In land development agreement, capital gain arises in year in which developer gets possession of property

IN THE ITAT HYDERABAD BENCH ‘A’

Ravinder Singh Arora

v/s.

Assistant Commissioner of Income-tax, Circle-10(1), Hyderabad

IT APPEAL NOS. 58 & 355 (HYD.) OF 2011

[ASSESSMENT YEAR 2007-08]

JULY 20, 2012

ORDER

Chandra Poojari, Accountant Member 

These are cross appeals directed against the order of the CIT(A)-VI, Hyderabad, dated 15.11.2010 for assessment year 2007-08.

2. The assessee raised the following grounds of appeal:

 1.  The order of CIT (Appeals) is in gross violations of the provisions of law and hence is bad in law.

 2.  The CIT (Appeals) has erred in upholding the assessing officer’s finding of considering the grant of right to construct as transfer u/s. 2(47) of the Income Tax Act.

 3.  The CIT(Appeals) has erred in rejecting the assessee’s contention that the possession of the property has not been handed over to the developer.

 4.  The CIT (Appeals) has erred in upholding the assessment of capital gains on entering into a development agreement.

 5.  The CIT (Appeals) has erred in concluding that entering into a development agreement tantamount to transfer of legal possession.

 6.  The CIT(Appeals) has erred in not considering the submission of the assessee that taxing the capital gains in the current year results in double taxation.

 7.  The CIT (Appeals) has erred in sustaining disallowance of interest expenditure of Rs. 9,83,824 in M/s. R.S. Arora Rubber Crop (Proprietary concern of assessee).

 8.  The CIT (Appeals) has erred in sustaining disallowance of interest expenditure of Rs. 3,64,479 in M/s. Fixo Seal Stoppers and Profiles (Proprietary concern of assessee).

3. The Revenue raised the following effective ground of appeal:

The CIT(A) erred in directing the Assessing Officer to adopt the cost of land at Rs. 22,000/- per sq. yard as against Rs. 25,000 as adopted by the Assessing Officer to calculate the capital gains as the rate of Rs. 25,000 per sq. yard is supported by the letter of SRO, Marredpally which is available on file.

4. First we will take up assessee’s appeal. Brief facts of the issue are that the assessee did business in the name of M/s. R.S. Arora Rubber Corporation. For A.Y. 2007-08, he filed his return admitting total income of Rs. 95,90,321 being income from property, business and other source and also income of his minor child. During the course of assessment proceedings, the Assessing Officer found that the assessee owned land of 3200 sq. yd at Sarojini Devi Road, Secunderabad. The assessee entered into a Development Agreement with M/s. Legend Estate Pvt. Ltd., on 19.4.2006. As per the said agreement, the developer M/s. Legend Estate Pvt. Ltd. was to develop the assessee’s land of 3200 sq. yd and construct flats with an understanding to share the built-up area in the ratio of 50:50. During the course of assessment proceedings, the Assessing Officer noted that the agreement for development amounted to transfer of the assessee’s land to the developer within the meaning of section 2(47) and he brought to tax the resultant capital gain. While doing so, he arrived at the net capital gain on this transaction at Rs. 5,03,79,427 after adopting the value of the land at Rs. 25,000 per sq. yd.

5. The assessee challenged this issue before the CIT(A). The CIT(A) held that there is a transfer u/s. 2(47) of the Act. However, regarding the valuation of the land at Rs. 25,000 per sq. yd., he directed the Assessing Officer to adopt the value of land at Rs. 22,000 per sq. yd., as per the SRO record and re-compute capital gain. Aggrieved, the Revenue is in appeal before us. Against the treatment of development agreement as transfer u/s. 2(47) of the Act, the assessee is in appeal before us.

6. The learned AR submitted that the Assessing Officer has relied on the order of the Income Tax Appellate Tribunal in the case of Dr. Maya Shenoy v. Asstt. CIT  [2009] 124 TTJ 692 (Hyd.) and charged the assessee to capital gains. There are significant distinctions in facts between the case relied upon by the assessing officer and the present case. As such, the case of Dr. Maya Shenoy’s case (supra) is not applicable to the present case. Some of the distinctive features of the present case are that possession of the property has not been handed over to the developer in the present case as per clause 15 of the development agreement. This is one of the most important considerations on account of which section 53A of the Transfer of Property Act becomes inapplicable. The said section requires delivery of possession as an essential ingredient which is absent in the present case. At best, the developer merely had the right to enter the property to do construction but does not have the right of legal possession exclusive of the owner that is the assessee. This fact is totally overlooked by the assessing officer. The other very important requirement of section 53A of the Transfer of Property Act is that the transferee (developer) must have performed or be willing to perform his part of the contract. In the present case, till the end of the previous year the developer has not performed his part of the contract. Because the Developer has not completed construction of the property, he cannot even be willing to perform his part of the contract. The developer can be considered to be willing to perform his part of the contract only when the construction is complete, if for some reason he does not deliver possession. This is not the case of the assessee. Hence the other important ingredient of section 53A of the Transfer of Property Act, does not get fulfilled. This fact is also overlooked by the assessing officer. As such, capital gains cannot be said to accrue during the current previous year.

7. The AR further submitted that the assessee has received five semi-finished apartments in the year 2007-08 and two semi-finished apartments subsequently in the year 2008-09. On receipt of the apartments the assessee offered the capital gains relatable to apartments received in his return of income filed with the department for the AY 2008-09 and AY 2009-10 and paid tax on the capital gains. Though the assessing officer had this information in his possession, he overlooked these facts altogether while assessing the income for the AY 2007-08. Thus it resulted in double taxation of same income in two different years, which is bad in law.

8. The assessing officer considered Rs. 25,000 per square yard as deemed consideration for transfer of land. However. the assessing officer has not indicated any rationale for adopting the rate Rs. 25,000. Being a quasi-judicial officer the assessing officer ought to have justified such adoption. In view of this fact, assessing the consideration at the rate of Rs. 25,000 per square yard is a gross error. Therefore, the addition deserves to be deleted. The assessee was to receive 50% of the super built-up area of the property to be constructed by the developer. Overlooking this fact, the assessing officer considered that that the assessee has transferred the entire 3,200 square yards of land, thus he computed the capital gains adopting an ad hoc rate of Rs. 25,000 per square yard as consideration for the entire land owned by me. Thus the assessing officer considered that the assessee has transferred the entire land and has grossly erred in both adopting an ad hoc rate of Rs. 25,000 per square yard as well as considering entire land as transferred. Since the assessing officer has overlooked vital facts and adopted ad hoc consideration, the addition made deserves to be deleted.

9. The learned AR submitted that against the consideration that the entire land as transferred is an apparent error, the assessee moved a petition u/s 154 and requested the assessing officer to rectify the errors. In response to the said petition, vide modification order dated 27th January 2010 the assessing officer considered 50% of land as transferred. From the modification order passed by the assessing officer it is noticed that the AO relied on SRO letter No. 287 dated 29-12-2009 for market value of land and adopted the market value of land as consideration. The AR submitted that the Assessing Officer has not given to the assessee any copy of the document on which he placed reliance which is in gross violation of natural justice. Therefore, placing reliance and making an addition based on the documents not offered to the assessee for rebuttal is bad in law. Thus even on this ground the addition made by the officer deserves to be deleted.

10. The learned AR submitted that the assessing officer has erred in adopting the SRO value as the basis of computation of consideration and the resulting capital gains. Though not admitting, for the sake of argument. if it is assumed that capital gains arises in the year in which the development agreement was entered into. though the developer was not in a position to perform his part of consideration and if it is further assumed that adoption of market value of land as per SRO is also as correct, the assessing officer ought to have considered the SRO rate applicable for the AY 2007-08 for computing the capital gains. In this regard the a copy information relating to market value of land in the month of April 2006 obtained from Sub-Registrar of Maredpally dated 2nd January 2010 is placed on record. Though adoption of land value as consideration is not correct. at best the assessing officer could have considered the market value of land prevailing in the month of April 2006 for computing the capital gains. The assessing officer has not chosen to do so. Therefore the addition made is erroneous and deserves to be deleted.

11. Further the learned AR drew our attention to the Registration and Other Related Laws (Amendment) Act, 2001 specifically to amendment of section 17 which reads as follows:

Amendment of section 17 – In section 17 of the Registration Act, –

(a)  After sub-section 1, the following sub-section shall be inserted, namely:- “(1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A”.

(b)  In sub-section (2), in clause (v), for the opening words “any document”, the words, brackets, figure and letter” any document other than the documents specified in sub-section (1A)” shall be substituted.

12. According to him, there was no registration of development agreement. Being so, there is no effect for the purpose of section 53A of Transfer of Property Act to consider the transaction as transfer u/s. 2(47)(v) of Income-tax Act, 1961. The learned AR relied on the following judgements:

(a)  CIT v. Atam Prakash & Sons [2008] 175 Taxman 499 (Delhi) wherein it was held that grant of mere right of development of a plot of land with possession to facilitate development under JDA against receipt of a security to be adjusted in future against transfer of built up area allocable to the assessee on completion of development did not involve transfer of capital asset giving the rights to chargeable capital gain, more so, when neither the registered sale deed was executed nor construction was completed nor permission for construction was granted by the Government.

(b)  Asstt. CIT v. Mrs. Geetadevi Pasari [2006] 104 TTJ 375/[2007] 14 SOT 63 (Mum.) (URO) wherein the Tribunal concluded that transfer of property under the sale-cum-development agreement could be said to have taken place when the possession was handed over by the assessee to the developer and not on the date of agreement when only a small portion of cash consideration was received as earnest money on the date of agreement and possession was given long after fulfilment of other terms of the agreement and, therefore, the date of agreement was not relevant to decide the year of chargeability of capital gains.

(c)  Dy. CIT v. Asian Distributors Ltd. [2001] 119 Taxman 171 (Mum.) (Mag.) wherein the Tribunal held that the case of the AO precisely is that by virtue of the amendment to s. 2(47)(v) of the IT Act, there is a “transfer” of immovable property in the year under consideration. In order to appreciate as to whether the facts suggests “transfer” of immovable property in the year under consideration, it is necessary to bear in mind the facts and circumstances of the instant case and the specific clauses in the agreement dt. 29th July, 1987 as amended by the supplementary agreements dt. 24th Sept., 1987. Admittedly, the last instalment falls due in the month of May, 1988. For the assessment year under consideration, the previous year ends on 31st March, 1988. The clauses in the agreement, amply show that the possession of the property is agreed to be given to the developers only upon payment of the last instalment and till such time, the assessee has a right to revoke the contract in certain eventualities. The language used in the contract also indicates that it is not a case of transferring the possession of the property to the developers to enjoy absolute rights over the said property, but it is a case of mere licence to him to enter upon and carry on the developmental activities in the said property. In the light of the specific clause in the agreement as regards the transfer of possession of the property, it is for the Revenue to prove that the assessee gave possession of the property to the developers before the end of the previous ear relevant to A.Y. 1988-89 and such transfer of possession, if any, debars the assessee from enforcing against the transferee or persons claiming under him any right in respect of the property. Thus, neither in terms of s. 2(47)(v) of the IT Act, nor in terms of s. 53A of the Transfer of Property Act, the impugned transaction can be classified as “transfer” of capital asset or would be considered as allowing of the possession of any immovable property in part performance of a contract of the nature referred to in s. 53A of the TP Act. The transaction can at best be classified as an agreement granting licence to the developers within the meaning of S. 52 of the Easement Act 1882. It may also be noted that the Revenue has not brought any material to show that as on 31st March, 1988 i.e. the last day of the previous year, the developer ‘was willing to perform the contract on his part. On the contrary, the factum of delayed payment of the last instalment would indicate that the assessee had the privilege to terminate the contract as per terms of agreement and the other party cannot have any protection under law to seek specific performance of the contract or to take shelter under s. 53A of the TP Act. Thus, the conditions stipulated in s. 53A of the TP Act are also not satisfied. Thus, on a careful perusal of the agreements and upon a plain interpretation of the concerned provisions, the impugned agreements did not give rise to any transfer, in the previous year relevant to A.Y. 1988-89, of the assessee’s land and, therefore, the consideration receivable by the assessee by virtue of the impugned agreements is not taxable under the head ‘capital gains’ in this year.

(d)  Ms. K. Radhika v. Dy. CIT [2011] 47 SOT 180  wherein the Tribunal held that that is clearly an erroneous assumption, and an the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has received only a ‘meager amount’ out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. 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. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital gains could not have been taxed in the in this assessment year in appeal before us. The other grounds raised by the assessees in their appeals have become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessees in the assessment year under consideration. Consequently, the appeal filed by the revenue in ITA No.328 to 331/Hyd/2011 have become infructuous and dismissed accordingly.

13. The learned DR contended that the action of the Assessing Officer and the contentions of the assessee’s counsel revolved around two clauses of the development agreement dated 19.04.2006, as follows: . They are reproduced below:

“Clause 7(t): The first (sic) has already delivered possession of the property to the second party and the second party has obtained all permissions and sanctions for the proposed residential complex.”

“Clause 15: It is agreed by both parties that till the completion of sale of the share of both parties, the first party shall have the possession of the plot of land and the second party shall have absolute rights to visit and inspect the construction of the residential complex, at any reasonable time, so as to check if the construction is being carried out as per the specifications and plans agreed upon and detailed in this and any other agreement”

14. The DR submitted that it is necessary to digest the following interpretations of statute:

“The rule of construction is well settled that the intention of the executor of a document is to be ascertained after considering all the words in their ordinary natural sense. The document is required to be read as a whole to ascertain the intention of the executant. It is also necessary to take into account the circumstances under which any particular words may have been used”.

F.M. Devaru Ganapati Bhat v. Prabhakar Ganapathi Bhat [Civil Appeal No. 4385 of 2001, dated 19-12-2003]

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 vas 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…..

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 ……

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.

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 fulfil 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.”

Authority for Advance Rulings Jasbir Singh Sarkaria, In re. [2007] 164 Taxman 108 (AAR – New Delhi)

15. As per clause 7(f) of the development agreement, the first party i.e., the assessee had already delivered possession of the property to the second party i.e., M/s Legend Estate Private Ltd. Deriving support from the ruling of the Authority for Advance Rulings extracted as above, this act of the assessee amounts to “transfer” as defined in Section 2(47) of the Act. Accordingly, the contention of the assessee that the ‘possession of the property has not been handed over to the developer’ as per clause 15 of the development agreement and therefore section 53A of the Transfer of Property Act was not applicable, is not acceptable.

16. The learned DR submitted that an identical issue has been decided by the CIT(A)-I, Hyderabad in the case of B. Narasimha Reddy for the assessment year 2008-09 in IT Appeal Nos. 348/CC-6, HYD/CIT(A)-I/09-10 dated 7.1.2011. In that case also, the assessee has entered into a development agreement with Janapriya Engineers Syndicate Ltd. and the Assessing Officer had charged capital gains on the transaction relating to the development agreement. The Assessing Officer had relied on the same set of judicial decisions as in the case of the present assessee. While deciding the appeal in the case of B. Narasimha Reddy (supra) it was held that the Assessing Officer was justified in bringing to tax the transaction relating to the development agreement in view of the provision of sec. 2(47) of the I.T. Act. While doing so, the CIT(A) relied on the decision of ITAT Pune Bench in the case of Taher Alimohammed Poonawala v. Addl. CIT [2009] 124 TTJ 387 wherein the Tribunal observed as under:

“Where owners (assessees) 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 …. “

17. The learned DR relied on the decision in the case of Dr. Maya Shenoy (supra) wherein the Hon’ble ITAT Hyderabad observed as under:

“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 licence to builder to carry on development activities but would be a case of transfer under section 2(47).”

The Hon’ble ITAT after analysing the issue further held that

“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 4-1/2 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 as money was not the consideration but some other valuable consideration was passing to the assessee in the form of 4-1/2 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). (Head Note)”

18. The learned DR submitted that the case of the assessee is identical to that of B. Narasimha Reddy (supra). Accordingly, the assessee was liable for capital gains in respect of the development agreement b virtue of which the assessee was liable to get 27% of the constructed area.

19. We have heard both the parties and perused the material available on record with reference to the contentions of the assessee on chargeability of capital gains in respect of the land. According to AR which was not ‘transferred’ but only given for development. We may 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)”

20. 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”.

21. 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. It shall not be out of context, at this juncture, to mention an observation of the Hon’ble Authority of Advance Rulings in the case of Jasbir Singh Sarkaria (supra) that the expression used in sec. 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 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.

22. But the issue do not get settled only by the interpretation of s. 45 and s. 2(47)(v) because the definition of “transfer” 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.

23. 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 therefor 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.”

24. 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.

25. 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 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 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 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. As far as the payment of consideration is concerned, we have already noticed that it is in the form of both cash as well as kind and payment made to the assessee has not been brought on record by the lower authorities and the same to be examined and considered by the CIT(A).

(e) 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 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.

(f)  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 fulfil 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.

26. 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 fulfilment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein to be seen.

27. Accordingly, we decide the above issue relating to transfer of property u/s. 2(47)(v) of the IT Act in favour of the Department after considering the ratio laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT  [2003] 129 Taxman 497 and also the order of the Tribunal in the case of Dr. Maya Shenoy (supra). This ground raised of the assessee is dismissed.

28. Coming to the ground raised by the Revenue with regard to value to be adopted by the Assessing Officer at Rs. 2,000 per sq. yd. Which is as per SRO’s record, we do not find any infirmity in the finding of the CIT(A) and the same is confirmed.

29. Ground Nos. 7 and 8 in assessee’s appeal are with regard to sustaining of disallowance of interest expenditure of Rs. 9,83,824 in M/s. R.S. Arora Rubber Corporation (proprietary concern of the assessee). Brief facts of this issue are that the Assessing Officer noticed from the Balance Sheet of M/s. R.S. Arora Rubber Corporation that the assessee debited an amount of Rs. 1,09,44,009 from friends and relatives under the head unsecured loans and paid an interest of Rs. 9,83,324. Correspondingly it was seen that the assessee made certain investments in Arora Towers, MG Road amounting to Rs. 40,71,489, investment in SD Road amounting to Rs. 40,32,320 and some deposits amounting to Rs. 3,74,914. The Assessing Officer disallowed interest payment of Rs. 9,83,324 u/s. 36(1)(iii) on the ground that the above loan amount was not utilised for the business purpose but was diverted in making the investments. Similarly, on perusal of the Balance Sheet in the case of M/s. Fixo Seal Stoppers and profiles, it was noticed by the Assessing Officer that the assessee debited an amount of Rs. 52,01,765 from friends and relatives under the head unsecured loans and paid interest amounting to Rs. 3,64,479. Correspondingly, the assessee withdrew the capital and had a negative balance. Therefore, the Assessing Officer disallowed an interest of Rs. 3,64,479 u/s. 36(1)(iii) as the funds were not utilised for the business purposes and added back to the income of the assessee.

30. The learned AR submitted that the assessing officer disallowed interest of Rs. 9,83,324 in RS Arora Rubber Corp and interest of Rs. 3,64,479 in Fixo Seal Stoppers and Profiles holding that the funds were used for making investments, deposits and for assessee’s personal use and were not used for the purpose of business. Breakup of the investments and the deposits considered personal by the assessing officer are as under:

31. With reference to the deposits, the AR submitted that all the deposits are made for the purpose of business and are not personal deposits. He submitted that it is necessary for a business of the assessee size to have such business deposits. All these deposits were made to various Government Departments, Service Providers etc., for business considerations several years back and were appearing in the Balance sheet of R.S Arora Rubber Corporation for several years now and the same were accepted by the department till now. The assessing officer has overlooked these facts and held the deposits to be assessee’s personal deposits without giving any reasons whatsoever. Thus the disallowance attributable to the deposits is unjustified. The DR submitted that it was stated earlier by the assessee that he is a proprietor of R.S Arora Rubber Corp., Fixo Seal Stoppers & Profiles and R.S. Constructions. The aggregate capital in all the three businesses is Rs. 1,99,56,411. The AR submitted that for ready reference of the Bench, a consolidated abridged Balance Sheet as at 31st March 2007 is extracted below.

Consolidated Balance Sheet of all business concerns of the assessee as on 31.3.2007

32. The AR submitted on a perusal of the above consolidated Balance Sheet it will be clear that the total capital of the assessee is Rs. 1,99,56,411. Investment of Rs. 81,03,809 and deposits of Rs. 3,74,914 appearing in the Balance Sheet both aggregating to Rs. 84,78,723 are considered as the personal assets of the assessee by the assessing officer. Since the assessee was proprietor of all the three business the assessing officer ought to have looked at the availability of aggregate of assessee’s own capital in all the three firms to arrive at sufficiency of funds to meet the investments. From the above it is clear that the assessee had sufficient capital of his own to invest. These facts are overlooked by the assessing officer while completing the assessment. Thus the disallowance of interest made by the assessing officer is erroneous and accordingly, the AR requested to delete the disallowance. The AR further submitted that from the consolidated balance sheet it can be appreciated that the non-interest bearing unsecured loans available for investment are Rs. 64,28,456. Thus the aggregate capital and the non-interest bearing funds available to the assessee are Rs. 2,63,84,867. In view of this fact, assessee’s capital and the non-interest bearing funds are sufficient to cover the investments and deposits aggregating to Rs. 84,78,723.

33. From the foregoing facts, it is apparent that the assessee had sufficient own funds to meet the investments. Thus holding the interest paid on unsecured loans as not for business purpose and disallowing the same is erroneous and baseless. The AR submitted that the disallowance made by the assessing officer be deleted. The AR submitted that from the Balance Sheet of RS Arora Rubber Corporation, the assessing officer noticed that the unsecured loan balances stood at Rs. 1,09,44,009 and the investments in Arora Tower MG Road stood at 40,71,489, investment in property at SD Road stood at Rs. 40,32,320 and deposits stood at Rs. 3,74,914. Without bringing any information on record, the assessing officer held that the assessee had diverted the loan amount towards the investments and deposits. Thus the assessing officer disallowed the claim of interest on unsecured loans u/s 36(1)(iii) amounting to Rs. 9,83,324. which is totally baseless and erroneous. The learned AR submitted that similarly from the Balance Sheet of Fixo Seal Stoppers & Profiles the assessing officer noticed that the unsecured loan balances stood at Rs. 52,01,785 and capital account reflected a debit balance of Rs. 43,66,358. Without bringing any information on record, the assessing officer held that the assessee has diverted the loan amount towards personal purposes. Thus the assessing officer disallowed the claim of interest on unsecured loans u/s 36(1)(iii) amounting to Rs. 3,64,479. The disallowance made is totally baseless and erroneous.

34. The learned AR submitted that though not admitting for the sake of argument, if one was to consider firm-wise availability of own and interest-free funds available to the assessee to meet the investment in RS Arora Rubber Corporation as on 31.03.2007 the assessee had Capital and non interest bearing unsecured loans aggregating to Rs. 68,91,324 while the investments were Rs. 81,03,809. Hence, at best investments to the tune of Rs. 12,12,485 can only be said to be funded by interest bearing unsecured loans. Thus the interest disallowance in the firm of RS Arora Rubber Corp should have been Rs. 1,59,144 (i.e., interest proportionate to Rs. 12,12,485).

35. Similarly in Fixo Seal Stoppers, the assessee had a debit balance in capital account of Rs. 43,66,358 and non interest bearing unsecured loans of Rs. 29,76,198. Hence, at best debit balance to the tune of Rs. 13,90,160 only can be said to have been funded from interest bearing unsecured loans. Thus the interest disallowance in the firm of Fixo Seal Stoppers should have been Rs. 2,27,663 (i.e., interest proportionate to Rs. 13,90,160).

36. The learned DR submitted that the investments were made in the properties at MG Road and SD Road and some deposits, It is seen that the assessee is a proprietor of M/s RS Arora Rubber Corporation, M/s Fixo Seal Stoppers and profiles and M/s. R.S. Constructions. The assessee filed the aggregate of the capital in all the three businesses in a tabular form which amounts to Rs. 1,99,56,411. The total investments made in the two properties namely at MG Road and SD Road amounted to Rs. 81,03,809 and the deposits made were Rs. 3,74,914 making a total of Rs. 84,78,723/-. The assessee in his submissions segregated the interest bearing and non interest bearing unsecured loans, out of the unsecured loans procured from friends & relative in two firms namely M/s. R.S. Rubber Crop. & M/s. Fixo Seal Stopper and Profiles. The assessee in his arguments during appellate proceedings worked out a formula by arriving at difference between the investments and non-interest bearing unsecured loans and treated the difference as interest bearing loans and proportionately disallowed the interest from the said difference. This contention of the assessee was not taken during the assessment proceedings but is taken for the first time before the appellate proceedings and voluntarily conceded certain portion of the interest to be disallowed. In support of the non-interest bearing loans the assessee has not produced any evidence or substantiated with any documentary evidence as to how they would qualify for non interest bearing funds which are not utilized for the business purposes. No doubt that the assessee is a proprietor but he cannot work hotchpotch without any basis or any evidence and come to a conclusion on his own that his affairs are properly managed. There is no evidence submitted by the assessee and there is also no information on record that any such argument was made during the assessment proceedings and there are no additional grounds of appeal or additional evidence filed by the assessee during the appellate proceedings on this issue. Therefore, the learned DR submitted that the Assessing Officer had judiciously looked into the issue and made an addition as these funds were utilized for acquiring properties but not utilized for operation in the course of the business. He submitted that the addition made by the Assess Officer u/s 36(1)(iii) amounting to Rs. 9,83,324 in Ms. R.S. Arora Rubber Corporation and an interest of Rs. 3,64,479 in M/s. Fixo Seal Stopeprs and Profiles is justified.

37. We have heard both the parties and perused the material on record. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, there was justification to advance loans to sister concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent.

38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed.

39. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case.

40. If the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would not be termed as diversion of borrowed capital or that the revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act.”

41. In the result, both Revenue and assessee appeals are dismissed.