Telangana High Court Rules on Capital Gains Tax in Development Agreements | Section 2(47) & Transfer of Property Act Explained
Summary: The Telangana High Court ruled in favor of the assessee, Smt. Shantha Vidyasagar (NRI), in a dispute over capital gains tax arising from a development agreement. The Income Tax Department assessed capital gains of ₹13,78,900 for AY 1997-98, arguing that the agreement itself constituted a “transfer” under Section 2(47)(v) of the Income Tax Act. The assessee contended that no actual transfer occurred at that time, as ownership remained with her and no consideration was received. Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the assessment. However, the High Court, relying on legal precedents and Section 53A of the Transfer of Property Act, ruled that the agreement did not constitute an immediate taxable transfer. The court clarified that capital gains tax applies only when ownership or possession is transferred along with consideration. This ruling underscores that merely granting development rights does not trigger tax liability unless actual possession and consideration are exchanged. The case highlights the importance of structuring development agreements carefully to avoid premature tax liability.
HIGH COURT FOR STATE OF TELANGANA
Case No.: INCOME TAX TRIBUNAL APPEAL NO: 527 0F 2006
Date of Judgment: Tuesday, 07th January, 2025
Judges: The Honourable Chief Justice Alok Aradhe and Justice J. Sreenivas Rao
Petitioner: M/s R S Associates. (Smt. Shantha Vidyasagar)
Respondent: Income Tax Officer, Ward4(2), Hyderabad.
Assessment Year: 1997-98 (FY 1996-97)
Counsel for the Appellant: Mr S Ravi, Senior Counsel
Counsel for the respondent: Mr. J. V. Prasad
Question of law with this appeal are revolve around sections given below:
Section 2(47)(v) of the Income Tax Act
Section 53 of the Transfer of Property Act, 1882
Important Dates and Timeline for quick grasp
04-05-1996: Date of agreement between assessee and Developer
23-03-2001: Issued of Notice u/s 144 assessment Capital gain: Rs.1378900.00
03-04-2001: Assessee submitted the reply, that Proper AY should be 1999-2000(FY1998-99) & claimed 54F exemption on ground of reinvestment.
21-02-2002: Department issued an order Rejecting the claim of the Assessee and determine the capital gain of rupees 13,78,900.
21-03- 2003: Assessee challenge the aforesaid order in Commissioner appeal, which is rejected by the Commissioners appeals. And affirm the assessing officer’s order.
09-06-2006: Assessee aggrieved by the CIT Appeal order again appeal to the income tax appellate tribunal Which is again dismissed by the tribunal.
Aggrieved by the judgment of income tax appellate tribunal, assessee move to high court with this Appeal under Section 260A of the Income Tax Act, 1961
Brief about the case:
In a significant ruling, the Telangana High Court verdict whether entering into a development agreement with a builder by any person for development of building or infrastructure will constitutes a transfer of property (Sale of property/assets in general sense), thereby attracting capital gains tax (attracted on sale of Assets) in the assessment year of the agreement. This case, Smt. Shantha Vidyasagar (NRI) vs. Income Tax Officer, Ward 4(2), Hyderabad, revolved around the timing of capital gains taxation when an owner transfer development rights to a builder. This article explains the background, legal arguments, and the court’s decision, which provides valuable insights for taxpayers engaged in property development agreements.
Case Facts, grounds and legal scenarios
1. The assessee, Smt. Shantha Vidyasagar, was a Non-Resident Indian (NRI) who entered into a development agreement on 04-05-1996 with a builder to construct residential flats on a land she owned. The agreement specified that the builder who perform development work would receive 60% of the total built-up area, while the assessee i.e. Landowner would retain 40% of the built-up area on that particular land which will be around 6000 sq. ft segregated in ground floor, first floor and second floor.
2. The Assessing Officer (AO) issued a notice under Section 148 of the Income Tax Act dated 23-03-2001, reopening the assesses tax assessment for 1997-98. The AO specifically argued that the development agreement itself amounted to a “transfer” under Section 2(47)(v) of the Income Tax Act, triggering capital gains tax in the AY 1997-98 of Rs. 13,78,900, and tax demand was raised along with interest under Sections 234A & 234B. (Section 2(47) of Income Tax Act and 53A of the transfer of the property Act, 1882 given below for ready reference)
3. The assessee challenged the tax assessment stating the land was only handed over for construction purposes, and no actual sale or ownership transfer had taken place. The builder did not get the right to sell or transfer the property at that stage. Capital gains tax should apply only when she received possession of the constructed flats, not at the time of signing the development agreement. And the Amount of Rs. 2 lakhs is only for the security purpose which will be refundable after the completion of job, so it can be said that it’s a consideration received.
4. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision that the agreement amounted to a transfer.
5. The Income Tax Appellate Tribunal (ITAT) also dismissed the appeal, ruling that the agreement constituted a transfer and capital gains were taxable in AY1997-98 (FY1996-97).
6. The High Court examined Section 2(47)(v) of the Income Tax Act, which defines “transfer” to include: “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”
7. The High court said that in order to attract the applicability of Section 53A of the Transfer of Property Act, 1882 (Section given below for ready reference), as held by the Supreme Court in the case of “Shrimant Shamrao Suryavanshi vs Pralhad Bhairoba Suryavanshi (Appeal (civil) 2706 of 1991) the following conditions are required to be fulfilled:
- there must be a contract to transfer for consideration any immovable property;
- the contract must be in writing, signed by the transferor, or by someone on his behalf;
- the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;
- the transferee must in part performance of the contract take possession of the property, or of any part thereof;
- the transferee must have done some act in furtherance of the contract; and
- the transferee must have performed or be willing to perform his part of the contract.
8. The court said that even though there is a contract to development which is signed by assessee and the developer but there is no consideration received at the time of signing the contract. Thus, development agreement did not involve an immediate sale or relinquishment of the property. The builder was only given possession for construction purposes, no ownership has been transferred. The assessee continued to own the land, and no consideration (payment) was received at the time of signing the agreement.
9. The actual transfer happened only when the constructed flats were handed over to the assessee, which was in a later year after the completion of the construction of residential flats.
10. The High court also interpreted the case of Potla Nageswara Rao vs Deputy Commissioner of Income Tax as cited by the department “if someone has physical control of a property and there’s an agreement in place, it can be considered a transfer u/s 2(47) of IT Act, even if no money has changed hands. However, if the transfer is complete, then the amount agreed upon in the sale agreement must be considered when calculating income. Now, applying this to the current case, it seems that there is no actual transfer of property, and no payment has been made. So, the rules mentioned in the Potla Nageswara Rao case don’t apply here.
11. Similarly high court said that, in the case of Commissioner of Income Tax ‘s. Arvind S Phake (supra) (as cited by the department), the possession was handed over to the developer and the entire consideration was paid, but in the present case no consideration was received by the assessee.
12. The High court in interpreted that in Commissioner of Income Tax vs. Harbour View (supra), the Division Bench of Kerala High Court on the facts of the case found that the possession of the property was handed over under Section 53A of the Transfer of property Act, 1882. Therefore, the aforesaid decision also has no application to the fact situation in the present case.
13. Accordingly, The Telangana High Court ruled in Favor of the assessee. And it quashed the tax demand and interest levied by the Income Tax Department. The court concluded that capital gains tax should not be imposed in the 1997-98 assessment year, as there was no actual transfer of property.
Suggestion/opinion
1. Development Agreements Does Not Automatically Trigger Capital Gains Tax If the owner grants development rights but retains ownership, capital gains tax is not immediately applicable as per the present case.
2. Capital gains tax liability arises only when possession of the constructed property is received, not when the agreement is merely signed for the development work where ownership is specifically retained by the owner.
3. NRIs and landowners should always carefully structure development agreements to avoid premature tax liability as per the section 2(47) of the income Tax Act, 1961
4. Supreme Court and High Court have regularly held that capital gains tax should apply only when an owner receives a constructed asset or sale proceeds as a consideration.
Conclusion
The Telangana High Court’s ruling in this present case provides much-needed clarity on capital gains taxation in property development agreements. It again emphasised that merely signing a development agreement does not amount to a taxable transfer.
Property owners and investors before entering into any joint development agreements of any property, they should ensure they understand the tax implications and seek professional advice to optimize their tax liability in future.
If you are facing a similar tax dispute, consulting with a tax expert or legal professional can help you navigate the issue effectively.
Links:
1. Original Case: https://drive.google.com/file/d/1otebllbXNS0ZnAB5pNeAjcnGgFGS8RkG/view?usp=sharing
2. Shrimant Shamrao Suryavanshi vs Pralhad Bhairoba Suryavanshi: https://indiankanoon.org/doc/1904257/
Sections for ready reference
2 [(47) of the Income Tax Act, 1961: – “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;] 3 [or] 4 [(iva) the maturity or redemption of a zero coupon bond; or] 3 [
(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. 5
[Explanation 1]. — For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.] 6
[Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;]
Section 53A of the Transfer of Property Act, 1882: – Part performance. —
Where any person contracts to transfer for consideration any immoveable 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 2***, 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 transferor 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
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