Unlock the complexities of development rights and their tax implications under India’s Income Tax Act, 1961. Delve into Section 56(2)(x) to understand the treatment of development rights as immovable property or capital asset. Explore legal definitions, case law, and the intricate interplay of tax provisions in this comprehensive guide.
In the realm of real estate and construction, it is common in India for the property owners to grant development rights to construction companies while retaining the ownership of the land. This arrangement allows developers to breathe life into the property by constructing commercial or residential projects. To delve into the tax implications of such transactions, we turn our attention to Section 56(2)(x) of the Income Tax Act, 1961.
Development rights, in simple terms, confer the privilege to construct, improve, or develop a property. These rights are typically bestowed upon construction companies, who then enter into agreements with the landowners or tenants residing on the property. The crux of the matter lies in determining whether these development rights can be regarded as Immovable Property or Capital Asset, thus falling under the purview of the Income Tax.
Section 56(2)(x) of the Income Tax Act, 1961 addresses income arising from the receipt of property without consideration or under inadequate consideration. But what in cases where development rights are transferred to a construction company? the taxability of such transactions becomes a critical consideration.
The Big Question:
Do development rights constitute as ‘Immovable property’, ‘Property’ or ‘Capital asset’ for taxation purposes?
Understanding this distinction can help us decipher the tax implications for both the property owner and the construction company. The Income Tax Act, 1961 does not explicitly define whether development rights are deemed ‘Immovable property’, ‘Property’ or ‘Capital asset’. Consequently, the classification depends on the interpretation of existing tax laws and precedents set by legal cases. This article covers the Developments rights with respect to Immovable Property, Property, Capital Asset and Transfer definition.
Development Rights an ‘IMMOVABLE PROPERTY’ for the purpose of Section 56(2)(x) and 56(2)(vii) of the Income Tax Act, 1961:
> Taxation of “Immovable Property” as per the Section 56(2)(X) of the Income Tax Act, 1961
The term ‘Immovable Property’ for the purpose of Section 56(2)(x) of the Income Tax Act, 1961 does not include ‘Development Rights’:
“56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely …………
(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, —
(a) ……………;
(b) any immovable property, —
A. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
B. for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:
………………”
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to ten percent of the consideration:
(c) any property, other than immovable property, —
A. without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
B. for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration”
On the perusal of the above provision, it is seen that section 56(2)(x) of the Income Tax Act, 1961 will be applicable if and only if a person receives any of the following:
a) Money,
b) Immovable property, or
c) Any property other than Immovable Property
> Definition of “Immovable Property” as per the clause (d) of the Explanation to Section 56(2)(vii) of the Income Tax Act, 1961
As per the clause (b) of Explanation to section 56(2)(x) of the Act, the term “property” shall have the same meaning as assigned to it in clause (d) of the Explanation to Section 56(2)(vii) of the Act, which defines property as:
“Explanation – For the purpose of this clause, –
……..
Item (d) of the explanation to section 56(2)(vii) defines property as:
“(d) “property” means the following capital asset of the assessee, namely: —
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures;
(viii) any work of art; or
(ix) bullion;”
First Let’s analyze the phrase “For the purpose of this clause”
“For the purpose of this clause” is a phrase commonly used in legal documents, contracts, and agreements to specify that the following analysis or explanation pertains specifically to the context or provisions outlined within a particular clause.
It serves to narrow down the focus of the analysis to the relevant section of the document. When this phrase is used, it often precedes a detailed examination or explanation of the specific terms, requirements, or implications within the mentioned clause.
For instance:
In a contract of Leave and License, you might find a sentence like: “For the purpose of this clause, the term ‘vendor‘ shall refer to the party who is owner of a leased property”
Now, in general terms a ‘Vendor’ for anyone is a person who buys and sells goods or services. But here, the phrase “For the purpose of this clause” acknowledges the Vendor as a person who provided right of tenancy in the leased property. Therefore, the phrase “For the purpose of this clause” signals that the forthcoming explanation or definition is limited to the context of that particular clause.
The definition of property given under this section in clause (d) of the Explanation to Section 56(2)(vii) of the Act is exhaustive and will include only the above nine items as property for the purpose of section 56(2)(x) of the Act and will not include anything besides the above items as defined in item (d) of Explanation to section 56(2)(vii) of the Act.
> Definition of “Immovable Property” as per the Section 269UA of the Income Tax Act, 1961
Further, to better explain the scope of the term ‘immovable property’ for the purpose of section 56(2)(x) of the Act, a reference is made to section 269UA of the Income Tax Act, 1961 the relevant portion of which is as under:
“In this Chapter, unless the context otherwise requires
(d) “immovable property” means—
i. any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.
Explanation. —For the purposes of this sub-clause, “land, building, part of a building, machinery, plant, furniture, fittings and other things” include any rights therein;
ii. any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from 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 of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building;”
Now, let’s analyze the phrase “unless the context otherwise requires”.
When this phrase is included in a legal document, contract, statute, or regulation, it serves to emphasize that the default interpretation of a term or provision should be followed, but that interpretation can be overridden if the context or specific circumstances dictate a different interpretation.
In the context of the “immovable Property” as define u/s 269UA of the Income Tax Act, 1961, the phrase “unless the context otherwise requires” acknowledges that while the default meaning of Immovable Property is including the item mentioned in clause (1) and clause (ii) of the section 269UA of the Act, there might be situations where the meaning of the same could be different based on specific conditions outlined elsewhere in the contract.
For instance:
“Any person found guilty of the offense shall be fined up to Rs. 500/-, unless the context otherwise requires.”
Here, the phrase emphasizes that the standard fine for the specified offense is Rs. 500/-, but if there are factors or circumstances that justify a different fine, those factors can be taken into account and the amount of fine can be different.
In essence, the phrase “unless the context otherwise requires”, acknowledges that legal language should be interpreted in a consistent and logical manner, but it also allows for adjustments when the specific circumstances or context of the document call for a different interpretation to achieve fairness, clarity, or compliance.
Accordingly, as per the definition provided in Explanation to Section 56(2)(vii) of the Income Tax Act, 1961, immovable property includes only land or building or both but does not include any rights in or with respect to such land or building or both.
On the contrary, as the definition provided u/s 269UA of the Act, immovable property includes land or building or both or any rights therein.
Therefore, as specific meaning has been assigned to the term ‘immovable property’ for the purpose of section 56(2)(x) of the Act, which only includes tangible immovable property, being land or building or both and not any intangible rights in such immovable property. Hence, there is no scope of importing any other meaning from anywhere else to construe Development Rights to be immovable property for invoking the provisions of section 56(2)(x) of the Income Tax Act.
Authors View:
Upon examination of the definition of the “immovable property’ as provided in the Explanation to section 56(2)(vii) of the Income Tax Act, 1961 and the definition as provided under section 269UA of the Income Tax Act, 1961, the view taken by the author is:
- The meaning to ‘Immovable Property’ provided in the Explanation to section 56(2)(vii) overrides the meaning provided in Section 269UA of the Income Tax Act, 1961.
- According to definition as provided in the Explanation to section 56(2)(vii) of the Act, ‘Development Right’ for the purpose of section 56(2)(vii) or Section 56(2)(x) of the Income Tax Act, 1961 cannot be treated as an Immovable Property.
- Therefore, the provisions of section 56(2)(vii) or section 56(2)(x) cannot be invoke In lieu of section 269UA of the Act, when there is transfer of Development Rights.
Development Rights as ‘PROPERTY’ or ‘CAPITAL ASSET’ for the purpose of Section 56(2)(x) of the Income Tax Act, 1961:
As explained above, the term ‘immovable property’ has been assigned specific meaning for the purpose of section 56(2)(x) of the Act. As per clause (b) of Explanation to section 56(2)(x) of the Act, the term “property” shall have the same meaning as assigned to it in clause (d) of the Explanation to Section 56(2)(vii) of the Act, which defines property as:
“(d) “property” means the following capital asset of the assessee, namely: —
(i) immovable property being land or building or both;”
> Definition of ‘Capital Asset’ for the purpose of Section 2(14) of the Income Tax Act, 1961 does not include ‘Development Rights’:
“(14) “capital asset” means—
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,”
“but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession;”
It is amply clear from the above definition that; certain properties are excluded from the definition of the capital asset. Such exclusions are not only restricted to stock in trade, raw materials and consumables but also exclude other asset like personal effects, agricultural land etc. Stock in trade does not fall within the purview of the definition of capital asset and hence it will not be covered as property as per the definition given under item (d) explanation to section 56(2)(vii) of the Act.
Therefore, a property which is held as stock in trade is outside the ambit of the term ‘capital asset’. Therefore, even for the purpose of section 56(2)(x) of the Act, when a person receives land or building as stock in trade, then the same shall not constitute as income chargeable u/s 56(2)(x) of the Act.
To remove the ambiguity, CBDT issued a circular and provided a clarification regarding the above issue, as per the CIRCULAR NO 01/2011, dated 06.04.2011, Para 13.4
“13.4 The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent in not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.”
The Hon’ble Jaipur Tribunal in its one of the judgement in the case of Satendra Koushik Vs. Income-tax Officer, Ward-2, Jhunjhunu, ITA No. 392 of 2019 (Jaipur), held that:
“10. I have considered the rival contentions and carefully gone through the orders of the authorities below. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extent the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. However, a property is defined in a very specific way, which includes agricultural and non-agricultural land or both. It appears that the lower authorities have not properly appreciated the relevant provisions of the Act with regard to the land purchased by the assessee, which is part of stock-in-trade. In the substantial interest of justice, we restore the matter back to the file of the AO for deciding the matter afresh after giving due opportunity of hearing to the assessee.”
‘Transfer” of Development Right:
‘Developmental Rights’ is nothing but the right to develop land, where the owner of a land authorizes a person to develop a structure of the land. Developmental Right is simply a document granting permission to a person to develop a structure on land.
It should be emphasized that the Development Agreement is a “contract for sale” and not “a contract of sale” and hence there is no interest created on the property per se in favour of the Developer.
The term ‘transfer’ is defined u/s 2(47) of the Act and we reproduce the provisions of transfer under the Income Tax Act, 1961 are as under:
“2(47) “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; or
(iva) the maturity or redemption of a zero coupon bond; or
(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 1. —For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.
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 characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;”
The crux of the matter lies in understanding the scope of the term “transfer” concerning capital assets. Only when a property falls under the category of a capital asset can it be subject to the provisions governing transfers under the Income Tax Act. For transactions involving immovable property, this definition holds particular significance.
According to this definition, “transfer”, concerning a capital asset, encompasses various scenarios, such as the sale, exchange, relinquishment, or extinguishment of rights in the asset, as well as compulsory acquisition. An interesting observation emerges from this definition – even transactions involving allowing the possession of immovable property against part performance of a contract, as described in Section 53A of the Transfer of Property Act, 1982 (hereinafter referred to as ‘TOPA’), are also considered transfers under the Income Tax Act, 1961.
Role of Section 53A of TOPA, 1982:
Section 53A of the Transfer of Property Act, 1982, is instrumental in certain property transactions where possession of immovable property is handed over to the buyer or transferee against part performance of a contract. While this provision safeguards the buyer’s rights even if the transfer of ownership has not been completed through a formal deed, it triggers implications under the Income Tax Act.
If we Dive Deeper into “Transfer” under the Income Tax Act:
“Section 53A in The Transfer of Property Act, 1882:
53A. 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 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: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.”
Section 53A of TOPA provides that transfer would include any transaction wherein the possession of Immovable property is taken or retained in part performance of the contract as referred in the TOPA. In order that the provisions of Section 53A of the TOPA be attracted, the following condition should be satisfied:
- First and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof.
- Secondly, the transferee must have performed or be willing to perform his part of the agreement.
It is noted that, in the case of ‘Development Agreement’, the developer is merely allowing to enter the property for the construction of the building, it cannot be deemed to be a possession for the purpose of section 2(47) r.w.s. 53A of TOPA.
The terms and conditions of the development agreement between the developer and other parties clearly indicate that only a permissive possession for the construction work was handed over to the developer, the developer is not allowed to enjoy the rights of ownership over the land as is evident from the fact of the case. The owner of the land had granted only “permission of development” to the appellant for construction on the impugned land as per the terms and conditions of the development agreement. Such permission cannot be treated as possession within the meaning of section 53A of the Transfer of Properties Act, 1982.
Important Judicial Judgment
- The Hon’ble Supreme Court in the case of Sehasayee Steel Pvt. Ltd. 115 Taxmann.com 5(SC), wherein Para 14, held that:
“14. Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be ‘possession’ within the meaning of section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, Section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone.”
- The Hon’ble Supreme Court in the case of CIT Vs. Balbir Singh Maini [2017] 86 taxmann.com 94 (SC), held that:
The land and buildings are different and the rights attributed to such land and buildings are different. They are altogether independent and separate. The provision of section 56(2)(x) of the Act is not applicable here as to the definition of property as explained in section 56(2)(vii) of the Act does not include Development Rights. The provision of section 56(2)(vii) of the Act is applicable only to landed building which is tangible immovable property and Development Rights not being the tangible asset, it cannot be considered as capital asset u/s 56(2)(vii) of the Act. Therefore, when there is a specific meaning provided in the section itself, there is no scope to import any other meaning from any other enactment, or anywhere else and this would amount to an exercise of jurisdiction which is not provided in the law.
- The Hon’ble High Court in the case of Dilip Anand Vazirani Vs. ITO [2015] 57 taxmann.com 142, wherein Para 14, it was held that:
“As per the terms of development agreement, the assessee has given only license to enter into the property, meaning thereby the possession was not given in the year relevant to asst. yr. 2001-02. In view of the peculiar facts narrated above, the assessee has contended that the tax authorities are not correct in holding that the transfer of property took place in the year relevant to asst. yr. 2001-02. The various case laws discussed above also support the view taken by the assessee. Hence, we agree with the contentions of the assessee in this regard. Accordingly, we hold that the transfer of property did not take place on the date of execution of development agreement and accordingly, the tax authorities are not justified in assessing the capital gain in asst. yr. 2001-02. Accordingly, we set aside the orders of tax authorities on this issue.”
Therefore, the tax implications of development rights under Section 56(2)(x) of the Income Tax Act, 1961 are a complex puzzle that necessitates a case-by-case examination. The absence of a clear definition leaves room for diverse interpretations, adding to the intricacy of the matter. The authors just try to put one of the many perspectives in this article.
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CA Vaishali S. More | Direct Tax litigation | Mumbai
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