PCIT Vs Sai Lakshmi Industries Pvt. Ltd. (Karnataka High Court)
The Karnataka High Court dismissed the Revenue’s appeal under Section 260A of the Income-tax Act, 1961, concerning capital gains on a joint development agreement (JDA) for Assessment Year 2014-15. The appeal challenged the Bengaluru ITAT order dated 15 March 2022 in ITA No. 1624/Bang/2019, which had affirmed the first appellate authority’s decision in favour of Sri Sai Lakshmi Industries Pvt. Ltd. The assessee entered into a JDA on 3 April 2013 with Assetz Whitefield Homes Pvt. Ltd. for development of land measuring 22 acres and 23 guntas. Under the agreed sharing arrangement, the developer was entitled to 70% and the landowner to 30%. The Assessing Officer considered execution of the JDA sufficient to attract Section 2(47) and brought capital gains to tax in AY 2014-15.
The Revenue argued that Clauses 13.1 and 13.2 of the JDA authorised the developer, through a power of attorney, to execute agreements to sell, construction agreements and sale deeds. According to the Department, those powers distinguished the case from an earlier Karnataka High Court ruling and indicated that the developer had obtained rights amounting to transfer. The assessee countered that Clause 3.1 expressly preserved ownership of the entire joint development property with the landowner until actual conveyance to purchasers. It further submitted that the developer’s rights under the power of attorney were administrative, and the authority to execute sale documents would operate only after development-plan approval and payment of the specified instalment.
The High Court examined the relevant JDA clauses rather than treating the power of attorney in isolation. Clause 13.1 described the powers as administrative. Clause 13.2 made the developer’s authority to execute sale documents conditional upon development-plan approval and payment of the development-plan instalment. Reading Clauses 3.1 and 13 together, the Court found that the parties had expressly agreed that the assessee would continue to own the entire property until conveyance. The Court observed that no material on record established any conveyance during AY 2014-15.
The Court therefore held that the Assessing Officer’s contrary view was perverse and that CIT(A) and the ITAT had rightly reversed it. It dismissed the Revenue’s appeal, answered the proposed questions of law in favour of the assessee, and made no order as to costs. The decision turns on the particular JDA clauses and the absence of evidence of conveyance in the relevant year. It should not be read as establishing that every joint development agreement necessarily postpones capital gains until conveyance, irrespective of the agreement’s terms and applicable law.
Cases Discussed
- CIT Vs Balbir Sing Maini & Ors — (2017) 398 ITR 531 (SC). Mentioned in Revenue’s proposed question of law.
- Dr. Krishna Prasad Mikkilineni Vs DCIT — ITA No. 929/Bang/2018, order dated 31.01.2022 (ITAT Bengaluru). Mentioned in Revenue’s proposed question of law.
- Mrs. Margrit Goverdhan Vs Income Tax Officer — ITA No. 328/2018 and connected cases (Karnataka High Court). Assessee argued the issue was covered by this decision.
- CIT Vs Dr. T K Dayalu — 202 Taxmann 531 (Karnataka High Court). Assessment order referred to this precedent.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal by the Revenue, directed against the order dated 15.03.2022 in ITA No.1624/BANG/2019 passed by the ITAT1, “A” Bench, Bengaluru, has been filed to consider following questions of law:
1. Whether in the facts and circumstances of the case and in law the Tribunal was justified in upholding the order of CIT(A) in deleting addition of Rs. 6,86,27,826/- made under the head of Capital Gains by invoking the provision of Section 2(47) of the IT Act without appreciating the fact that the capital gain for the land owner stands reckoned on the date of JDA since the builder acquires right to start construction on the given property to the extent of ratio as laid in the JDA agreement?
2. Whether the Tribunal’s order can be said as perverse in nature in relying on the decisions of the Hon’ble Supreme Court 1 Income Tax Appellate Tribunal in the case of CIT Vs Balbir Sing Maini & Ors reported in (2017) 398 ITR 531 (SC) and Hon’ble ITAT’s decision in the case of Dr. Krishna Prasad Mikkilineni Vs. DCIT (ITA No.929/bang/2018 dt:31.01.2022) considering the transfer has not been taken place during the year under consideration which is distinguishable to the present case and ignoring the materials brought on record in assessment order?
2. Heard Shri K.V.Aravind, learned Senior Standing Counsel for the appellant-Revenue and Shri Annamalai, learned advocate for the respondent-Assessee.
3. At the outset, Shri S.Annamalai, submitted that the issue involved in this appeal is covered by the decision of this Court in Mrs.Margrit Goverdhan Vs. Income Tax Officer2.
4. Shri Aravaind, learned Senior Standing Counsel for the Revenue, refuting the submission of Shri Annamalai submitted that the facts are slightly different in this case and therefore, the issue is not covered by the said decision.
5. Brief facts of the case are, assessee entered into a JDA3 dated April 3, 2013 with M/s Assetz 2 ITA No.328/2018 & connected cases 3 Joint Development Agreement Whitefield Homes Pvt.Ltd. for development of its property in Survey Nos.167/1 to 167/4 and other survey numbers, in all measuring 22 acres 23 guntas. As per the agreement, developer’s share was determined at 70% and that of owner at 30%.
6. For the A.Y. 2014-15, the A.O4 has held that as per the JDA, the transaction attracted Section 2(47) of the I.T.Act5 and that the facts of the case are covered by the decision in CIT Vs. Dr.T K.Dayalu6 and added capital gains of Rs.6,10,73,524/-.
7. The CIT(A)7 has partly allowed the appeal and held that assessee is not liable to pay capital gains tax for A.Y.2014-15.
8. The ITAT8 has concurred with the view taken by the CIT(A). Hence, this appeal. 4 Assessing Officer 5 Income Tax Act, 1961 6 202 Taxmann 531 KAR 7 Commissioner of Income Tax (Appeals) 8 Income Tax Appellate Tribunal
9. Shri Aravind’s principal contention is that as per Clause 13.1 of the JDA, the owner of the land has simultaneously agreed to execute a power of attorney to do all acts and deeds in relation to rights, obligations and entitlements under the agreement as contemplated in the power of attorney. Therefore, according to him, once the power of attorney is executed, transfer of title takes place. According to him, as per clause 13.2, power of attorney empowers the developer to execute agreement to sell, construction agreements and sale deeds with prospective purchasers. In substance, Revenue’s contention is that terms contained in Clauses 13.1 & 13.2 permits sale of units by the developer and therefore, facts of this case are not similar to ITA No.328/2018 and connected cases. With these submissions, he prayed for allowing this appeal.
10. Shri Annamalai for the assessee contended that Clause 13.1 of the JDA makes it clear that until conveyed to the purchasers of the units in the Project, the owner shall own the entire JD property and the developer shall own all structures, units, buildings and other infrastructure. According to Shri Annamalai, the assessee shall remain the owner of units till the date of conveyance. With these submissions, he prayed for dismissal of this appeal.
11. We have carefully considered rival submissions and perused the records.
12. Undisputed facts of the case are, as per para 3 of the JDA, the assessee shall continue to own the entire property under the JDA. The relevant portion reads as follows:
“Clause 3: Right to enter to develop the JD property
Clause 3.1:
Xxxxxxx
Until conveyed to the purchasers of the units in the Project, the Owner shall own the entire JD Property and Developer shall own all structures, units, buildings and other infrastructure constructed, erected or installed by the Developer on the JD Property pursuant to this Agreement.”
(Emphasis Supplied)
13. So far as Clause 13 with regard to power of attorney is concerned, the said clause reads as follows:
“13. POWER OF ATTORNEY
13.1. The Owner shall simultaneously with the execution of this Agreement, execute and register power of attorney in favour of the Developer, to do all acts and deeds in relation to the rights, obligations and entitlements under this Agreement and as contemplated under the power of attorney (“Power of Attorney”). It is clarified that the powers provided under the Power of Attorney are administrative in nature.
13.2. The provisions of the Power of Attorney that empower the Developer on behalf of the Owner to execute agreements to sell, construction agreements and sale deeds with prospective third party purchasers shall become effective only upon Development Plan approval being obtained and the Development Plan Installment having been paid. The Parties agree that pending the aforesaid provisions coming into effect, the Developer shall be entitled to commence bookings of units and issue letters of allotment to prospective purchasers of units in the Projects, including receiving monies towards such bookings. Simultaneously with the payment of the Development Plan Installment, and if required by the Developer, the Owner undertakes to execute and register a document acknowledging that the Power of Attorney is fully effective and the Developer has powers to enter into agreements to sell, construction agreements and sale deeds with third party purchasers.
13.3. The cost of the Power of Attorney including, but not limited to stamp duty and registration fee, shall be borne by the Developer. It is hereby understood between the Parties that the Power of Attorney is coupled with interest and hence the said Power of Attorney is irrevocable and co-terminus with this Agreement in a manner that termination of this Agreement shall result in automatic revocation of the Power of Attorney, however, revocation of any or all the powers granted under the Power of Attorney shall not result in automatic termination of this Agreement.
13.4. The execution of the Power of Attorney as stated above is neither intended to nor shall it be construed as waiver, relaxation or discharge of any of the obligations of the Owner or the Developer under this Agreement.”
14. In Clause No.13.1, it is clarified that the powers vested are only administrative in nature. Clause 13.2 shows that power of attorney shall permit the developer to enter into agreement to sell, construction agreements and sale deeds with the prospective third party purchaser. It is also clarified that the GPA shall become effective only upon approval of developmental plan and installment being paid.
15. A combined reading of Clauses 3.1 and 13 shows that parties have specifically agreed that assessee shall continue to own entire JD property until conveyance deed took place. Clause 13 is in consonance with Clause 3.1. There is no material on record to show that any conveyance had taken place in A.Y.2014-15. Unless, there is material to establish that there was any conveyance, the view taken by the A.O. is perverse and the said view has rightly been reversed by both CIT(A) and ITAT.
16. Therefore this appeal must fail and it is accordingly dismissed. The questions of law are answered in favour of the assessee and against the Revenue.
No costs.
