Case Law Details
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 the transferee has taken steps in relation to construction of the building including project plan approval on 11-4-2008, then it is to be considered as transfer under section 2(47)(v) of the Income Tax 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 section 2(47)(v) as per the reasons assigned herein above. The transferee was undisputedly willing to perform its part of the contract, in this circumstance we have to hold that there is transfer under section 2(47)(v) of the Act. Thus, 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 under section 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. 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 section 45 of the Act on fulfillment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein is to be seen.
Accordingly, we decide the above issue relating to transfer of property under section 2(47)(v) of the Income Tax Act in favour of the Assessee. We also hold that clause (47) of section 2 was amended by the Finance Act, 1987 with effect from 1-4-1988 by inserting new sub-clauses (v) and (vi) there under. 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 section 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 for development of the impugned land and construction of flats thereon. Also, the assessee signed a development agreement dated 27-6-2006 in favour of the builder/developer and gave ossession 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 2006-07 relevant assessment year 2007-08. In view of the facts and circumstances discussed above, all the conditions of sub- clause (v) of section 2(47) are satisfied in this case and therefore, it has to be inferred that a “transfer” did take place within the meaning of section 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-clause (v) of section 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 sub-clause (v) of section 2(47). Thus, the taxability of long term capital gains only taxed in the financial year 2006-07 relevant to assessment year 2007-08 and ordered accordingly.
Full Text of the ITAT Order is as follows:-
These cross appeals by the Revenue and by the assessee are directed against the order of the Commissioner (Appeals)-4,Chenaai dated 8-2-2016.
2. The assessee has raised the following grounds :
“1. The order of the Commissioner (Appeals) 4, Chennai — 600 034 dated 08.02.2016 in I.T.A. No. 226/2013-14/A.Y.2011-12/Commissioner (Appeals)4 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The Commissioner (Appeals) erred in confirming the claim of deduction under section 24(a) of the Act to the extent of Rs. 4,20,000 in the computation of income from house property which formed part of the computation of taxable total income without assigning proper reasons and justification.
3. The Commissioner (Appeals) went wrong in recording the findings in this regard in para 7 of the impugned order without assigning proper reasons and justification.
4. The Commissioner (Appeals) erred in sustaining the claim of the Long Term Capital Loss suffered from sale of shares of M/s. Paramount Builders P. Ltd. to the extent of Rs. 1,07,45,847 as sham in the computation of taxable total income without assigning proper reasons and justification.
5. The Commissioner (Appeals) went wrong in recording the findings in this regard in para 10 of the impugned order without assigning proper reasons and justification and ought to have appreciated that there was no concession for dismissing the said ground of appeal thereby vitiating the findings recorded in relation thereto.
6. The Commissioner (Appeals) erred in confirming the assessment of Long Term Capital Gains relating to the JDA in overlooking the detailed factual submissions made as well as in not properly appreciating the fact of reporting of such Long Term Capital Gains in the return of income filed for the assessment year 2014-15 without assigning proper reasons and justification.
7. The Commissioner (Appeals) failed to appreciate that the survey report as well as the remand report were not properly taken note of in recording the wrong findings in para 12 to para 15 of the impugned order.
8. The Commissioner (Appeals) failed to appreciate that the finding in para 12 of the impugned order on the presumption of sale of the area related to the joint land owners including the appellant was wrong, erroneous, unjustified, incorrect and not sustainable in law and ought to have appreciated that the presumption of the reporting of the Long Term Capital Gains in the assessment year 2014-15 relatable to the balance portion retained by the co-owners including the appellant was also wrong, erroneous, unjustified, incorrect and not sustainable in law.
9. The Commissioner (Appeals) failed to appreciate that the computation attempted in para 13 of the impugned order for the purpose of revising the Long Term Capital Gains computed by the assessing officer was wrong, erroneous, unjustified, incorrect and not sustainable in law.
10. The Commissioner (Appeals) failed to appreciate that the directions given in para 15 of the impugned order were wholly unjustified, bad in law and outside the powers vested in the appellate jurisdiction, thereby vitiating the directions recorded for passing reassessment orders for the other co-owners.
11. The Commissioner (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.”
2.1 The Revenue has raised following ground :
“2. The learned Commissioner (Appeals) has erred in holding that the action of the assessing officer in invoking the provisions of Section 45(2) and thereby treating a portion of gains as Business Profit is untenable overlooking the fact that the asset was originally owned as a capital asset and as per the contents of Joint Venture Agreement it got converted into stock-in-trade as on 27-6-2006 and accordingly, a portion of the profit being the difference between the indexed cost of acquisition and the Market Value of the property on the date of conversion gets classified as Long Term Capital Gains under section 45(2) and the subsequent difference between the sale value of the property and the Market Value of the asset sold on 27-6-2006 gets classified as Business Profit under section 28. He has further erred in diverting the assessing officer to treat the gains on executing of Joint Venture Agreement as Long Term Capital gains.”
3. At the time of hearing, the learned Authorized Representative submitted that the assessee is not pressing ground Nos. 2, 3, 4, 5 and therefore, we dismiss ground Nos. 2, 3, 4, 5 as not pressed.
4. The facts of the case are that the assessee filed his return of income for the assessment year 2011-12 on 14-6-2012 admitting a taxable income of Rs. 14,41,921. Subsequently, the order under section 143(3) of the Act was passed on 5.3.2014 arriving at a taxable income of Rs. 1,25,49,533. The contentious issues which formed the enhanced value to the taxable income, were on account of ignoring the assessee’s claim of Long Term Capital Loss (LTCL) on sale of shares in M/s. Paramount Builders (Chennai) Ltd. amounting to Rs. 1,07,45,847 and invoking the provisions of section 45(2), thereby treating a portion of gain on sale of asset at Velachery as business profits. Additionally, the interest claimed under section 24(a) of the Act of Rs. 4,20,000 was also disallowed on the finding that the loan did not relate to the property that fetched rental income.
4.1 The assessee along with 14 other family members had entered into a Joint Development Agreement (JDA) with M/s. P.S. Srijan Realty, in respect of land at 137, Seetharam Nagar Main Road, Chennai — 600 042 for development of a commercial-cum-residential complex. The commercial portion is named ‘Paramount Grand Mall’. The JDA was entered on 27-6-2006, which was later modified into a Supplementary Agreement dated 10-7-2013. In lieu of transfer of 50% undivided share of land by the 15 co-owners, the land owners were jointly allotted 78,400 sq. ft. of commercial area, 15875 sq.ft. of ‘Food Street’ and 36537 sq. ft. of residential area in the project. The co-owners of land failed to offer the LTCG that had arisen on transfer of 50% land for a consideration worth the cost of 1,30,812 sq.ft. Hence, an action under section 133A of the Act was conducted in the premises of M/s. Paramount Builders (Chennai) Ltd. on 05.03.2014 by the Investigation Unit. As a consequence, the assessee filed the return of income for the asst. year 2014-15 electronically on 4.5.2015 admitting a taxable income of Rs. 4,63,04,570.
4.2 The assessee submitted that the Sale Deed executed during financial year 2010-11 was undertaken on behalf of the co-owners in pursuance of the JDA and it was by mistake that the assessee offered the capital gain in his Income Tax returns. Consequent to the survey undertaken on 5-3-2014, it was explained and accepted by the Department that the capital gain arises during financial year 2013-14. Since the capital gains on the entire transaction covered in the JDA had been offered to assessment in assessment year 2014-15 in respect of each of the co-owners in proportion to their share of ownership, the capital gains brought to tax during the assessment year 2011-12 is superfluous and hence, may be ignored. The copy of the Survey Report was provided by the learned Authorized Representative in support of his claim.
4.3 Since a fresh evidence or fact was brought on record before Commissioner (Appeals), remand report was sought from the ITO, NCW 3(3) on 22-1-2016 bb Commissioner (Appeals). On 26-1-2016, the assessing officer submitted a remand report, drawing reference from the Survey Report of the office of the DGIT (Inv.), Chennai, stating that the capital gains that had arisen in JDA is to be assessed in assessment year 2014-15, since the deemed transfer was undertaken in October, 2013. The assessee has submitted before the Commissioner (Appeals) the contents of the assessment order, Survey Report, the copy of the JDA dated 27-6-2006, the statement of facts and grounds of appeal, the additional evidences and written submission. The Commissioner (Appeals) has examined the Remand Report, the copy of the Sale Deed dated 15-12-2010 for Rs. 2,50,00,000, the copy of Agreement for Sale-cum-construction dated 15-12-2010 and the computation of income offering capital gains in assessment year 2014-15 of the assessee.
4.4 Regarding the correctness of invoking the provisions of section 45(2) of the Act in determining the taxability of gains on sale of land during financial year 2010-11 to Shri Salil Bansal and others for Rs. 2,50,00,000, in which the land owners received Rs. 1,25,00,000, the Commissioner (Appeals) observed that the Survey Report of the DGIT (Inv.) had clearly held that the transaction results in LTCG. According to the Commissioner (Appeals), since the office of the DGIT (Inv.), had endorsed that the resultant gain cannot be termed as business profit, while the assessing officer had not illustrated otherwise, the act of invoking provisions of section 45(2) thereby treating a portion of gains as business profit, is untenable. Accordingly, the Commissioner (Appeals) directed the assessing officer to treat the gains on execution of JDA as LTCG.
4.5 According to the assessing officer, the transactions involving sale of shares of M/s. Paramount Builders (Chennai) Ltd. and the loss generated on transfer to relatives is fabricated to suit the assessee’s needs. Shares of M/s. Paramount Builders (Chennai) Ltd. numbering 7,94,212 were sold for a consideration of Rs. 3 per share to the assessee’s brothers-in-law Shri A.Imran, Shri A. Qamaran and Shri A. Burhan, all sons of Shri Athaullah. The assessing officer relied on the decision of the Bombay High Court in the case of M/s. Killick Nixon Ltd. v. DCIT in ITA No. 5518 of 2010 dated 6-3-2012 and held the transactions to be sham and a colourable device looking at human probabilities.
4.6 The Commissioner (Appeals) observed that the assessee had not provided any documentary evidence to prove that the transactions are genuine and were not invented for the purpose of suppressing taxable LTCG on sale of property at Velachery. On the contrary, the assessing officer has illustrated that the transactions with relatives are pretence to reduce the liability to tax. Therefore, the Commissioner (Appeals) agreed with the assessing officer and his action to ignore the LTCL of Rs. 1,07,45,847 is sustained.
4.7 Before the Commissioner (Appeals), the assessee sought deletion of assessment of LTCG on sale of asset for Rs. 1,25,00,000, when the same is comprised in the composite transaction covered under JDA and the resultant gain offered entirely in assessment year 2014-15. The assessee relies on the relevant content of the Survey Report which states that “Since the sale consideration of Rs. 2,50,00,000 is taken into account in the hands of all the co-owners of the land for the purpose of calculation of capital gains in the financial year 2013-14, the assessing officer is requested to ignore the capital gains offered in the hands of Shri Shafiq Mohamed Shah in financial year 2010-11.”
4.8 After perusing the JDA, the contents of the sale deed, the components of constructed area earmarked for the owners of land and the contents of the Survey Report, the Commissioner (Appeals) was of the opinion that the finding of the office of the DGIT (Inv.), on this issue is not in order. According to the Commissioner (Appeals), as per the terms of the Supplementary Agreement dated 10-7-2013, the owners of land got possession of 78400 sq.ft. of commercial mall area, 15875 sq.ft. of commercial ‘Food Street’ area and 36537 sq.ft. of residential area in all totaling 1,30,812 sq.ft. of constructed area in the residential-cum-commercial project ‘Paramount Grand Mall”, Velachery. The Commissioner (Appeals) observed that out of the same, a major portion was retained by the owners of land and the balance portion was sold jointly along with the developer to outside parties. The co-owners of land had thus sold 8568 sq.ft. of ‘Food Street’ commercial building and the property sold during financial year 2010-11 to Shri Salil Bansal and Shri Jayesh Agarwal forms part of this area sold jointly. The capital gain offered to tax in assessment year 2014-15 relates to the asset retained by the assessee and 14 other co-owners and has no connection with the property sold during the year under consideration. According to the Commissioner (Appeals), this transaction is undertaken separately and the sale proceeds have been received by the assessee.
4.9 The Commissioner (Appeals) observed that as per the JDA, the developers had paid a refundable security deposit of Rs. 11.50 crores and the same were to be appropriated against sale proceeds of a portion of the land owners’ share in constructed space. In order to refund the deposit, the co-owners of land had transferred 36537 sq.ft. of residential area and 4284 sq.ft. of commercial area ‘Food Street’ during the year. Therefore, according to the Commissioner (Appeals), the total sale consideration received by the co-owners is Rs. 22,71,223 and directed the assessing officer to adopt this value of Rs. 22,71,79,223 as the sale consideration for the purpose of computing the LTCG for the assessment year 2011-12 and compute the liability after reducing the indexed cost of acquisition that corresponds to the asset sold and selling expenses of Rs. 1,09,45,602.
4.10. The Commissioner (Appeals) further observed that in respect of the commercial area in Mall and Food Street, which are retained by the co-owners, the computation of LTCG shall be undertaken in assessment year 2014-15 to the extent of the value in money’s worth received in the form of constructed space and retained by the assessee and other co-owners. According to the Commissioner (Appeals), it is clear from the documents provided that the capital gains on the assets transferred by the assessee in the form of land and building relates to assessment year 2011-12 only. The liability to tax in the hands of the assessee is fastened to the extent of 17% of the total gains in tandem with the share of ownership he possesses in the impugned asset. Accordingly, the Commissioner (Appeals) has not accepted the request of the assessee for deletion of LTCG and in exercise of the powers conferred on the Commissioner (Appeals) under section 150(1) of the Act, he directed the assessing officer to pass relevant reassessment order in respect of the gains that had arisen in the hands of 14 other co-owners, consequent to transfer of their proportionate share in 36537 sq.ft. of residential area and 4284 sq.ft. of commercial area ‘Food Street’ during the financial year 2010-11 for a total sale consideration received by the co-owners of Rs. 2,,71,79,223. Against this, both are in appeal before us.
5. We have heard both the parties and perused the material available on record with reference to the contentions of the assessee with regard non-charge ability of capital gains in respect of the land in the assessment year under consideration. We have also gone through the various case laws cited by the parties. According to the authorized representative for assessee, the land was not ‘transferred’ in this assessment year 2011-2012 and it was actually transferred in the assessment year 2007-08 vide Development Agreement date 27-6-2006. We may refer to the provisions of section 2(47)(v) which reads as follows :–
“(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)”
6. The importance of the word “transfer” is due to the reason that under the charging section, viz., section 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”.
7. 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 section 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 Honorable Authority for Advance Rulings in the case of Jasbir Singh Sarkaria, In re (2007) 294 ITR 196 (AAR), that the expression used in section 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 accrual 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.
8. But the issue does not get settled only by the interpretation of section 45 and section 2(47)(v) because the definition of “transfer” does not merely prescribes allowing of possession but also that it must be retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act. Therefore, it is further requisite to deal with the relevant section contained in the Transfer of Property Act. The Transfer of Property Act contains section 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 trans feror 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.”
8.1. 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 eye of law.
8.2 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 section 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 section says “to transfer”, which 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 section 45 and section 2(47)(v) of the Income Tax Act. It is pertinent to clarify that one must not forget to identify the issue of capital gain with the term “transfer” as defined in section 54 of the 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. No capital gain tax was directed to be levied so long as the “transfer” has not taken place as per the generally accepted connotation of the term under the Transfer of Property Act. The resultant position was that the levy of capital gains tax thus resulted in major amendments in the Income-tax statute. The main objective of section 2(47)(v) of the Act 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 the 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 the 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 commercial and residential area 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 and clearly spoke 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 the second is passing over of possession. As far as the payment of consideration is concerned, we have noticed that it is in the form of both cash as well as kind and payment made to the assessee. The consideration is as follows:
(i) The land owners would get from the Developers a refundable security of Rs. 11.5 crores without interest as per Clause No.6.1 of the Development Agreement. Out of this, Rs. 5 crores was paid to Mr.M.S.Hameed on 27-6-2006 and each owners admitted and acknowledged the receipt of their proportionate share of the above said consideration. The balance Rs. 6.5 crores to be paid within a week from the date of the sanction of the proposed building development plan.
(ii) Owner has to get 50% of title of the land along with 50% constructed area in shopping mall, and 50% title in the land along with the residential building.
(e) The assessee has to hand over the possession of the land on the receipt of security deposit as mentioned in Clause 6 of the Agreement and thereafter the developer completes the construction in accordance with the sanction plan and to allow the developer to remain in occupation of the land for the purpose of said construction and allied activities during the continuation of the development agreement. The developer has to pay the corporation tax, water and other taxes as being paid by the owners from the date of obtaining the vacant position of the property till the development on the said land. The time for completion of the development work would be 30 months from the date of boomi pooja after obtaining the municipal sanction plan for the proposed building. If there is a delay beyond the control of the developer i.e. by God act, such period would be extended. However, if the delay is attributable to the developer, the developer has to pay an amount of Rs. 5 per sq. ft. per month to the developer for first four months and Rs. 20 per sq. ft thereafter.
(f) 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 one kind of the facet of part performance of the 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 section 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 clause (7) 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 clause (7) has its full role to play. There is no warrant to postpone the operation of clause 2(47)(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 the capital gains tax so as to postpone the same indefinitely. What is meant in clause (v) of section 2(47) 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, a right to enter upon and exercise the act of possession effectively, then such an act amounts to legal possession over the property.
(g) 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 the willingness is to be judged by the series of actions of the transferee. The developer made an application for project approval to Chennai Metropolitan Development Authority,Chennai on 3-4-2007 and got approval on 11-4-2008 as per approval letter No. C3/7853/2007 dated 11-4-2008 which is kept on record at paper book at page No. 62.The transferees survey the land and to attract purchaser 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 development agreement 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 the willingness to fulfill the commitment. Further, as per Survey Report submitted by Inspector of Income-tax which was conducted on 05.03.2014 confirmed the following facts:–
“As per the conditions laid down in the JVA, the transfer of the property as expressed in Article VII, paragraphs 7.1 to 7.4 of the said agreement, had got effected immediately on the building plan being sanctioned by appropriate authorities and after payment of security deposit to the owners. Therefore, the liability to tax on capital gains had arisen during the financial year 2006-07 itself. However, the land owners have postponed the share of 1,30,812 sq.ft. constructed building was handed over to the land owners in October, 2013. The landowners have not paid any tax on capital gains till the date of survey. Therefore, the tax on capital gains was not paid either in the financial year 2006-07 or in the financial year 2013-14.”
Facts of this case thus suggest that the developer had never intended to walk-out of the project. The possession was with developer from the date of 27-6-2006 as per clause 7.1 to 7.4 of the Development Agreement.
(h) From the development agreement, it is more than clear that it was an agreement for construction of residential/commercial flats on the property owned by the assessee. In lieu of the right given to the developer thereunder, the assessee was to receive 50 per cent of the constructed area of both commercial and residential areas. Further, even the vacant and peaceful possession of the property had been delivered to the developer on 27-6-2006 after receiving substantial amount of Rs. 11.5 crores as interest free security deposit. Under the circumstances, there was indeed an exchange of property which amounted to a transfer within the meaning of section 2(47)(v) of the Act on 27-6-2006 and the gain resulting from such transfer was indeed taxable in the year in which the development agreement entered which was coupled with by giving vacant and peaceful possession of the property to the developer. This view of ours is supported by the judgment of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (2003) 260 ITR 491 (Bom) wherein held that:
“Under section 2(47)(v) read with section 45 indicates that capital gains was taxable in the year in which such transactions were entered into even if the transfer of immovable property is not effective or complete under the general law. In this case, the test had not been applied by the Department. No reason had been given why that test had not been applied, particularly when the agreement in question, read as a whole, showed that it was a development agreement. Once under clause 8 of the agreement a limited power of attorney was intended to be given to the developer to deal with the property, then the date of the contract, viz., 18-8-1994, would be the relevant date to decide the date of transfer under section 2(47)(v) and, in which event, the question of substantial performance of the contract thereafter would not arise. This point had not been considered by any of the authorities below. The assessee had paid the capital gains tax for the assessment year 1999-2000. From mere substantial compliance of the agreement, one could not infer transfer in the accounting year ending 31-3-1996. There were mistakes apparent on the face of the record, in the order of the Tribunal. According to the Tribunal, the letter dated 18-2-1999, showed that the builder came into possession on the day next to 31-3-1996, i.e., 1-4-1997. The day next to 31-3-1996, would be 1-4-1996, and not 1-4-1997, and even if 1-4-1997, were taken as a typing mistake, it could only be read as 1-4-1996, and if 1-4-1996, was the date on which the developer came into possession, then the possession was received by the developer during the financial year 1996-97 corresponding to the assessment year 1997-98. Therefore, this finding of the Tribunal was erroneous. Taking into account the totality of the circumstances the Tribunal was not justified in concluding that the appellant had transferred the property during the previous year relevant to the assessment year 1996-97”.
Further, Madras High Court in the case of D.Kasturi v. CIT (251 ITR 532) wherein held that:
“The assessee entered into a sale agreement on 29-3-1993, with a firm, C, providing for the delivery of her property to C on receipt of the agreed sale consideration, which, in fact, was received by her in August, 1993. C had taken delivery of the property during 1993-94. The assessee executed a power of attorney on 17-8-1993, in favour of the two partners of C after obtaining the clearance for the sale of property under Chapter XXC of the Income Tax Act, 1961. The partners of C who had obtained power of attorney started selling the property in parts to others on or after March, 1995, by executing the sale deeds, describing themselves as the agents of the assessee. Originally, she filed the return for the assessment year 1994-95 admitting the capital gain by treating the transfer of possession to C in August, 1993, as a transfer under section 2(47)(v) of the Act. Subsequently, she claimed that there was no transfer relevant for the assessment year 1994-95 and that the actual transfers were made in the assessment year 1995-96 when the power of attorney holders executed registered sale deeds in favour of others. This claim was rejected by the Department. On a writ petition :
Held, rejecting the claim of the assessee, that the ingredients of section 53A of the Transfer of Property Act, 1882, were satisfied when the assessee had put C in possession of the property in August, 1993, after receipt of the full sale consideration. The subsequent execution of the sale deeds by the power of attorney holders did not militate against the operation of section 53A of the Transfer of Property Act.”
and also by the several decisions of the Income Tax Appellate Tribunal including that in the case of Dr. Maya Shenoy, Secunderabad v. ACIT (124 TTJ 692 (Hyd.) ) wherein held that:
“Assessee owner of land having parted with possession of land under a development agreement for construction of flats having handed over possession of vacant land to developer on promise to be handed over 45 per cent of constructed area, it was a case of transfer by exchange within the meaning of s.2(47)(i); property was handed over in part performance under section 53A of the TP Act and it could not be said that the transaction was without consideration; possession of land being handed over to developer only in December, 1999, the transfer took place in December, 1999, hence capital gain accrued and was chargeable in assessment year 2000-01 and not in assessment year 2001-02; transfer of land and transfer of flats allotted in consideration of transfer of land are two transactions and not one for purposes of charge of capital gains.”
In view of the above, the land is one capital asset transferred by the assessee and the constructed area allotted to the assessee in consideration for the transfer of land constitute a different capital asset for the assessee. The two capital asset transferred on the different dates would constitute two different transactions for the purpose of computation of capital gains under the Act. It is not a conversion of an asset from one form to another. Such a conversion is deemed to be a transfer only when capital asset is converted into stock in trade by a person. In the instant case, it is not in dispute that the land held by the assessee was his capital asset. It cannot also be disuted that the constructed area acquired by the assessee on the completion of the project by developer were also his capital asset. The acquisition of a new asset may have been by any mode, but simply because new asset came to him by way of consideration for transfer of earlier asset, the transfer of new asset does not ceased to be a transfer as per section 2(47)(v) of the Act constituting altogether a new transaction. The argument of the Authorized Representative that commencing from the date of transferring the land to the developer and ending on the date when the assessee sold his share of constructed area constitute a single transaction which cannot be accepted as this contention easily defeat very charging provision of section 45 of the Act by postponing the sale of new asset indefinitely. Such a situation is not envisaged under the Act. As per the Development Argument the assessee has no claim over the land which has been given to the Developer and he may not shell any constructed area coming to his share. In that case, despite there being transfer of land under section 2(47)(v) of the Act, the assessee could escape the liability of the capital gains taxes. Therefore, as mentioned earlier it is not possible to treat the two transactions as one transactions which is too fallacious. Accordingly we hold the transfer of land in consideration of the constructed area constitute one transaction which giving rise to the capital gains in the financial year 2006-07 relevant to assessment year 2007-08 and the sale of constructed area along with undivided share in land by the assessee constitute another transaction due rise to the capital gains which may be short term capital gains or long term capital gains as the case may be depending upon period for which the assessee held the constructed area with him and the constructed area received by the assessee cannot be treated it as stock in trade in this case. Since the development agreement in the assessee’s case has been executed on 27-6-2006 and the vacant and peaceful possession also was given vide this development agreement itself, such long term capital gains were indeed to be taxed in the financial year 2006-07, relevant to the assessment year 2007-08.
(i) As regards the contention of the Departmental Representative that the said decisions are not applicable to the assessee’s case, it is clear that no reasons for such view could be ever furnished by him. Similarly, there is no merit in the contention that the development agreement could not have come into force unless and until the builder deposited Rs. 11.5 crores. As discussed in earlier para, the land owner had indeed been paid Rs. 5 croes on the date of signing the agreement balance Rs. 6.5 crores within a week from the date of the sanction of the proposed building plan. There is no evidence to show that this was not paid to the land owners. Under these circumstances, it cannot be disputed that there was a promise to pay which has not been shown as having remained unfulfilled. It is an established judicial proposition that the consideration may be futuristic also, as held by the Supreme Court in the case Jugalkishore Saraf v. Raw Cotton Co. Ltd. reported in AIR 1955 SC 376. Accordingly, there is no merit in such contention of the representative of the assessee. As regards the argument of the Departmental Representative that the agreement under reference had been executed only for the purpose of getting permissions from various Departments for construction, the very terms of the agreement belie any such claim as the development agreement gives absolute rights to the builders, including possession, duly specified the consideration to be received by the assessee on such exchange. As regards the case law cited by the Departmental Representative, evidently those stand on a set of different facts and hence cannot be considered in the facts of the present case.
9. 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 the transferee has taken steps in relation to construction of the building including project plan approval on 11-4-2008, then it is to be considered as transfer under section 2(47)(v) of the Income Tax 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 section 2(47)(v) as per the reasons assigned herein above. The transferee was undisputedly willing to perform its part of the contract, in this circumstance we have to hold that there is transfer under section 2(47)(v) of the Act. Thus, 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 under section 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. 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 section 45 of the Act on fulfillment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein is to be seen.
10. Accordingly, we decide the above issue relating to transfer of property under section 2(47)(v) of the Income Tax Act in favour of the Assessee. We also hold that clause (47) of section 2 was amended by the Finance Act, 1987 with effect from 1-4-1988 by inserting new sub-clauses (v) and (vi) there under. 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 section 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 for development of the impugned land and construction of flats thereon. Also, the assessee signed a development agreement dated 27-6-2006 in favour of the builder/developer and gave ossession 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 2006-07 relevant assessment year 2007-08. In view of the facts and circumstances discussed above, all the conditions of sub- clause (v) of section 2(47) are satisfied in this case and therefore, it has to be inferred that a “transfer” did take place within the meaning of section 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-clause (v) of section 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 sub-clause (v) of section 2(47). Thus, the taxability of long term capital gains only taxed in the financial year 2006-07 relevant to assessment year 2007-08 and ordered accordingly.
11. Now coming to the computation of short term capital gains on selling of assessee’s share of residential and commercial constructed area, the learned Authorized Representative submitted that co-owners of the land have transferred 36,537 sq.ft. of residential area and 4284 commercial area called as Food street during the financial year relevant to the assessment year 2011-12 and the findings of the Commissioner (Appeals) in para -14 of his order is irrelevant and bad in law. In our considered opinion, the gain on the transfer of the assessee’s share in constructed area is to be brought in tax as short term capital gains after giving due deduction as enumerated in sec.48 of the Act. The assessing officer has to consider this issue of computation of capital gains on assessee’s share of construction area along with undivided share in land which was actually transferred by the assessee in this assessment year. In other words, the assessing officer cannot bring into tax entire share of constructed area along with undivided share in land only on receipt basis as transferred unless there is actual transfer in terms of Sec.45 of the Act. Accordingly, we direct the assessing officer to tax the gains arising from transfer of capital asset effected in the previous year alone in the relevant assessment year 2011-12.
12. Further, the direction of the Commissioner (Appeals) in para -15 that Assessing Officer has to pass relevant orders in respect of 14 other co-owners so as to bring gains into taxation in their respective hands. The Commissioner (Appeals) cannot decide the issue behind the back of the co-owners without hearing them. More so, where they are third party to the litigation before him. Accordingly, we vacate that findings.
13. Since we have held that there was a transfer under section 45 in the assessment year 2007-08 and the long term capital gains to be computed in terms of section 2(47)(v) of the Act in the assessment year 2007-08 and short term capital gains to be computed in transfer of capital asset in the respective previous years when the transfer of constructed area when it was actually taken place, there is no question of computing any business on the impugned issue. Accordingly, the findings of the Commissioner (Appeals) on applicability of section 45(2) is infractuous.
14. In the result, the appeal of assessee is partly allowed for statistical purposes and the appeal of Revenue is dismissed as infractuous.
