Relief by Bombay HC for Joint Development Agreement (JDA)

Yogesh S. Limaye

Background-:

a) Currently, the real estate sector is seeing a rough weather. Despite the tax benefits offered in last two budgets, demonetisation has added some problems to the industry.

b) When a real estate developer or a land owner thinks of the development of the property, one of the first prominent aspects [and impediments] is tax treatment under direct and indirect taxes.

c) The decision of Chaturbhuj Dwarkadas Kapadia – Bombay High Court as decided in February 2003 (See note-1) holds field in deciding the timing of capital gain especially in respect of the development agreement of the immovable property.

d) It is a pro- revenue decision and has been extensively relied upon by Revenue.

e) To be honest, the ghost of the manner in which Revenue has applied the ratio arising out of Chaturbhuj Kapadia supra is still haunting the assessees and creating uncertainties.

f) Bombay High Court has in the case of Chemosyn Ltd [2] in February 2015 [incidentally after 12 years] held that Chaturbhuj Dwarkadas Kapadia supra does not eliminate real income theory.

g) It has given a big breather for assessees’. I had expected a wide publicity for this decision in terms of various articles or the case being quoted before various judicial forums at least before various benches of tribunal across India. This decision was rendered in February 2015 which will complete 2 years in a month’s time or so.

Take away point-:

h) The real income theory of accrual [arise being capital gain] of income still holds the field.

i) Section 2(47)(v) read with section 53A of the Transfer of Properties Act,allows an advancement of timing point of taxation of capital gain as compared to transfer under the commercial laws dealing with transfer of properties.

j) But there can-not be taxation of capital gain unless and until there is REAL of accrual [arise being capital gain] of income.

k) Subsequent events can be taken into consideration while deciding the question of whether real income has actually accrued / arisen. Perhaps this is on the same principles as contemplated in Accounting Standard – 4 Subsequent events.

l) The moot question as to whether real income has accrued / arisen or not is largely based on facts of the case and grass root reality must be looked into the same.

m) Section 2(47)(v) does not dissect / dilute the real income theory.

Chemosyn Ltd – Relevant observations

The text of relevant paragraphs is re-produced in a para-phrased manner and emphasis is supplied by way of underline.

7. Grievance of the revenue is that the decision of this Court in Chaturbhuj Dwarkadas Kapadia of Bombay (supra) should apply to the present facts. As pointed out by the Tribunal, the issue before the Court in the above case was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset. Thus, reliance upon Chaturbhuj Dwarkadas Kapadia of Bombay (supra) does not assist the revenue. We specifically asked the revenue whether the decision of the Tribunal in Kalpataru Construction Overseas (P.) Ltd. (supra) has been appealed to this Court and to which the answer was “we do not know”.

What is Kalpataru Construction Overseas (P.) Ltd.

The text of relevant paragraphs is re-produced in a para-phrased manner and emphasis is supplied by way of underline.

19. The facts of the case are that the assessee had agreed to sell its subsidiary company, namely, Neo Pharma PrivateLtd., which was carrying on pharmaceuticals business to M/s. Treva Health Care Private Ltd. by agreement dated 10-7-1998 by selling the entire equity shares held by the assessee in the aforesaid subsidiary company. The sale was made on the condition that the liabilities pertaining to the period prior to 30-6-1998 and the current assets stated in the books of account were all realizable at the amounts stated in the books. In other words, in case the actual liabilities prior to 30-6-1998 exceeded the amounts provided for in the books of account, or if the debtors and other current assets stated in the accounts could not be realized, the assessee, in terms of the agreement, would be responsible for the same and the amount of consideration would stand modified accordingly. It was the case of the assessee before the Departmental authorities that the agreed consideration was a variable amount subject to the ceiling of Rs. 1.25 crores. It was further pointed out that the amount of consideration was finally agreed upon between the parties in April 2001 at Rs. 1 crore on account of various unrealized/unrealizable current assets and then provided liabilities which was also confirmed by the parties in writing vide assessee’s letter dated 2-4-2001 addressed to M/s. Teva Health Care Private Ltd. According to the assessee, the consideration was shown at Rs. 1.25 crores in the return of income as it was filed before its crystallization in April 2001. The case of the assessee before the Assessing Officer was that the amount of consideration should be taken at Rs. 1 crore. The Assessing Officer, however, treated the sum of Rs. 1.25 crores as consideration instead of taking the actual consideration of Rs. 1 crore. On appeal, the ld. CIT(A) rejected the plea of the assessee on the ground that subsequent events could not be considered for deciding the matter for earlier years.

20. We have heard the parties. It cannot be laid down as inflexible rule that subsequent events can never be considered for deciding a matter under dispute. It is the duty of the assessee to pay correct amount of tax on its income chargeable to tax. It is the right of the department to realize tax from the assessees on their income chargeable to tax. Subsequent events in the case before us would relate back to the assessment year under consideration. In our view, the matter should go back to the Assessing Officer with the direction to consider and decide the matter afresh in accordance with law after giving reasonable opportunity of hearing to the assessee. Ground No. 3 is treated as allowed for statistical purposes.

Chaturbhuj kapadia – Relevant observations

The text of relevant paragraphs is re-produced in a para-phrased manner and emphasis is supplied by way of underline.

 Scope of section 2(47)( v)

 5. Clauses (v) and (vi) of section 2(47) [w.e.f. 1-4-1988] reads as under :

“(v)any transaction involving the allowing of the possession of any immovable property [as defined] to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi)any transaction (whether by becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property [as defined].”

The above two clauses were introduced with effect from 1-4-1988. They provide that “Transfer” includes (i) any transaction which allows possession to be taken/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 [See section 269UA(d)]. Therefore, in these two cases capital gains would be taxable in the year in which such transactions are entered into, even if the transfer of immovable property is not effective or complete under the general law [See Kanga & Palkhivala’s Law & Practice of Income Tax – Eighth Edition, at p. 766]. This test is important to decide the year of chargeability of the capital gains.

 Findings

6. At the outset, we may point out that in this case, the assessee does not deny transfer. The only dispute in this case is whether the transfer took place during the accounting year ending 31st March, 1996 or whether it took place during the accounting year ending 31st March, 1999. In other words, the dispute is confined to the year of chargeability.

Under section 2(47)( v), any transaction involving allowing of possession to be taken over or retained in part-performance of a contract of the nature referred to in section 53A of the Transfer of property Act would come within the ambit of section 2(47)( v).

That, in order to attract section 53A, the following conditions need to be fulfilled.

• There should be a contract for consideration;
• it should be in writing;
• it should be signed by the transferor;
• it should pertain to transfer of immovable property;
• the transferee should have taken possession of the property;
• lastly the transferee should be ready and willing to perform his part of the contract.

That even arrangements confirming privileges of ownership without transfer of title could fall under section 2(47)( v).

Section 2(47)( v) was introduced in the Act from assessment year 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance. Consequently, assessees used to enter into agreements for developing properties with the builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loop hole, section 2(47)(v) came to be introduced in the Act.

It was argued on behalf of the assessee that there was no effective transfer till grant of irrevocable licence. In this connection, judgments of the Supreme Court were cited on behalf of the assessee, but all those judgments were prior to introduction of the concept of deemed transfer under section 2(47)( v).

In this matter, agreement in question is a Development Agreement. Such Development Agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a Development Agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements.

That such agreements are only a mode of remunerating the builder for his services of constructing the building – Gurudev Developers v. Kurla Konkan Niwas Co-operative Housing Society [2000] 3 ML J 131.

It is precisely for this reason that the Legislature has introduced section 2(47)(v ) read with section 45 which indicates that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law.

In this case that test has not been applied by the department. No reason has been given why that test has not been applied, particularly when the agreement in question, read as a whole, shows that it is a Development Agreement. There is a difference between contract on one hand and Performance on the other hand. In this case, the Tribunal as well as the department have come to the conclusion that the transfer took place during the accounting year ending 31st March, 1996 as substantial payments were effected during that year and substantial permissions were obtained. In such cases of Development Agreements, one cannot go by substantial performance of a contract. In such cases, the year of chargeability is the year in which the contract is executed. This is in view of section 2(47)(v ) of the Act.

Before us, it was argued on behalf of the assessee that the date on which possession is parted with by the transferor is the date which should be taken into account for determining the relevant Accounting Year in which the liability accrues. It was argued on behalf of the assessee that in this case, irrevocable licence was given in terms of the contract only during the financial year ending 31st March, 1999 and, therefore, there was no transfer during the financial year ending 31st March, 1996. On the other hand, it was argued on behalf of the revenue that one has to go by the date on which the developer substantially performed the contract. It was argued on behalf of the department that since substantial payments were made during the financial year ending 31st March, 1996 and since majority of permissions were obtained during that year, the liability to pay capital gains tax accrued during assessment year 1996-97.

In this case, the agreement is a Development Agreement and in our view, the test to be applied to decide the year of chargeability is the year in which the transaction was entered into. We have taken this view for the reason that Development Agreement does not transfer the interest in the property to the developer in general law and, therefore, section 2(47)( v) has been enacted and in such cases, even entering into such a contract could amount to transfer from the date of the agreement itself. We have taken this view for a precise reason.

Firstly, we find in numerous matters where the Assessing Officer and the department generally proceed on the basis of substantial compliance of the contract. For example, in this very case, the department has contended that because of substantial compliance of the contract during the financial year ending 31st March, 1996, the transfer is deemed to have taken place in that year. Such interpretation would result in anomaly because what is substantial compliance would differ from Officer to Officer. Therefore, if on a bare reading of a contract in its entirety, an Assessing Officer comes to the conclusion that in the guise of agreement for sale, a Development Agreement is contemplated, under which the developer applies for permissions from various authorities, either under power of attorney or otherwise and in the name of the assessee, then the Assessing Officer is entitled to take the date of the contract as the date of transfer in view of section 2(47)( v).

In this very case, the date on which the developer obtained a commencement certificate is not within the accounting year ending 31st March, 1996. At the same time, if one reads the contract as a whole, it is clear that a dichotomy is contemplated between limited Power of Attorney authorising the developer to deal with the property vide para 8 and an irrevocable licence to enter upon the property after the developer obtains the requisite approvals of various authorities.

In fact, the limited power of attorney may not be actually given, but once under clause 8 of the agreement a limited power of attorney is intended to be given to the developer to deal with the property, then we are of the view that the date of the contract viz., 18th August, 1994 would be the relevant date of decide the date of transfer under section 2(47)( v) and, in which event, the question of substantial performance of the contract thereafter does not arise.

This point has not been considered by any of the authorities below. No judgment has been shown to us on this point. Therefore, although there is a concurrent finding of fact in this case, we have enunciated the principles of applicability of section 2(47)( v). We do not find merit in the argument of the assessee that the Court should go only by the date of actual possession and that in this particular case, the Court should go by the date on which irrevocable licence was given. If the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability.

References

[1] – Chaturbhuj Dwarkadas Kapadia – [2003] 129 TAXMAN 497 dated Feb 13, 2003 by Bombay High Court

[2] – Chemosyn Ltd – [2015] 64 taxmann.com 219 dated Feb 11, 2015 by Bombay High Court

[3] – Excel Industries Ltd CIVIL APPEAL NO.125 OF 2013 dated October 8, 2013 by Supreme Court of India

[4] – Kalpataru Construction Overseas (P.) Ltd. [2007] 13 SOT 194 (Mumbai)/[2006] 100 TTJ 451 (Mumbai) OCTOBER 31, 2006 ITAT – I bench

(Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)