Surjeet Kaur Dalam Vs CIT (Punjab & Haryana High Court)
Unreceived JDA Consideration and Unconstructed Flat Cannot Be Taxed as Accrued Capital Gains—C.S. Atwal Ruling Applied to Another Member of Same Society
Summary: The assessee was the widow of Late Shri Natha Singh Salam, a member of the Punjabi Cooperative House Building Society Ltd. The Society owned approximately 21.2 acres of land in Village Kansal, and the assessee’s husband held rights corresponding to a plot measuring 500 square yards.
On 25-02-2007, the Society entered into a tripartite Joint Development Agreement with Hash Builders Pvt. Ltd. and Tata Housing Development Company Ltd. Under the JDA, each member was entitled to monetary consideration and constructed area based on the size of the plot held by that member.
In respect of the assessee’s 500-square-yard entitlement, she was to receive:
- Monetary consideration of ₹82,50,000; and
- One residential flat measuring 2,250 square feet.
However, the JDA was only partly implemented. Payments were made only up to the second instalment, and conveyance was executed in favour of Tata Housing only in respect of 7.7 acres. Disputes thereafter arose between the Society, its members and the developers.
Against the total promised monetary consideration of ₹82.50 lakh, the assessee actually received only ₹33 lakh—₹15 lakh during the relevant previous year and ₹18 lakh during the succeeding year. The promised flat was also not delivered.
Entire Contractual Consideration Taxed Despite Failure of JDA
The assessee’s husband had died on 16-05-2005, following which she became a member of the Society as his nominee. She claimed to be a super senior citizen, illiterate and unaware of income-tax requirements. She did not have a PAN and did not file a return concerning the alleged capital gains.
The Assessing Officer reopened the assessment under sections 147 and 148. He held that the execution of the JDA itself constituted a “transfer” under section 2(47), particularly under clauses (ii), (v) and (vi), read with section 53A of the Transfer of Property Act.
According to the AO, possession and development rights had been handed over to Tata Housing during the previous year relevant to AY 2007-08. Therefore, the entire consideration promised under the JDA became taxable in that year, irrespective of whether it was actually received.
The AO adopted the total consideration as follows:
- Monetary consideration: ₹82,50,000
- Value of the proposed 2,250-square-foot flat at ₹4,500 per square foot: ₹1,01,25,000
- Total consideration: ₹1,83,75,000
After allowing cost of acquisition of ₹6,32,953, the AO assessed long-term capital gains of ₹1,77,42,047.
The CIT(A) and the Tribunal affirmed the assessment. The assessee thereafter approached the Punjab and Haryana High Court.
Issue Already Settled in C.S. Atwal
Before the High Court, both parties accepted that the controversy was no longer open for fresh consideration. The same JDA dated 25-02-2007 had already been examined by the Punjab and Haryana High Court in C.S. Atwal v. CIT, Ludhiana, ITA No. 200 of 2013, decided on 22-07-2015.
C.S. Atwal involved members of the very same cooperative housing society and the same development arrangement. That judgment examined:
- Whether execution of the JDA amounted to a transfer under section 2(47);
- The applicability of clauses (ii), (v) and (vi) of section 2(47);
- The conditions governing section 53A of the Transfer of Property Act;
- The nature of possession delivered to the developer;
- The effect of the JDA remaining substantially unperformed; and
- The taxability of consideration which was neither received nor accrued.
Since the assessee’s case arose from the identical JDA and involved the identical legal controversy, the High Court held that the findings in C.S. Atwal directly governed her case.
The appeal was accordingly disposed of in terms of the judgment in C.S. Atwal, without undertaking a separate examination of the same issues.
Effect of the Decision
The ruling effectively rejects the approach of taxing the entire consideration mentioned in an incompletely performed JDA merely because the agreement was executed.
Under the principle laid down in C.S. Atwal, the JDA did not result in a taxable transfer of the entire property under section 2(47)(v) merely on account of the limited possession granted for development. The transaction had to be examined with reference to the land actually conveyed and the consideration that had legally accrued or been received.
Consequently, amounts which were never paid and a flat which was never constructed or delivered could not be treated as accrued consideration for computing capital gains.
Author’s Comments
The decision is significant because the AO had taxed a capital gain of ₹1.77 crore even though the assessee received only ₹15 lakh during the relevant year, another ₹18 lakh in the subsequent year and never received the promised flat.
A development agreement may mention a substantial monetary and non-monetary consideration. However, contractual entitlement and taxable accrual are not always identical. Where the agreement is frustrated, abandoned or substantially unperformed, the Department cannot proceed on the fiction that every promised instalment and every proposed flat has been received.
The ruling must, however, be understood in its historical context. The JDA was executed in 2007, much before the introduction of section 45(5A). The case was therefore governed by section 2(47), section 53A of the Transfer of Property Act and the ordinary principles of accrual.
For qualifying JDAs entered into on or after 01-04-2017 by individuals or HUFs, section 45(5A) generally shifts the year of taxation to the year in which the completion certificate for the whole or part of the project is issued, subject to its statutory conditions. Therefore, the precise ratio of C.S. Atwal must be applied principally to pre-section 45(5A) arrangements or cases falling outside that provision.
The present judgment is short because it does not independently reconsider the legal questions. Its binding force flows from applying C.S. Atwal to another member of the same Society under the same JDA. The practical proposition remains important: capital gains cannot be computed on purely hypothetical consideration which neither accrued nor was received because the development arrangement itself failed.
Cases Discussed
- C.S. Atwal v. Commissioner of Income Tax, Ludhiana and another — ITA No. 200 of 2013, decided on 22.07.2015 — applied as directly governing the identical controversy arising from the same Joint Development Agreement.
FULL TEXT OF THE JUDGMENT/ORDER OF PUNJAB & HARYANA HIGH COURT
1. The present appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (for short, “the Act”) against the order dated 29.07.2013 passed under Section 254(1) of the Act by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as “the Tribunal”) in ITA No. 1156/chd/2011 for the assessment year 2007-08.
2. The facts leading to the filing of the present appeal, in brief, are that the appellant is an individual and widow of late Shri Natha Singh Salam, who was a member of Punjabi Cooperative House Building Society Limited (hereinafter referred to as “the Society”). The Society owned 21.2 acres of land in Village Kansal, in which the appellant’s husband had rights in respect of a 500 square yards plot. On 25.02.2007, the Society entered into a Tripartite Joint Development Agreements (JDA) with Hash Builders Private Limited, Chandigarh, and Tata Housing Development Company Limited, Mumbai, whereby the developers agreed to develop the land belonging to the Society in consideration of development rights. The consideration payable to the individual members was partly monetary and partly in the form of built-up flats, depending upon the size of their respective plots.
3. Pursuant to the aforesaid JDA, payments were made only up to the second instalment and an area of 7.7 acres of land was registered in favour of Tata Housing Development Company Limited, Mumbai. Disputes thereafter arose between the Society/members and the developers with regard to further payments under the JDA. The appellant, being entitled under the JDA in respect of a 500 square yards plot, was to receive monetary consideration of ₹82,50,000/- and one flat measuring 2250 square feet. She, however, actually received a sum of ₹33 lakhs, comprising ₹15 lakhs during the relevant previous year and ₹18 lakhs during the subsequent year.
4. The appellant’s husband died on 16.05.2005, whereafter she became a member of the Society as his nominee. The appellant claimed to be a super senior citizen and was not an existing income-tax assessee. She did not possess a Permanent Account Number and, being illiterate and unaware of the requirements of the Income Tax Act, did not file a return of income or pay tax in respect of the capital gains allegedly arising from the aforesaid transaction. The Assessing Officer thereafter issued notice to the appellant under Section 148 read with Section 147 of the Act. Vide order dated 29.02.2010 passed under Sections 144/143(3)/147 of the Act, the Assessing Officer held that execution of the JDA amounted to a “transfer” within the meaning of Section 2(47) of the Act. Relying upon Section 2(47)(v) read with Section 53A of the Transfer of Property Act, 1882, and referring to the grant of rights and handing over of possession in favour of Tata Housing Development Company Limited, the Assessing Officer held that the transfer had taken place during the previous year relevant to the assessment year 2007-08. The Assessing Officer also invoked clauses (ii) and (vi) of Section 2(47) of the Act. Consequently, the Assessing Officer brought the entire consideration to tax under the head “Capital Gains”, comprising ₹82,50,000/- towards monetary consideration and ₹1,01,25,000/- towards the fair market value of the 2250 square feet flat, calculated at the rate of ₹4,500/- per square foot. After allowing deduction towards cost of acquisition of ₹6,32,953/-, long-term capital gain of ₹1,77,42,047/- was assessed in the hands of the appellant.
5. Aggrieved by the aforesaid assessment order, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals), which came to be dismissed vide order dated 23.08.2011, thereby affirming the action of the Assessing Officer. The appellant thereafter challenged the aforesaid orders before the Tribunal, principally contending that execution of the JDA did not constitute a taxable transfer during the relevant assessment year and that consideration which had neither accrued nor been actually received could not be subjected to capital gains tax. The Tribunal, however, dismissed the appeal vide the impugned order. Hence, the present appeal.
6. Learned counsel for the parties are ad idem that the issue arising in the present appeal is no longer res integra and stands concluded by the judgment of this Court dated 22.07.2015 in ITA No. 200 of 2013, titled C.S. Atwal v. Commissioner of Income Tax, Ludhiana and another. The said judgment pertains to the very same Joint Development Agreements dated 25.02.2007 and examined, inter alia, the scope and legislative intent of Section 2(47)(ii), (v) and (vi) of the Income Tax Act, 1961, the requirements for attracting Section 53A of the Transfer of Property Act, 1882, the nature and effect of possession delivered pursuant to the JDA, and the question as to whether the transaction gave rise to taxable capital gains.
7. In C.S. Atwal (supra), upon consideration of the relevant statutory provisions and the material on record, this Court recorded its findings on the aforesaid aspects, including the legal effect of the JDA, the nature of possession delivered thereunder and the applicability of Section 2(47)(v) of the Income Tax Act, 1961, read with Section 53A of the Transfer of Property Act, 1882. Since the present appeal arises from the very same JDA and involves an identical controversy, the findings recorded therein directly govern the issue before this Court. Consequently, the controversy raised in the present appeal stands concluded by the aforesaid decision.
8. Since the facts and the issue involved in the present appeal are covered by the aforesaid judgment in C.S. Atwal (supra), no separate or independent consideration of the same issue is called for. The present appeal is, accordingly, disposed of in terms of the judgment dated 22.07.2015 passed by this Court in C.S. Atwal v. Commissioner of Income Tax, Ludhiana and another, ITA No. 200 of 2013.
9. Pending miscellaneous application(s), if any, shall also stand disposed of.
