By TIOL News Service

NEW DELHI, OCT 05, 2017: THE issue before the Bench is - Whether when the transaction of real estate development under JDA, fell through for want of approval, such transaction still gives rise to capital gain tax. And the SC verdict is NO.

Facts of the case

The Assessee is an individual and a members of Cooperative Housing Society. The society consisted of 95 members and was the owner of 21.2 acres of land. A tripartite JDA for development of 21.2 acres of land was entered into between the owner i.e. society, Hash Builders Pvt. Ltd., Chandigarh (HASH) and Tata Housing Development Company Ltd. (THDC). Under the JDA, it was agreed that HASH and THDC viz., the developers, will undertake to develop 21.2 acres of land owned and registered in the name of the society. The agreed consideration was to be disbursed by THDC through HASH to each individual member of the society, and different amounts and flats were payable and allotable to members having different plot sizes. The developers were to make payments in four instalments. A sum of Rs.3.87 crores was paid on execution of the JDA. Rs.15.48 crores was to be paid against a registered sale deed for land of an equivalent value of 3.08 acres, earmarked on the demarcation plan annexed to the JDA, which was effected by a registered conveyance. The second instalment payment, being Rs. 23.22 crores, was for land of an equivalent value of 4.62 acres, also earmarked on the demarcation plan, which was effected by a registered deed of conveyance. The third instalment payment of Rs.31.9275 crores was to be made within six months from the date of execution of the agreement or within two months from the date of approval of plans/design and drawings and grant of the final license to develop, whichever was later. This was to be for land of an equivalent value of 6.36 acres, also earmarked on the demarcation plan. The balance payment of Rs.31.9275 crores was to be made within two months from the date of the last payment, towards full and final settlement of the entire payment of Rs. 106.425 crores, for which a registered sale deed for land of an equivalent value being 7.14 acres, also earmarked on the demarcation plan, was to be conveyed. The developers made payments only up to the 2nd instalment payment, and 7.7 acres of land was conveyed and thereafter the issue arises regarding the payment of capital gains tax for AYs 2007-2008 & 2008-2009. Due to pending proceedings, at various High Courts, the necessary permissions for development were not granted, as a result of which the JDA did not take off the ground.

The Assessee filed return for the AY in question declaring an income of Rs.30,08,606/-, which included capital gains of Rs.27,58,436/-. According to the Assessee, Rs.36 lakhs received in the subsequent AY was also offered for tax under the head “capital gains”. The AO held that since physical and vacant possession had been handed over under the JDA, the same would tantamount to “transfer” within the meaning of Sections 2(47)(ii), (v) and (vi) of Act and since the Assessee owning a 1000 square yards plot, the full value of consideration would be Rs.3.675 crores less cost of acquisition of Rs.12,81,724/- and accordingly, the LTCG was, therefore, stated to be Rs.3,54,68,276/-. On appeal, both the CIT(A) and the Tribunal upheld the order of the AO. However, the High Court, on appeal by the Assessee set aside the order of the AO and held that no possession had been given by the transferor to the transferee of the entire land in part performance of JDA so as to fall within the domain of Section 53A of Transfer of Property Act. .

After hearing both the parties, the Apex Court held that,

++ a reading of the JDA shows that, it is essentially an agreement to facilitate development of 21.2 acres so that the developers build at their own cost, after obtaining necessary approvals, flats of a given size, some of which were then to be handed over to the members of the society. Payments were also to be made by the developer to each member in addition to giving each member a certain number of flats depending upon the size of the member's plot that was handed over. What is important to bear in mind is that payments under the third instalment were only to be made after the grant of approvals and not otherwise, and that it is an admitted position that this was never done because no approvals could be obtained as the High Court ultimately interdicted the project. Also, the termination clause is of great significance because it shows that in the event of the JDA being terminated, whatever parcels of land have already been conveyed, will stand conveyed, but that no other conveyances of the remaining land would take place. The owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties;

++ it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act. The Assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the Assessees by the developers and therefore, the Assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains "arose" from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act.

(See 2017-TIOL-374-SC-IT)