S. 2(47)(v) Possession need not necessarily be sole & exclusive

ITAT HYDERABAD BENCH ‘B’

Assistant Commissioner of Income-tax

vs.

A. Ram Reddy

IT APPEAL NOs. 407, 408, 409, 483 and 484 (HYD.) OF 2011

[ASSESSMENT YEARs 2002-03 and 2008-09]

JULY 2, 2012

ORDER

Chandra Poojari, Accountant Member

ITA No. 483/Hyd/2011 and 484/Hyd/2011 are appeals by different assessees and ITA Nos. 407 to 409/Hyd/2011 are Departmental appeals. As certain issues involved in these appeals are common in nature, all these appeals are clubbed, heard and disposed of together by this common order for the sake of convenience.

2. Firstly we will take up assessee’s appeals. The issue is common in nature. The common grounds are follows:

 1.  The appellant submits that the First Appellate Authority erred both on law and on fact in deciding the appeal.

 2.  The appellant submits that the transaction entered into by the appellant namely the Development Agreement with the builder is not a transaction of transfer within the meaning of Sec. 2(47) of the Income Tax Act and as such no capital gains arise.

 3.  The appellant submits that the First Appellate Authority having recognized that the Development Agreement has been cancelled should have held that no capital gains arise to the appellant.

 4.  The appellant submits that the First Appellate Authority erred in considering the totality of the facts and circumstances of the case of the appellant.

 5.  The appellant submits that the Assessing Officer and the learned First Appellate Authority erred in holding a uniform rate for both the built-up area as well as the parking area.

 6.  On the basis of the above grounds and any grounds that may be permitted to be raised in the course of the appellate proceedings, the-appellant prays that the addition on account of capital gains assessed on the transaction with the developer be deleted.

3. For brevity we consider the facts in the case of Sri B. Jogi Reddy in ITA No. 483/Hyd/2011. Facts of the case, in brief, are that the assessee is an individual deriving income under the head “Other Sources” was originally an assessee on record with the Income Tax Officer, Ward 4(3), Hyderabad with PAN No. AGQPB 2894 M. The assessee is the owner of land admeasuring Ac 2-01 Guntas, situated at Mahadevpur Village, Alwal Municipality, Malkajgiri Mandal, Ranga Reddy District. The assessee entered into a Development Agreement in respect of the said land with M/s. Janapriya Engineers Syndicate Limited, a company engaged in the business of construction of residential apartments. The Development agreement was entered into on 04-03-2008 and is registered with the Sub-Registrar, Vallab Nagar vide Doc. No. 913/08.

3.1 Consequent to search operations in the case of the said Janapriya Engineers Syndicate Limited, the case of the assessee was notified to Central Circle -6, Hyderabad and a notice under section 148 for the assessment year 2008-09 was issued to the assessee by the Deputy Commissioner of Income Tax, Central Circle-6, Hyderabad. In response to the said notice, the assessee filed his return of income admitting an amount of Rs. 2,04,000/-as income under the head Other Sources. The assessing officer vide his order under section 143(3) r.w.s. 147 dated December 31, 2009 determined Long Term Capital gains on the transaction of Development Agreement and arrived at an assessed income of Rs. 9,00,09,850/- of which the capital gain part constitutes Rs. 8,98,05,850/-. (Balance Rs. 2,04,000/- admitted by the assessee).

3.2 The Capital Gain of Rs. 8,98,05,850/- was arrived at by the assessing officer as under:

3.3 As per the development agreement the assessee was entitled to 71,478/- S. Ft of total area that includes Car Parking Area of 14,545 S. Ft. The assessing officer valued the consideration for the entire area (including car parking area) as Rs. 1276/- per S. Ft. This amount of Rs. 1276/- has been arrived at by the Assessing officer by deducting 12% from the sale price of Rs. 1450/- per S. Ft. which has been taken by the Assessing officer, not from the books of the builder, but from a statement recorded from the Managing Director of the said Janapriya Engineers Syndicate Limited.

3.4 The assessee raised an objection before the First Appellate Authority that the amounts relied on by the assessing officer do not represent correct figures as they are based on a statement recorded by the DDIT from the Managing Director of the company and that the actual numbers should be taken from the books of the builder. The first appellate authority continued the sale rate taken from the said statement, but however increased the rate of profit (to arrive at the cost to the builder) from 12% to 25%. The assessee raised an objection that the same rate cannot be applied both to built up area and parking. This matter was not considered by the first appellate authority.

3.5 One of the clauses of the Development Agreement stipulated that the builder agreed to complete the project within 36 months from the date of agreement and in the event that does not happen the parties have mutually agreed to discuss further terms and reduce the same to writing by executing a Memorandum of Understanding. The development agreement having been entered into on 04-03-2008 the duration of 36 months closes on 04-03-2011. However, the project did not progress as anticipated. The assessment of the assessee was completed in the month of December 2009 and the first appeal was filed in the month of January 2010.

3.6 The assessee in pursuance of the said clause of the agreement executed an agreement with the builder on 05-04-2010 cancelling the original development agreement and getting into fresh terms and conditions in respect of the transaction relating to the said land. A copy of the said agreement is submitted at pages 10 to 16 of the material paper book. This being a development as per the agreed terms, that has taken place subsequent to the completion of the assessment the assessee has brought the fresh agreement dated 05-04-2010 to the record of the Hon’ble Commissioner of Income Tax (Appeals)-I, Hyderabad. The assessee prayed before the first appellate authority that the transaction of development agreement entered into by the assessee does not result in “Transfer” within the meaning of the term under section 2(47) of the Income Tax Act, 1961 so as to attract Capital Gains tax.

3.7 The assessee having brought the event occurring subsequent to the completion of the assessment viz., the cancellation of the development agreement and entering into fresh agreement between the parties, on record before the Hon’ble First Appellate Authority prayed that the original agreement having been cancelled, an assessment based on such cancelled agreement is invalid and not tenable in law. The first appellate authority, while taking the cancellation and fresh agreement on record, upheld the assessment subject to modification in the quantum of computation of gains. The first appellate did not consider the fresh agreement except recording that the matter has been raised by the assessee. Aggrieved by such assessment and the decision of the first appellate authority the assessee is in appeal before the Tribunal.

4. On cancellation of the Development Agreement, the learned AR submitted that, the first appellate authority having taken on record the fact that the development agreement has been cancelled, should have held that there occurred no transfer of the land and consequently no capital gains. The AR submitted that when an agreement is cancelled the rights and interests of the land lords have been restored as if the transaction never took place and as such there occurred no transfer as envisaged by the assessing officer.

4.1 The AR drew the attention of the Bench to pages 10 to 16 of the Material Paper Book which contains the copy of the agreement dated 05-04-2010. He submitted that Clause 1 of the agreement categorically states that the development agreement entered into on 04-03-2008 stands cancelled. The AR submitted that in these circumstances the learned Commissioner erred in law and on facts of the case in upholding the assessment. The first appellate authority failed to appreciate the facts of the case and take cognizance of the effect of cancellation of the development agreement. He also drew our attention to the copy of letter dated 30-04-2012 issued by Sub-Registrar, Vallabhanagar in reply to his application dated 27-04-2012 under RTI Act stating that impugned property is noted in prohibitory list issued by the Income Tax Department. He submitted that the learned first appellate authority, except mentioning that the assessee has stated that the development has been cancelled did not take the same into consideration while deciding the case. In the judicial pronouncements relied on by the assessing officer as well as the first appellate authority the transactions have been completed. Whereas in the case of the assessee the transaction has been cancelled. In the event of cancellation the agreement and the terms and conditions thereof cease to exist as if the agreement never took place and this legal position should have been appreciated by the learned Commissioner (Appeals).

4.2 The AR submitted that since the development agreement has been cancelled what remains between the parties is the compensatory rights for the damages in respect of the said cancellation and the transfer stands cancelled and this is what exactly happened in the case of the assessee. He submitted that this can be very clearly observed from the agreement dated 05-04-2010 exhibited at pages 10 to 16 of the material paper book. Accordingly, the AR submitted that the assessment be cancelled and that no transfer has taken place and consequently no capital gain arises.

4.3 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. For this proposition, the AR relied on the following cases and also in other cases relied on by the assessing officer as well as the learned first appellate authority it has been held that the case of development agreement falls under the ambit of section 2(47)(v) of the Income Tax Act, 1961;

 a.  Chaturbhuj Dwarakadas Kapadia [[2003] 129 Taxmann 497 (Bom.)]

 b.  Jasbir Singh Sarkaria [[2007] 164 Taxmann 108 (AAR – New Delhi)]

 c.  Dr Maya Shenoy [[2009] 124 TTJ 692 (Hyd)]

4.4 According to him, the following judicial decisions and interpretation has not been brought to the notice of the Courts/Appellate Authorities in the course of the presentation/arguments. 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.

4.5 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]

4.6 The AR submitted that the following extract from the case of Jasbir Singh Sarkaria before the Authority for Advance Ruling shows the line of argument before the Hon’ble AAR.

 1.  Where the agreement for transfer of immovable property by itself does not provide for immediate transfer of possession, the date of entering into the agreement cannot be considered to be the date of transfer within the meaning of sub-clause (v) of section 2(47).

 2.  To attract sub-clause (v) of section 2(47), it is not necessary that the entire sale consideration up to the last instalment should be received by the owner.

 3.  In the instant case, having regard to the terms of two agreements and the irrevocable GPA executed pursuant to the agreement, the execution of GPA shall be regarded as the ‘transaction involving the allowing of the possession’ of land to be taken in part performance of the contract and, therefore, the transfer within the meaning of section 2(47)(v) must be deemed to have taken place on the date of execution of such GPA. The irrevocable GPA was executed on 8-5-2006, i.e., during the previous year, relevant to the assessment year 2007-08 and the capital gains must be held to have arisen during that year. Incidentally, it may be mentioned that during the said year, i.e., financial year 2006-07, a final licence was granted and the applicant/owners received nearly two-third of the consideration.

 4.  Once it is held that the transaction of the nature referred to in sub-clause (v) of section 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee, has by virtue of that transaction, a right to enter upon and exercise the acts of possession effectively. [Para 20]

4.7 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 AR placed reliance on the principle enunciated by the Apex Court in the case of KP Varghese v. ITO (131 ITR 597) (SC) which was not brought to the notice of the Tribunal. The Apex Court 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.

4.8 The learned AR submitted that this has been considered by the co-ordinate Bench of the Tribunal in the case of K Radhika and others [ITA Nos. 208, 209, 201 and 211 of 2011 ITAT ‘A’ Bench Hyderabad] vide its order dated 9th August, 2011. The concept of real income was not brought before the Bench in the said cases. The development agreement was entered into on the 04-03-2008 and the share of the assessee in the project (if completed) was about 71400 S.Ft including parking area. The assessing officer taxed the cost of construction of the said area as full value of consideration in the year 2007-08 relevant to the assessment year 2008-09. Thus in the opinion of the assessing officer the project is completed in 27 days and the builder takes his share of 73% and gives the assessee his share of 27% (amounting to 71 thousand odd square feet).

4.9 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. The AR further submitted that yet another judgement that has not been brought before the Tribunal is the case before the Calcutta High Court reported in Baisakhi Bhattacharjee v. Shayamal Bose & Ors. [2002 (4) CHN 115] wherein the Calcutta High Court has held that “Development agreement comes out of the scope of the ambit of section 53A of the Transfer of Property Act. Therefore, section 53A of the TP Act, has no manner of application to a development agreement.”

4.10 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 and the Authority for Advance Ruling 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.

4.11 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;]

4.12 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;]

4.13 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.”

4.14 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]

4.15 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 Varghese (KP) v. ITO [1981] 131 ITR 597 (SC). 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.

4.16 The AR submitted that this principle in Varghese (KP)’s case was reiterated in Kerala State Industrial Development Corporation v. CIT [2003] 259 ITR 51 (SC), where the computation of chargeable interest on the basis of interest actually received and not accrued interest, found support in the statement of the Finance Minister’s Budget Speech, so that the Supreme Court found that it could be relied upon to throw light on the object and purpose of particular provisions introduced in the Finance Bill. The AR thus submitted that the case of the assessee does not come within the ambit of provisions of section 53A of the Transfer of Property Act and consequently under the provisions of section 2(47)(v) of the Income Tax Act.

4.17 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.

4.18 Without prejudice to the above, regarding computation of capital gains, the AR submitted that the assessing officer acted arbitrarily in taking the sale price as Rs. 1450 purely based on a statement given by the Managing Director of the developer company in a statement before Dy. Director of Income-tax. The assessing officer himself having accepted that the cost to the builder is to be taken as the full value of consideration in respect of the transaction, the assessing officer should have taken the actual cost to the builder who is also an assessee on the records of the same assessing officer instead of relying on a statement made before the Dy. Director of Income-tax.

4.19 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.

4.20 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.

4.21 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 2008-09 be held to be untenable and contrary to the provisions of law and that the same may be directed to be deleted.

5. The learned DR submitted that an identical issue has been decided by the CIT(A)-I, Hyderabad in the case of B. Narasimha Reddy for the assessment year 2008-09 in ITA Nos. 0348/CC-6, HYD/CIT(A)-I/09-10 dated 7.1.2011. In that case also, the assessee has entered into a development agreement with Janapriya Engineers Syndicate Ltd. and the Assessing Officer had charged capital gains on the transaction relating to the development agreement. The Assessing Officer had relied on the same set of judicial decisions as in the case of the present assessee. While deciding the appeal in the case of B. Narasimha Reddy it was held 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. While doing so, the CIT(A) 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 …. “

6. The learned DR relied on the decision in the case of Dr. Maya Shenoy v. Asstt. CIT [2009] 124 TTJ (Hyd.) 692 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)”

7. The learned DR submitted that the case of the assessee is identical to that of B. Narasimha Reddy (ITA No. 0348/CC-6, HYD/CIT(A)-I/09-10 dated 07.01.2011. Accordingly, the assessee was liable for capital gains in respect of the development agreement b virtue of which the assessee was liable to get 27% of the constructed area.

8. 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, 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. …..

(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)”

9. 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”. (Emphasis supplied by italicized print)

10. 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 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.

11. 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.

12. 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.”

13. 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.

14. 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 “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. However, whether the developer has performed its part of the contract by taking steps to construct the flats or not has to be verified by the lower authorities. The lower authorities have also not verified the parties concerned regarding the development agreement. It is also required to verify the fact with regard to the possession the property in whose hand it is vested with and also required to verify the revenue records in whose name the property stands and who is paying the land revenue on the said property to the concerned authorities and also directed to verify the genuineness of the cancellation agreement, if any duly executed.

15. 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 if the transferee has taken any steps in relation to construction of the flats, 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. If the transferee was undisputedly willing to perform its part of the contract, then we have to hold that there is transfer u/s. 2(47)(v) of the Act. Thus, if 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. If 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 to be seen.

16. Accordingly, we set aside the above issue relating to transfer of property u/s. 2(47)(v) of the IT Act to the file of the CIT(A) to decide the same afresh in light of the above observations and after considering the ratio laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (supra) and also the order of the Tribunal in the case of Dr. Maya Shenoy v. ACIT (124 TTJ (Hyd.) 692). He is also directed to consider the order of the Tribunal Pune Bench in the case of Dyaneshwar N. Mulik v. ACIT, 98 TTJ 179 wherein held that Clause (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). 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 KPE for development of the impugned land and construction of flats thereon. Also, the assessee signed a general power of attorney in favour of the builder/developer on 20th June, 1996 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 1997-98 aggregating to Rs. 48,00,000 as admitted in his letter dt. 22nd Feb., 2001 addressed to the AO. In para 4(b) of the above mentioned letter, the assessee admitted that the valuation of the amenities/complexes constructed by the builder/developer in terms of the second agreement of 20th June, 1996 was Rs. 38,11,934 as on 7th Jan., 1999. 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). Further, the assessee’s plea that subsequently he filed suits which were pending, against the builder/developer with the prayer that the agreements with the builder/developer be declared as cancelled, is merely about suits which were pending and which represent a subsequent event and, therefore, it does not affect the above inference. – Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 180 CTR (Bom.) 107 : [2003] 260 ITR 491 (Bom.) relied on.

17. Thus, this ground is partly allowed for statistical purposes. It is needless to say that reasonable opportunity of hearing shall be given to the assessee. The other grounds raised by the assessee in these two appeals are relating to computation of capital gains. With regard to this, the assessee’s grievance is that the assessing officer considered the rate at Rs. 1,296/- per sq.ft. for both the built up area as well as the parking area. In our opinion, at this stage this issue does not require adjudication as the main issue gone back to CIT(A)to be decided afresh.

18. Now we will take up Revenue appeals in ITA Nos. 407 and 409/Hyd/2011 wherein the issues are common in nature. The common grounds as in ITA No. 407/Hyd/2011 are as under:

 a.  The CIT(A) erred on facts and in law in allowing deduction of 25% from the sale realisation value of constructed area/space as the sale consideration of the land transacted.

 b.  The CIT(A) failed to appreciate the fact that the rate of 12% reduction from the total sale realisation value at the rate of Rs. 1450/- per sq. yard is the consideration received by the assessee in pursuance of the development agreement.

19. Brief facts of the case are that a search and seizure operation u/s. 132 of the I.T. Act was conducted at the business premises of Janapriya Group. During the year under consideration, the assessee had given his land for development to Janapriya Engineering Syndicate Ltd. The Assessing Officer was of the view that the assessee was liable for capital gains on the basis of development agreement. Since the assessee had not filed any return of income for the year under consideration, notice u/s. 148 of the Act was issued in response to which the assessee filed a return of income declaring an income of Rs. 4,80,590/- and agricultural income of Rs. 72,000/-. During the course of assessment proceeding, the Assessing Officer found that the assessee had given 2 acres 19.10 guntas of land situated at Mahadevpur village, Alwal Municipality, Malkajgiri Mandal, R.R. District to Janapriya Engineers Syndicate Ltd. for development as per development agreement dated 4-3-2008. As per the said agreement, the assessee was to get 27% of the built up area and car parking space and the balance 73% was to be retained by the builder. Accordingly, the assessee’s share in the super built-up area was 62,482 sft and car parking area of 15,962 sft. The assessee had already handed over the possession of the land to the developer. The Assessing Officer asked the assessee as to why capital gain should not be charged based on the development agreement. In response to the said show cause notice the assessee submitted that the builder was given only licence to enter the premises and construct the flats as per the develop agreement and the possession otherwise remains with the assessee. He further submitted that as per the development agreement dated 4-3-2008, possession was given to the builder only to perform the obligations envisaged in the agreement and not in part performance of the contract as enunciated u/s. 53A of the Transfer of the Property Act.

20. The Assessing Officer did not accept the explanation of the assessee. The Assessing Officer observed that the explanation filed by the AR is not acceptable as the transfer of land under development is covered within the meaning of sec. 2(47) of the IT Act. The Development Agreement clearly shows that the construction area to be shared by the assessee and the developer was 27:73 respectively. Therefore, even though it may not be an exchange within the meaning of Transfer of Property Act, there was a transfer within the meaning of sec. 2(47) of the IT Act. The Assessing Officer relied on the decision of ITAT, Hyderabad in the case of CIT v. Akashganga Estates. Considering the same, the Assessing Officer held that the assessee was liable for capital gains based on the development agreement entered into with Janapriya Engineers Syndicates Ltd. On the basis of details filed by the assessee, it was found that the assessee was entitled to 62,482 sft of built up area and 15,962 sft car parking area as per the Agreement dated 4.3.2008. The Assessing Officer referred to the statement of Sri K. Ravinder Reddy, Managing Director of Janapriya Engineers Syndicate Ltd. which was recorded on 14-5-2008 wherein he has submitted that the sale realisation is Rs. 1450 per sft and the profit is 12%. Considering the same, the Assessing Officer arrived at a figure of 1276 per sft (Rs. 1450-12% profit of the builder i.e. Rs. 174) towards cost of construction including indirect expenses to the builder. Adopting this rate, the Assessing Officer computed the long term capital gains on 78,445 sft of area to be received by the assessee including car parking. The long term capital gain was computed at Rs. 9,87,51,123/-. The total income was assessed at Rs. 9,93,03,713/- and a tax demand of Rs. 3,06,94,257/- was raised.

21. We have heard the rival submissions and perused the material available on record. Since the main issue regarding chargeability of capital gain has been set aside to CIT(A), in assessees’ appeals in earlier para of this order, this ground does not required adjudication at this stage. Accordingly, these two appeals are dismissed as infructuous.

22. Now let us take up ITA No. 408/Hyd/2011. The grounds raised by the Revenue are as follows:

 a.  The CIT(A) erred on facts and in law in deleting the addition of Rs. 16,00,000 being the opening balance shown in the cash flow statement, which remain unexplained as no evidences were furnished by the assessee.

 b.  The CIT(A) failed to appreciate the fact that in the absence of any cogent evidences for the opening cash balance of Rs. 16.00 lakhs filed by the assessee at any point of time, the same need to be treated as unexplained.

23. Brief facts of the case are that an addition of Rs. 16 lakhs reflected in the Receipts and Payments A/c as opening balance for the year under consideration. In course of the appellate proceeding, the AR of the assessee submitted that the assessee was deriving income from other sources and was an assessee on record with DCIT, Central Circle-6, Hyderabad with PAN: AGQPB2894N. During the assessment proceeding, the assessee had filed the cash flow statement for all the years for which notice u/s. 153C had been issued. Assessee submitted that the action of the Assessing Officer in adding the said Rs. 16 lakhs as unexplained money is contrary to law and against the principle of limitation under the provision of IT Act. The Assessing Officer should have accepted the opening balance which pertains to savings before 1-4-2001 and related to the assessment years 2001-02 and earlier years which are outside the jurisdiction of the taxability provision of the Act. The assessee submitted that the principle of limitation clearly establishes that an item of income which pertains to a period which is beyond the time of issue of notice cannot be brought to tax and furthermore, it is well established that the Assessing Officer has no jurisdiction to call for explanation for items that pertain to periods beyond the time limits of notice. Accordingly, the addition made by the Assessing Officer treating the opening balance as unexplained money u/s. 69A is unjustified and should be deleted.

24. The learned DR submitted that in the receipts and payments account, opening cash balance of Rs. 16,00,000 is shown for the year under consideration. The assessee is not maintaining any records and no capital accounts and Balance Sheets have been filed along with original returns of income or along with returns filed in response to notice u/s. 153C. The receipts and payments account is submitted only during the course of scrutiny proceedings. The assessee has not filed any satisfactory evidence for the source of huge opening cash balance of Rs. 16,00,000. Accordingly, the learned DR supported the order of the Assessing Officer.

25. The learned AR submitted the Assessing Officer had issued common notice dated 7-9-2009 and 23-9-2009 u/s. 143(2). From the letter dated 7-9-2009, the Assessing Officer had called for some general information for the assessment years 2002-03 to 2008-09 regarding computation of income sheet, Profit and Loss A/c., Receipts and Payments A/c, etc. In response to the same, the assessee filed the Receipts and Payments A/c in the form of cash flow statement for all the years wherein the opening balance for the A.Y. 2002-03 was shown at Rs. 16 lakhs. Below the cash flow statement, the assessee had left a note that he was working as a Personnel Officer in Electronics Corporation of India Ltd (ECIL) and voluntarily retired from the service in the year 1996. The past salary and the other income of himself and his wife had been considered as the opening balance. No specific query was further raised in respect of the opening cash balance shown by the assessee. Therefore, without causing any specific enquiries drawing the conclusion that the figure of opening balance filed by the assessee was incorrect was not justified. Consequently the addition made by the AO treating the opening cash balance as unexplained money would be equally unjustified. Accordingly, the AR submitted that the addition having been made without any enquiry is unjustified and the same may be directed to be deleted.

26. We have heard the rival submissions and perused the material on record. In this case the additions made on the reasons that the assesses have not explained the opening balance properly. In our opinion, the CIT(A) before deleting the additions should have caused necessary enquiries. Being so, in the interest of justice, we inclined to set aside the issue to the file of CIT(A) to cause necessary enquiry on the issue and decide thereupon in accordance with law and assessee is directed to substantiate the availability of opening balance to the tune of Rs. 16 lakhs. This Revenue appeal is partly allowed for statistical purpose.

27. In the result, assessee’s appeals in ITA No. 483 & 484/Hyd/11 and Revenue appeal in ITA No. 408/HYD/11 are partly allowed for statistical purpose. Revenue appeals in ITA No. 407 & 409/HYD/11 are dismissed.