By TIOL News Service

HYDERABAD, JAN 27, 2014: THE issue before the Bench is - Whether for the purpose of deemed transfer u/s 2(47)(v), all Development Agreements, in all situations, can be said to have satisfied the conditions of Section 53A of the Transfer of Property Act. And its answer is NO.

Facts of the case

AO received information from M/s. MAK Projects Pvt. Ltd, Hyderabad during the relevant FY that the assessee company transferred lands for development to M/s. MAK Projects Pvt. Ltd. The assessee was in receipt of notice u/s. 148 on 20/10/2011. In response to the said notice the assessee filed its return of income on 23/03/2011. During the previous year 2006-07 relevant to A.Y. 2007-08, the assessee company had entered into a Development Agreement cum-GPA with M/s. MAK Projects Pvt. Ltd for development of its agricultural property, into a Housing Project as company under incorporation. After examination of all the documents and details filed, the AO, completed the assessment by rejecting claim of the assessee company that the land is not a capital asset, being agricultural land, and therefore no capital gain is assessable. Having held that there is a charge within the meaning of section 45, the land being a capital asset, the AO proceeded to determine the full value of consideration ignoring the plea of the assessee company that the same is not ascertainable in the year under consideration. In other words, it was the prayer of the assessee company that the full value of consideration is only ascertainable in the year of receipt of constructed area for the purpose of computation of capital gain as the same can be worked out with certainty with reference to the cost of construction in the hands of the builder. The AO referred to the penal clause of the development agreegment and adopted the same as yardstick to estimate the full value of consideration for the purpose of computation of capital gain. On appeal, the CIT(A) confirmed the additions made in the assessment order.

On further appeal, the Tribunal held that,

++ the primary contention of the assessee's counsel is that the land given for development is an agricultural land in terms of section 2(14)(iii) of the Act as on the date of Development Agreement i.e., 15.12.2006 and the land was converted on 27.6.2006. But the facts brought on record clearly establish that the impugned land was converted from agricultural purposes to non-agricultural purposes by permission from competent authority on 27.12.2006 and the registration of supplementary Development Agreement cum GPA was executed on 4.1.2007 though it was presented for registration on 15.12.2006. It was an admitted fact that the registration was delayed awaiting approval from RDO for land conversion and only after the approval was received on 27.12.2006 the document was registered on 4.1.2007 and at the time of registration of Development Agreement, the land was no more agricultural land and it was non-agricultural land by valid conversion on approval from the competent authority. Being so, there is no merit in the argument of the assessee's counsel that the land is agricultural land. This ground is dismissed;

++ the next argument of the assessee's counsel is that there is no transfer on account of development agreement cum GPA in terms of section 2(47)(v) of the Act on entering agreement with MAK Projects Pvt. Ltd., as there is no quantification of consideration to be received by the assessee from M/s. MAK Properties Pvt. Ltd. The Revenue has placed heavy reliance on the judgment of Bombay High Court in the case of Chaturbhuj Dwarakadas Kapadia vs. CIT (260 ITR 491) (Bom), and it is based on this judgment that the impugned addition has been made by the AO, and sustained by the CIT(A);

++ their Lordships of Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. This provision, which covers one of the modes of deemed 'transfer', lays down that the scope of expression 'transfer' includes "any transaction involving the allowing of, the possession of any immovable property (as defined) 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';

++ their Lordships, took note of the fact that Section 2(47)(v) was introduced in the Act w.e.f. AY 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, Section 2(47)(v) came to be introduced in the Act;

++ it is important to bear in mind that Section 2(47)(v) refers to possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act and in the case before Bombay High Court, there was no dispute that the conditions of Section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions u/s 53A are satisfied, and when the assessee enters into a contract which is a Development Agreement, in the garb of agreement of sale, it is the date of this Development Agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all Development Agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v);

++ in order to invoke the principles laid down by the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia, it is, therefore, necessary to demonstrate that the conditions u/s 53A of the Transfer of Property Act are satisfied. A plain reading of the Section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in Section 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Bombay High Court;

++ 'willingness to perform' for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer u/s 2(47)(v) of the IT Act;

++ Coming to the facts of the present case, the assessee entered into Development Agreement with MAK Projects Pvt. Ltd. with reference to the land. At the time of entering into development agreement on 15th December, 2006, the land was in the promoter's name. The assessee was under incorporation. The same agreement was presented for registration on 29th December, 2006. Later the assessee-company was incorporated on 4th January, 2007. On the basis of this agreement, the AO taxed the capital gain on the transaction treating that there was a transfer in terms of section 2(47)(v) of the Act. Through this is a Development Agreement cum GPA the assessee has not received any monetary benefit. Being so, there is no receipt of any part of the sale consideration. Further, we cannot say that there is any sale in terms of section 2(47)(i), (ii) or (iii) of the Act so as to say that there is sale, relinquishment, extinguishment or compulsory acquisition;

++ to say that there is an exchange u/s. 2(47)(i) of the Act, both the properties which are subject matter of the exchange in the transaction are to be in existence at the time of entering into the transaction. It is to be noted that at the time of entering into development agreement as on 15.12.2006, only the property i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee has to get for handing over the assessee's property for development. The contention of the DR is that the consideration accrued to the assessee in the form of 16 villas comprising of developed land of 9602 sq. yards and built up area of 58606 sft which the assessee has to get on completion of the project. In our opinion, there was no progress in the development work in the AY under consideration as the project is only in conception stage and it is not appropriate to tax the assessee on imaginary reasons. Admittedly, there is no progress in the development of the project;

++ even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the previous year relevant to AY under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 15.12.2006 but no consideration was passed between the parties. As such, the assessee has received no consideration. Admittedly, there is no progress in the Development Agreement in the AY under consideration.;

++ it is submitted that the Director of Town and Country Planning approved the plan submitted by the assessee company only on 06.03.2007. The assessee submitted that there is no development activity until the end of the previous year relevant to the AY 2007-08. Commencement of building construction had not been initiated as the building approval was granted only on 06.03.2007. Therefore, no income be said to have accrued, as laid down in section 48, in A.Y. 2007-08. More so, building/villas has to be constructed as per the approved plan within 36 months from the date of agreement. The construction was not taken place in the AY under consideration. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties which was granted only in the last month of the year i.e., on 6.3.2007. Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. Since there was no amount of investment by the developer in the construction activity during the previous year relevant to the AY in this project, it would amount to non-incurring of required cost of acquisition by the developer. Hence no consideration can be attributed to the AY 07-08. Nothing is brought on record by authorities to show that there was development activity in the project during the AY under consideration and cost of construction was incurred by the builder/developer. Hence, it is to be inferred that there was no amount of investment by the developer in the construction activity during the AY in this project and it would amount to non incurring of required cost of acquisition by the developer. In the AY under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this AY had not shown its readiness or having made preparation for the compliance of the agreement. The developer has not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredient that make a person eligible and entitled to make the construction. The act and conduct of the developer in this AY has to be seen to decide the taxability on transfer;

++ Being so, it was clear that in the year under consideration, there was no transfer of not only the villas as superstructure but also the proportionate land by the assessee under the joint Development Agreement. But the fact remains that the transferee has not performed its obligations under the agreement, in the AY under consideration. Even otherwise, the assessing authority has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction work at any time during the AY under consideration or any development has taken place in the project in the relevant period. He went on to proceed on the sole issue with regard to handing over the possession of the property to the developer in part performance of the Development Agreement-cum-General power of Attorney. In our opinion, the handing over of the possession of the property is only one of the condition u/s 53A of the Transfer of Property Act, but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was 'willing to perform' its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this AY, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee's obligations which can give rise to the situation envisaged in Section 53A of the Transfer of Property Act;

++ on these facts, it is not possible to hold that the transferee was willing to perform its obligations in the FY in which the capital gains are sought to be taxed by the Revenue. The Tribunal held that this condition laid down u/s 53A of the Transfer of Property Act was not satisfied in this AY. Once we come to the conclusion that the transferee's 'willing to perform' the contract is ascertainable in the AY, as stipulated by and within the meanings assigned to this expression u/s 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present AY, it is only a corollary to this finding that the Development Agreement dt. 15.12.2006, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case. The judgement in the case of Chaturbhuj Dwarakadas Kapadia vs. CIT undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as 'willingness to perform' has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. The Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue's case is thus devoid of legally sustainable basis;

++ that is clearly an erroneous assumption, as the provisions of deemed transfer u/s 2(47)(v) could not have been invoked on the facts of the present case and for the AY in dispute. In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the Revenue authorities to show that there was actual construction taken place at the impugned property in the previous year relevant to the AY under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal u/s 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation. Considering the facts and circumstances of the present case as discussed above, the assessee deserves to succeed on the reason that the capital gains could not have been taxed in the in this AY in appeal;

++ the other grounds raised by the assessee in this appeal had become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessee in the AY under consideration. However, the AO is at liberty to examine the taxability of capital gain in any other AY when substantial consideration has passed to the assessee with reference to the Development Agreement;

++ even otherwise, we cannot say that the assessee carried on the adventure in the nature of trade so as to bring the income under the head 'income from business'. This is so, because the assessee has not sold any undivided share in the landed property to the developer in the year under consideration. The assessee remains to be the owner of the said property and the land was put for development for the mutual benefit. There is a merit in the argument of the assessee's counsel. Even if we consider the transaction as business transaction, then it would be taxed only when the undivided share in the land is transferred.

(See 2014-TIOL-51-ITAT-HYD)