DCIT Vs Hema Mohanlal Divyasree (ITAT Cochin)
We have carefully perused the JDA entered between the assessee and the developer. As per the JDA (in page 3 para 4), the construction should have completed and the share of build up area marked for the assessee ought to have been handed over within 36 months of obtaining necessary sanction. The developer could not complete the construction as per the JDA due to their internal problems and working capital issues and 20,000 sq. ft. of buildup area was handed over to the assessee only on 12.04.2016 after a gap of seven years. The closure agreement dated 12th April, 2016 evidencing the handing over is enclosed from page 16 of the paper book. As per page 3 para 5 of the JDA, it is stated that “the sale deeds the developer executes with the prospective buyers or other investors, shall be without prejudice to the complete ownership of land to the land owner until the owner’s part of the built-up area is finished and handed over”. Hence the builder did not have the right to sell the land without the signature / thumb impression of the assessee / the owner. Further, as per 1st para page No.4 of the JDA, it is stated that “if the developer fails to complete the project within 36 months from the date of signing the agreement, the Land Owner will have the right to mortgage or alienate the land as absolute owner and use the money for completing the project and developer shall have no right to object or obstruct the process of construction in the aforesaid property”. Therefore, the assessee has given the possession of the property for limited purpose of construction as per the JDA and the assessee continue to retain the ownership of the property. In other words, the assessee has the right to take back or reclaim property at any time, if the 20,000 sq.ft. built-up area is not handed over to the assessee in time.
The provisions of deemed transfer u/s 2(47)(v) cannot be invoked in the assessee’s case since she did not receive any consideration and also no construction actually took place during the Asst.Year 2009-2010. The permission from Trivandrum Corporation to construct the building was issued only during the next financial year on 08.06.2009. Copy of permission to construct the building is enclosed at page 19 of the paper book filed by the assessee.
The Power of Attorney was given to the developer only to represent the land owner and to sign on behalf of the land owner as per the instruction given by her since she is handicapped and living abroad at the time of execution of power of attorney. Nowhere in the power of attorney, handing over of the complete possession of the property to M/s.Artech Realtors (P) Ltd. was mentioned. Copy of the Power of Attorney is enclosed at page 21 of the paper book. As per the Power of Attorney and the JDA, flat can be transferred to a buyer only with the signature of the land owner and no power is given to the developer for selling the land. The developer had waited for 7 years (i.e. up to 12th April, 2016) for handing over the built-up area to the land owner to get the first sale deed registered with the signature of the land owner assessee. Before the date of handing over on 12th April, 2016 no land right was transferred to the flat owners. (Copy of the first sale deed is enclosed from page 25 of the paper book). It is made clear in the JDA that “the land owner hereby agrees to give the right to sell the undivided share of interest in the aforesaid property to the developer in lieu of construction and handing over of 20,000 sq.ft. of super built-up area of service apartments”.
When time is essence of the contract, and the time schedule is 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any right on the vendor / landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. The provisions of section 2(47)(v) will not apply in such a situation. It was held in the case of Sri ABVS Prakash, Hyderabad v. The ACIT, Central Circle-1, Hyderabad (2014) 8 TaxCorp (A.T.) 35688 that “The provisions of deemed transfer under section 2(47)(v) could not have been invoked. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor / landlord to seek redressal under section 53A of the Transfer of Property Act. The agreement cannot be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot be said that the provisions of section 2(47)(v) will apply in the situation. Thus, the capital gains could not have been taxed”.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal at the instance of the Revenue is directed against the order of CIT(A)-IV, Kochi dated 05.05.2017 . The relevant assessment year is 2009-2010.
2. The brief facts of the case are as follows:
There was a search and seizure operation u/s. 132 of the I.T. Act, 1961 in the premises of M/s. Artech Realtors Pvt. Ltd. on 12/11/2013. During the course of search, a copy of the Joint Development Agreement (JDA) executed on 08/02/2009 between the assessee and M/s. Artech Realtors Pvt. Ltd. was seized. The JDA was executed for developing 72 cents of land owned by the assessee at Trivandrum. A notice u/s. 153C of the Act was issued on 11/03/2015. In response to the said notice, the assessee filed return of income declaring total income of Rs.13,34,054/-. The assessment was completed u/s. 153C r.w.s. 143(3) of the I.T. Act vide order dated 31/03/2018. In the said assessment order, the Assessing Officer made an addition of Rs.3,81,59,200/- as long term capital gains. The relevant finding of the Assessing Officer for making the impugned addition reads as follows:
“Submissions of the assessee have been considered with facts and available records. In this case, assessee along with many others had entered into the Joint Venture Development Agreement with Artech to build a apartment complex. In this case, it is seen that the assessee had executed an irrevocable Special Power of Attorney (POA) in favour of M/s. Artech Realtors thereby giving them control and rights over the land. In this case under POA transaction, it may not be necessary to register the Joint Venture development Agreement if the special POA has been given and the same is duly registered.
Based on review of the terms of the JDA documents entitled the developers to not only enter the property of development, but they were also given rights for various other purposes like consolidating the project with others, creating mortgage or encumbrance for raising project funds, sale of flats to be developed without landowner signing as a confirming party. Thus, it can be concluded that ‘clear possession over the subject land was given to the developers upon execution of the POA. It can be summarized that the possession of the land need not be exclusive possession, and where the transferee is able to exercise control on the overall project for the intended purposes, capital gains provisions would arise.
Here it may be noted that the clause (v) and (vi) of Section 2(47) of the Act were inserted with effect from 1 April 1988 by Finance Act, 1987 to enlarge the definition of transfer, whereby cases of transfer, what is popularly known as ‘power of attorney’ transaction, which allows the enjoyment of right in the property would be covered by new definition.
It is clear that doctrine of part performance was given statutory recognition in Section 53A of the T.P. Act and it was desired only to protect possession of at transferee when the transfer falls short of requirement laid down by law.
The purpose of introducing sub-clause (v) in conjunction with sub-clause (vi) is to widen the net of taxation so as to include transactions that closely resemble transfers but are not treated as such under the general law.
In order to be ‘transfer’ within the meaning of sub-clause (v)} there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. Secondly, such taking or retention of possession, as is well known, is a facet of the equitable doctrine of part performance of contract falling within the scope of section 53A of the Transfer of Property Act, 1882. Section 53A is not a source by which title to immovable property could be acquired but it only serves as a shield to defend one’s lawful possession obtained pursuant to a contract for transfer of immovable property for a consideration.
12) Determination of date of transfer for purpose of section 2( 47) (v)
There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling within the scope of section 53A of the Transfer of Property Act. The crucial question then arises – at what point of time the transaction allowing the taking of possession in part- performance of such contract had taken place. Incidentally it raises the question as to how the expression ‘transaction’ is to be understood. One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed is itself the ‘transaction’ contemplated by section 2(47](v). It is enough if the agreement/contract falling within the description of section 53A’ provides for taking possession at some stage before the ownership is transferred in a manner known to law. This interpretation has no doubt the merit of certainty. Take the date of execution of agreement as the relevant date of transfer and pay the tax on capital gains that would arise based on the price stipulated in the agreement – that is what this interpretation leads to.
13. Meaning of ‘possession’ and how should it be understood in context of sub-clause (v) of Section 2(47)
Possession is an abstract concept. It has different shades of meaning. It is variously described as ‘a polymorphous term having different meanings in different contexts’ and as a word of ‘open texture’.
On a fair and reasonable interpretation and on adopting the principle of purposive construction, it can be said that possession contemplated by sub-clause (v) need not necessarily be the sole and exclusive possession. So long as the transferee is, by virtue of the possession given, enabled to exercise general control over the property and to make use of it for the intended purpose, the mere fact that the owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of agreement does not introduce any incompatibility. The concurrent possession of the owner, who can exercise possessory rights to a limited extent and for a limited purpose and that of the buyer/developer, who has general control and custody of the land can very well be reconciled. Sub-clause (v) of section 2(47] will have its full play even in such a situation. There is no warrant to postpone the operation of sub-clause (v] and the resultant accrual of capital gain to a point of time when the concurrent possession will become exclusive possession of developer/transferee after he pays full consideration.
Further, what is spoken to in sub-clause (v) of section 2(47) is the ‘transaction’ which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession or the instances of possessory acts exercised is not very relevant. The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. It is enough if the transferee has, by virtue of that transaction, a right to enter upon and exercise acts of possession effectively pursuant to the covenants in the contract. That tantamount to legal possession.
14) Payment of entire sale price:
That expression which reflects the language of later part of the second limb of section 53A of the Transfer of Property Act is not of much relevance in the context of the instant case.
The fact that legal ownership continues to remain with the owners or that the transfer of title cannot be demanded by the developer till he pays the entire consideration is really not germane to the applicability of sub-clause (v) of section 2(47). The very purpose of expanding the definition of transfer will be frustrated if the test of ownership and title is applied. The readiness and willingness of the transferee who is put in possession to fulfill his obligations is sufficient to invoke the doctrine of part performance.
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.”
“Where owners (assesses) 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”
“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 license to builder to carry on development activities but would be a case of transfer under section 2(47).”
“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 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 interest 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 since money was not sole the consideration but some other valuable consideration was passing to the assessee in the form of 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). “
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)”
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”.
15) 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. 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.
But the issue do not get settled only by the interpretation of s. 45 and s. 2(47)(v) because the definition of “transfer1′” 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.
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 therefore 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.”
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.
(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 I T 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 terra 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.
(e) The other factor which governs the happening of transfer is the handing over of possession. This section says “and the transferee has, in pan 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.
16) 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 JDA 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 fulfill the commitment. Facts of this case thus suggest that the developer had never intended to walk-out of the project and the flats were constructed by the developer. Being so, the transfer cannot be ruled out.
17) 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 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 been duly acted upon 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 fulfillment of conditions laid down in section 53A of the Transfer of Property Act.
18) Accordingly, the ground raised by the assessee relating to transfer of property u/s. 2(47)(v) of the IT Act is rejected in view of the guidelines laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 129 Taxman 497. The capital of the assesses is therefore computed in the year in which the Joint Ventrue Agreement was entered into, as detailed below; .
During the completion of her assessment proceedings, Smt Preethy John who was also a joint venture partner along with Smt. Hema Mohanlal, submitted that if the capital gain is chargeable on the development of property under the Joint Development Agreement dated 21/03/2009, the proposal to arrive at the consideration @ Rs.3500/- per sq.ft is highly objectionable, that Rs.3500/-is only the cut off rate for paying commission to Artech for effecting the sale of the residential units for paying commission and has nothing to do with the cost of construction, that as per the MOU between Muthoot Estate Investments and Artech rate for purchase of super built up area is only Rs.2,363/- per sq.ft.
20. After considering the merits of the arguments and supporting documents put in by Smt. Preethy John regarding the rates, it was decided to take the value @Rs.2,363/- for computing the sale consideration of Hema Mohanlal, since the facts and circumstances are exactly similar in this case. Hence, it has been decided to adopt the value of @Rs.2,363/- for working out the sale consideration in respect to Joint Venture Agreement with M/s Artech Realtors (P) Ltd.
The! total_gain_of Smt. Hema Mohanlal is computed as under:
