Land given for development is ‘transfer’ – ITAT rejects ‘Not transferred but only given for development’ plea

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 open 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.

IN THE ITAT HYDERABAD BENCH ‘B’
Krishna Kumar D. Shah (HUF)
v.
Deputy Commissioner of Income-tax

ORDER
Chandra Poojari, Accountant Member – The above appeals by different assessees are directed against different orders of the CIT(A)-I, Hyderabad dated 26.7.2010 for assessment years 2006-07 and 2007-08. Since the issues arising out of these appeals are common in nature, they are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.

2. The common grounds raised in these appeals are as follows:
1.  The CIT(A) erred on points of fact and law.
2.  The CIT(A) erred in holding that there was a ‘transfer’ within the meaning of section 2(47)(v) of the Income-tax Act, in respect of the Development Agreement executed by the assessee.
3.  The CIT(A) ought to have considered the letter dated 14.10.2009 issued by Developer, confirming that they have not taken possession of the land, as enough evidence for non-applicability of section 2(47)(v) of the Income-tax Act.
4.  The CIT(A) erred in relying upon contingent clauses of the Development Agreement for the purpose of determining applicability of section 2(47)(v).
5.  Based on the facts and circumstances, the CIT(A) ought to have held that the assessee was not liable for long term capital gain in the year under appeal.
6.  Without prejudice to the above, the CIT(A) ought to have determined the market value based on records of the Registrar of Assurance.

3. The facts in all these appeals are common in nature. For brevity, we consider the facts relating to ITA No. 1164/Hyd/2010 in the case of Krishna Kumar D. (HUF). Brief facts of the issue are that the assessee had entered into a Development Agreement cum GPA with M/s. Splendid Aparna Projects Ltd., Hyderabad vide agreement dated 31.3.2006. As per the said agreement, a total land to the extent of 11 acres 34 guntas in Vattinagulapalli village, Rajendra Nagar Mandal was to be developed by M/s. Splendid Aparna Projects Ltd. As per the said agreement, the assessees being the land owners were entitled for 36% of the saleable constructed area. They had received a deposit of Rs. 1,18,50,000 from the developer. The Assessing Officer took the view that the Development Agreement attracted the provisions of section 2(47)(v) of the I.T. Act and capital gains tax was leviable on the said transaction. Accordingly, the Assessing Officer computed a long term capital gain of Rs. 14,32,38,499 which was apportioned equally among four assessees herein and added to the income returned by the assessees. Being aggrieved, the assessee’s went in appeal before the CIT(A) and the CIT(A) confirmed the orders of the Assessing Officer. Hence, the assessees are in appeal before us.

4. The learned AR submitted that the assessees entered into a Development Agreement with M/s. Splendid Aparana Projects Private Limited on 31.03.2006, for development of their land admeasuring 11.34 acres in survey No. 167, Vattinagulapally, R.R. District. As per the said agreement, the developers paid a sum of Rs. 1,18,50,000 as interest free refundable deposit as security for due performance of agreement. Further the said deposit was refundable at the time of handing over the agreed area of 36% built up area of the proposed township project to the land owners. The agricultural property is covered by G.O. No. 111 of 1996 issued by Government of Andhra Pradesh which restricts construction in view of land lying between two water bodies of Osman Sagar & Himayat Sagar. Para 11 & 14 of the said Development Agreement creates a restriction that the construction activity and execution of the project is subject to approval of drawings after obtaining amendment to GO 111 from Government of Andhra Pradesh. Copy of the Development Agreement is placed on record.

5. The AR submitted that the owners have not delivered possession of the land to developers but only agreed to deliver as clearly specified in para 1 page 4 of Development Agreement. In fact in view of failure of the Developer in obtaining amendment of 111 G.O. by Government of Andhra Pradesh, the assessee did not part with possession. The fact is further confirmed by the developer vide their letter dated 14.10.2009 enclosed. The presumptions of the Assessing Officer in the assessment order are irrelevant. It is beyond the jurisdiction of Assessing Officer to frame the assessment based on assumptions and his own personal views on the subject. Section 2(47) of the Act clearly specifies that possession of the property should be handed over in order to define “transfer” under the Act. This was also clearly decided in the case of Chaturbhuj Dwarkadas Kapadia v. CIT [2003] ITR 497 (Bom.). The case law relied by the Assessing Officer is not applicable since possession was given in the said case. Capital Gains is taxable strictly in accordance with section 2(47) of the IT Act and in the present case no possession was given. The entire assessment was framed on probability and assumptions not based on facts and contrary to the evidence filed.

6. The learned AR further submitted that with prejudice to the above, the assessing officer should have applied the provisions of section 50C of the Act, and not based on any comparable cases, for arriving at the market value of the property for determining capital gains. Therefore relying upon the sale deed of Suresh Kumar D Shah as a comparable case is not valid since, the Assessing Officer is duty bound to apply the market value of the property based on Sub Registrar Records. He relied on a order of the Tribunal in the case of Jitender Mohan Saxena v. Income tax Officer (23 SOT 0974) (Lucknow).

7. The learned DR submitted that regarding whether the GPA is acted upon in terms of possession of land that it is an irreversible document and the rights have been acquired absolutely without any time frame for execution of construction. Time is not the essence of this contract. Hence it is a perpetual contract which cannot be rescinded by either party. Hence effectively it is a contract for sale. This is evident from the development agreement. The period of six years starts after obtaining all necessary permissions and not from the date of agreement. Even as on date the agreement is in force (i.e. after a lapse of 5 years from the date of agreement). This is evident from the statement recorded from Sri P.R.G. Raju. At Clause 1 of page 5, it is clearly mentioned that the physical delivery and vacant possession of the property shall be given to the developer/second party. There is no option for the first party to retain the physical possession as per the agreement. Since the lands are situated in hilly and rocky area it cannot be contended that physical possession has not been given by the first party.

8. The learned DR submitted that a physical inspection has been carried out by an Inspector of Income Tax with the help of the village revenue assistants of Vattinagulapally Gram Panchayat and the surveyor concerned of the village and the lands were identified by them. It is found that there is no security arrangement nor boundary wall nor any separation from the other lands. It cannot be stated that the physical possession is with the landlords/owner of the lands only and not with the Developer/second party. Further, this contention of the assessee that physical possession is still with him is incorrect. Copy of the Inspector’s report is placed on record. The encumbrance certificate as on date has been obtained through online and the same mentioned that the claimants are M/s Splendid Aparna Projects (P.) Ltd.

9. We have heard both the parties and also perused the case-records in the light of the compilation filed and precedents cited by both the parties. We deal with the contentions of the assessee with regard non-chargeability of capital gains in respect of the land, 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. . . . . . .
(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 1982)”

10. The importance of the word “transfer” is due to the reason that under the charging section, viz. S.45, 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”.

11. 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, cited supra, 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 arisal 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.

12. 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.

13. 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.”

14. 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 eyes of law.

15. 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 31.03.2006.
(b)  This section 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 “transfer” took 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 thus clearly spoken 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 not been brought on record by the lower authorities and the same to be examined and considered by the CIT(A).
(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 open 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 action 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 power of attorney 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. Even otherwise, clause 14(iv) of the agreement states that if the project does not take up in six years due to delay in Government permission, relaxation of G.O. 111 etc., in such a case, the deposit made by the developer shall be adjusted towards the part of the land @ Rs. 72 lakh per acre and the proportionate land has to be registered by the land owner in favour of the developers. This clause further states that the balance land has to be handed over back by the developer to the owner. Thus this clause clearly indicates that the assessee has already given possession of the land to the developer, otherwise, the question of handing back the possession of the land by the developer to the landlord would not arise at all as mentioned in the joint development agreement. It is also noticed from the agreement that the vacant possession of the property has been handed over to the developer so that the developer can develop the project by obtaining the necessary permission. As per clause 25 of the agreement whereby the assessee authorised the developer and appointing them as lawful attorney to approach the appropriate authorities for the purpose of obtaining permissions, service connection etc. It is also noticed that the developer is also entitled to sell their share, enter into agreements, receive consideration and execute sale deed and other conveyance deed as enshrined in clause 25 of the agreement. Further, it is noticed from the latest encumbrance certificate as on date which has been obtained through online and therein it was mentioned that the claimants are M/s Splendid Aparna Projects (P.) Ltd. Hence, in the present case, the possession of the property already handed over to the developer and right and interest in the property has been transferred in favour of the developers.

16. Being so, in our opinion, the condition laid down in section 2(47)(v) has been complied with and the lower authorities justified in treating the transaction is liable for capital gain.

17. Accordingly, we confirm the order of the lower authorities in the case of all these assessees as the facts in all these appeals are common in nature.

18. The assessee raised one more ground that CIT(A) ought have determined the market value based on the records of the Registrar of Assurance. We have gone through the case records. This ground does not emanates from order of the CIT(A), being so, we decline to entertain the same.

19. In the result, all the appeals of the assessees are dismissed.