has no sanction in the eye of law.
28. In the light of the ingredients of this section, which has been argued from both the sides, now we proceed to examine the factual matrix of the case in hand, herein below:
| (a) | Starting words of s. 53A are "where any person contracts" which means just the existence of a contract. The assessee is the "person" who has entered into a contract with the developer vide agreement dated 12.4.2006. | |
| (b) | This sections says "to transfer" means the said contract is in respect of a transfer and not for any other purpose. The term "transfer" is to be read along with the s. 45 and s. 2(47)(v) of IT Act. It is pertinent to clarify that one must not mistake to identify the issue of capital gain with the term "transfer" as defined in s. 54 of Transfer of Property act. At the cost of elaboration, we may like to add that in the past there was a long line of pronouncements; while deciding income tax cases, that unless and until a sale deed is executed and that too it is registered, transfer cannot be said to have been effected. The consequence of said catena of decisions was that no capital gain tax was directed to be levied so long as the "transfer" has no taken place as per the generally accepted connotation of the term under Transfer of Property Act. The resultant position was that the levy of capital gain tax thus resulted in major amendments in the income-tax statute. The main objective of those amendments was to enact that for the purposes of capital gains, the transaction involving transfer of the nature referred are not required to be registered under Registration Act. Such arrangement does not include transfer of certain rights vesting to a purchaser; however such "transfer" does confer certain privileges of constructive ownership with connected bundle of rights. Indeed it is a departure from the commonly understood meaning of the definition "transfer" while interpreting this term for tax purpose. On the facts of this case, the developer has got bundle of rights and thereupon entered into the property. Thereafter, we have to see what has happened and what steps the transferee has taken to discharge the obligation on his part. If transferee has taken any steps to construct the flats, undisputedly then, under the provision of Income Tax Act a "transfer" has definitely taken place. | |
| (c) | The existence of the "consideration" is the essence of the contract. In this case the amount of consideration has to be paid to the assessee in the form of cash as well as in kind i.e., the flats to be constructed by the developers to be handed over to the owners. | |
| (d) | Next is the important phrase i.e., "terms necessary to constitute the transfer can be ascertained with reasonable certainty". According to us, in this case, the terms and conditions of the contract were unambiguous and clearly spoke about the rights and duties with certainty of both the signing parties. We are concerned mainly with two certainties; one is passing of substantial consideration and second is passing over of possession. As far as the payment of consideration is concerned, we have already noticed that it is in the form of both cash as well as kind and payment made to the assessee has been brought on record by the lower authorities and the same was examined and considered by the CIT(A). There was a payment of Rs. 50 lakhs by cheque on 19.7.2004 itself. Further, the balance of Rs. 150 lakhs was to be paid by 3 equal instalments. | |
| (e) | The other factor which governs the happening of transfer is the handing over of possession. This section says "and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession continues in possession in part performance of the contract and has done some act in furtherance of the contract". Retention of possession is one kind of the facet of part performance of contract. The agreement in question can be said to be a distinct transaction that has given rise to the event of allowing the contractor to enter into the property. What is contemplated by s. 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance. It is at that point of time that the deemed transfer takes place. According to us the possession as contemplated in cl. (v) need not necessarily be sole and exclusive possession, so long as the transferee is enabled to exercise general control over the property and to make use of it for the intended purpose. The mere fact that the assessee owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of the agreement, did not restrict the rights of the developer or did not introduce any incompatibility. In a situation like this when there is a concurrent possession of both the parties, even then cl. (v) has its full role to play. There is no warrant to postpone the operation of cl. (v) to that point of time when the concurrent possession would become exclusive possession of the developer. Any other interpretation i.e., possession means exclusive possession, shall defeat the purpose of amendment. The possibility of staggering of payment linked with possession is ruled out by this amendment so that the taxability of gain may not be shifted to an uncertain distant date. We have no hesitation in saying that even if some part of consideration remains to be paid, the transaction shall not affect the liability of capital gains tax so as to postpone the same indefinitely. What is meant in clause (v) is the "transfer" which involves allowing the possession so as to allow developer to undertake development work on the site. It is a general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. To our understanding of the language of the Act, it is enough if the transferee has, by virtue of the impugned transaction, has a right to enter upon and exercise the act of possession effectively, then such an act amounts to legal possession over the property. | |
| (f) | The last noticeable ingredient is, "the transferee has performed or is willing to perform his part of the contract". To ascertain the existence of willingness on the part of the transferee one must not put stop at one event but willingness is to be judged by the series of actions of the transferee. The transferees survey the land and to attract purchases put up hoardings plus sales office and carry out site development work. Landscaping, sales promotion, execution of construction and completion of project are all incidental to demonstrate the willingness of the transferee. On one hand, the JDA grants bundle of possessor rights to the developer simultaneously and on the other hand transferee's gesture of payment of consideration coupled with development work can be said to be a positive step towards willingness to fulfil the commitment. Facts of this case thus suggest that the developer had never intended to walk-out of the project. However, whether the developer has performed its part of the contract by taking steps to construct the flats or not has been verified by the lower authorities and the possession was with developer as per delivery note dated 7.3.2005. | |
| (g) | From the Development Agreement, it is more than clear that it was an agreement for construction of residential/commercial flats on the property owned by the assessee. In lieu of the right given to the Developer there under, the assessee was to receive 50% of the constructed area of all the floors. Further, even the vacant and peaceful possession of the property had been delivered to the developer on 7.3.2005, as evidenced by the "Delivery Note" of the same date. Under the circumstances, there was indeed an exchange of property which amounted to a transfer within the meaning of sec. 2(47)(v) of the Act and the gain resulting from such transfer was indeed taxable in the year in which the Development Agreement giving vacant and peaceful possession of the property to the Developer was entered into by the assessee, as held by the Hon'ble Bombay High Court in the case of Chaturbuj Dwarakadas Kapadia (supra) and in the several decisions of the Jurisdictional ITAT, Hyderabad, including that in the case of Dr. Maya Shenoy (supra). Since the Development Agreement in the assessee's case has been executed on 2.8.2004 and the vacant and peaceful possession also was given in 7.3.2005 itself, such gains were indeed to be taxed in the F.Y. 2004-05, relevant to the A.Y. 2005-06. | |
| (h) | As regards the contention of the assessee's representative that the said decisions are not applicable to the assessee's case, it is clear that no reasons for such view could be ever furnished by him. Similarly, there is no merit in the contention that the Development Agreement could not have come into force unless and until the builder deposited Rs. 2 crores. As discussed in the assessment order, the assessee had indeed been paid Rs. 50 lakhs by cheques dated 19.7.2004 itself. Further, the assessee was to receive 3 instalments of Rs 50 lakhs each at different stages. Under the circumstances, it cannot be disputed that there was a promise to pay which has not been shown as having remained unfulfilled. It is an established judicial proposition that the consideration may be futuristic also, as held by the Supreme Court in the case reported in Jugal Kishore v. Raw Cotton Co. AIR 1955 S.C. 376. Accordingly, there is no merit in such contention of the representative of the assessee. As regards the argument that the agreement under reference had been executed only for the purpose of getting permissions from various department for construction, the very terms of the agreement belie any such claim as the development agreement gives absolute rights to the builders, including possession, duly specified the consideration to be received by the assessee on such exchange. As regards the case laws cited by the AR, evidently those stand on a set of different facts and hence cannot be considered in the facts of the present case. |
29. To sum up the owners have entered into an agreement for development of the property and certain rights were assigned to the developer who in turn had made the substantial payment and consequently entered into the property and thereafter the transferee has taken steps in relation to construction of the building, then it is to be considered as transfer u/s. 2(47)(v) of the I.T. Act. The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of s. 2(47)(v) as per the reasons assigned hereinabove. The transferee was undisputedly willing to perform its part of the contract, in this circumstance we have to hold that there is transfer u/s. 2(47)(v) of the Act. Thus, the possession and control of the property is already vested with the transferee and the impugned development agreement has not been duly cancelled and it is still in operation, it has to be decided that there is a transfer u/s. 2(47)(v) of the Act. We have to see the real intention of the parties. As per the well known cannon of construction of document, the intention generally prevails over the word used and that such a construction placed on the word in a deed as is most agreeable to the intention of the parties. There are grounds appearing from the face of the instrument affording proof of the real intention of the parties, then that intention would prevail against the obvious and ordinary meaning of the words used. Entering into the property and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of S. 45 of the Act on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein is to be seen.
30. Accordingly, we decide the above issue relating to transfer of property u/s. 2(47)(v) of the IT Act in favour of the Department. We also hold that subsection (47) of s. 2 was amended by the Finance Act, 1987 w.e.f. 1st April, 1988 by inserting new sub-cls. (v) and (vi) thereunder. These two new sub-clauses provide that 'transfer' includes (i) any transaction which allows possession to be retained in part performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act; and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Therefore, under these two sub-clauses, the capital gain would be taxable in the year in which such transactions are entered into even if the transfer of the immovable property is not effective or complete under the general law. The assessee entered into an agreement with the builder/developer for development of the impugned land and construction of flats thereon. Also, the assessee signed a delivery note dated 7.3.2005 in favour of the builder/developer and gave possession of the property to the builder/developer. Further, the assessee acted on the impugned agreement by accepting from the builder/developer payments by cheques on different dates in the financial year 2004-05. In view of the facts and circumstances discussed above, all the conditions of sub-cl. (v) of s. 2(47) are satisfied in this case and therefore, it has to be inferred that a 'transfer' did take place within the meaning of s. 2(47)(v). The argument that the deeds in respect of the sale of flats were not registered/executed is not a relevant consideration so far as provisions of sub-cl. (v) of s. 2(47) are concerned. The completion of 'transfer' of an immovable property as per the general law is not a requirement for the applicability of the provisions of the sub cl. (v) of s. 2(47). Thus, this ground is dismissed.
31. In the result, assessee's appeal is dismissed.
Regards
Prarthana Jalan
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