Capital gains vis a vis Transfer u/s 2(47)(v) through GPA and JDA registered containing intention of owner
Once registered GPA and JDA confers entitlement to developer to sell, convey or deed in any manner with 60% undivided share, etc., it would be construed nothing but transfer of property being land within meaning of section 2(47)(v).
Assessee-Firm had about 35 acres of land and same was subject of joint development agreement (JDA) with M/s. B during year 2012-13 to develop residential flats of superior quality. In this transaction, assessee had received interest-free refundable deposit of Rs. 10 crores. AO noticed that provisions of section 2(47)(v) was attracted in this case since assessee had agreed to transfer/sell its 60% of total land to M/s. B for a consideration which would be equivalent to 40% of total constructed area. Accordingly, AO computed capital gains on deemed sale of 60% of total area and added same to total income under head |long-term capital gains|of AO.
Once registered GPA alone confers entitlement to developer to sell, convey or deal in any manner with 60% undivided share or etc. it shall very well be construed as nothing but transfer of property within meaning of section 2(47)(v). In this case, assessee had executed three documents on 17-9-2012 out of which two documents were registered GPAs and another one was JDA. If all these documents were conjointly read, then, it could be said that there was transfer of property under section 2(47)(v). Execution of MOU and JDA coupled with two registered GPAs in favour of developer, transfer of scheduled property was taken place on 17-9-2012 in terms of provisions of section 2(47)(v) and to this extent, order of the CIT(A) stands sustained. Date of execution and registration of GPA shall only be reckoned as date of transfer, i.e., 17-9-2012 and there was no way to take date of transfer as on 30-1-2012 since MOU was not registered.
In favour of revenue/Against the assessee (partly).
Kasturi D. v. CIT 323 ITR 40 (Mad), Chaturbhuj Dwarakdas Kapadia (2003) 260 ITR 491(Bom), Potla Nageswara Rao v. Dy. CIT (2014) 365 ITR 249 (AP), CIT v. Dr. T. K. Dayalu (2011) 202 Taxman 531 (Karn), Dr. Maya Shenoy v. Asstt. CIT (2009) 124 TTJ (Hyd-Trib) 692, CIT v. Jeelani Basha (2002) 256 ITR 282 (Mad) and Authority for Advance Rulings in Jasbir Singh Sarkaria, In Re (2007) 294 ITR 196 (AAR).
CIT v. Balbir Singh Maini (2017).
E D Sassoon & Co. Ltd. v. CIT (1955) 1 SCR 313 at 343 and E. D. Sassoon & Co. Ltd. v. CIT (1955) 1 SCR 313 at 343, Morvi Industries Ltd. v. CITT (1972) 4 SSC 451:1974 SCC (Tax) 140: (1971) 82 ITR 835).
IN THE ITAT, ‘D’ CHENNAI BENCH
ABRAHAM P. GEORGE, A.M. & DUVVURU RL REDDY, J.M.
Tamilnadu Brick Industries v. ITO,
ITA No. 744/Chny/2017
11 May, 2018
Appellant by: S. Sridhar, Advocate
Respondent by: Vijay Kumar Punna, Jr. Standing Counsel
Duvvuru RL Reddy, J.M.
This appeal filed by the assessee is directed against the order of the learned Commissioner (Appeals) 9, Chennai, dated 27-2-2017 relevant to the assessment year 2013-14. The assessee has raised the following grounds :–
“1. The order of The Commissioner (Appeals) 9, Chennai dated 27-2-2017 in I.TA. No. 07/CIT (A)-9/2016-17 for the above mentioned assessment year is contrary to law, facts, and in the circumstances of the case.
2. The Commissioner (Appeals) erred in sustaining the taxation of Long Term Capital Gains on the presumption of deemed transfer of 60% of the land in favour of the developer as per the scheme of Memorandum of Agreement and Joint Development Agreement executed on the application of section 2(47)(v) of the Act in the computation of taxable total income without assigning proper reasons and justification.
3. The Commissioner (Appeals) failed to appreciate that the presumption of the transfer within the scope of section 2(47)(v) of the Act for justifying the taxation of Long Term Capital Gains in relation thereto was wrong erroneous, unjustified, incorrect and not sustainable in law.
4. The Commissioner (Appeals) failed to appreciate that the misconstruction of facts and misreading of the provisions governing the reckoning the deemed transfer would vitiate the decision rendered from para 5.3 of the impugned order.
5. The Commissioner (Appeals) failed to appreciate that in any event the computation of Long Term Capital Gains on various facets was wrong, erroneous, unjustified, incorrect and not sustainable in law.
6. The Commissioner (Appeals) failed to appreciate that the decisions cited were completely overlooked/wrongly rejected incorporating irrelevant reasons and further ought to have appreciated that the decisions applied to sustain the computation of Long Term Capital Gains on the reckoning of deemed transfer in the previous year relating to the assessment year under consideration were not applicable to the facts of the present case while the principles laid down in those decisions were applied out of context.
7. 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.
8. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
2. Brief facts of the case are that the assessee was engaged in the business of brick manufacture and filed its return on 19-7-2013 admitting a total income of Rs. 44,04,628. The return of income filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 (“Act” in short). Subsequently, the case of the assessee was selected for scrutiny and after service of statutory notices, the assessee furnished all particulars. After examining the various details furnished by the assessee and considering the submissions, the assessing officer completed the assessment under section 143(3) of the Act by determining the total income of the assessee at Rs. 511,60,00,657 after making addition of long term capital gains of Rs. 511,02,41,400 and other disallowances.
3. The assessee carried the matter in appeal before the learned Commissioner (Appeals). After considering the details as was furnished before the assessing officer and by considering the written submissions, the learned Commissioner (Appeals) confirmed the addition made towards long term capital gains.
4. On being aggrieved, the assessee is in appeal before the Tribunal. Before the Tribunal, by filling written submissions running upto 14 pages, the learned Counsel for the assessee vehemently argued that the learned Commissioner (Appeals) was not correct in confirming the taxation Long Term Capital Gains on the presumption of deemed transfer of 60% of the land in favour of the developer as per the scheme of Memorandum of Agreement and Joint Development Agreement executed on the application of section 2(47)(v) of the Act in the computation of taxable total income without assigning proper reasons and justification. Further the the presumption of the transfer within the scope of section 2(47)(v) of the Act for justifying the taxation of Long Term Capital Gains in relation thereto was wrong, erroneous, unjustified, incorrect and not sustainable in law. It was the submission of the learned Counsel that the authorities below have misconstructed the facts by misreading of the provisions governing the reckoning of deemed transfer. It was also submitted that the computation of Long Term Capital Gains on various facets was wrong, erroneous, unjustified, incorrect and not sustainable in law and prayed for justice by deleting the addition made under long term capital gains.
5. Per contra, by filing detailed written submissions, the learned Departmental Representative pleaded for confirmation of orders of authorities below.
6. We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee was engaged in the business of brick manufacture till 1986 and was not functioning due to stoppage of brick manufacture as the available land was fully exploited. The firm had about 35 acres of land and the same was subject of joint development agreement (JDA) with M/s. Brigade Enterprises Ltd. during the year 2012-13 to develop residential flats of superior quality. In this transaction, the assessee has received interest free refundable deposit of Rs. 10 crores (Rs. 1,00,00,000 vide cheque No. 812960 dated 25-1-2012 and Rs. 9,00,00,000 vide DD No. 240826). The assessing officer noticed that the provisions of section 2(47)(v) of the Act is attracted in this case since the assessee had agreed to transfer/sell its 60% of total land of 35.55 acres to M/s. Brigade Enterprises Ltd. for a consideration which would be equivalent to 40% of total constructed area Hence, the assessing officer requested the assessee to explain the applicability of section 2(47(v) of the Act as per the JDA entered in the previous year 2012-13 relevant to the assessment year 2013-14. In turn, the AR of the assessee contended before the assessing officer that the provisions of section 2(47)(v) of the Act would not be applicable as actual transfer of property as per section 53A of the Transfer of Property Act had not been taken place and it was a mere agreement to develop the property without transferring ownership till development. The assessing officer did not accept the assessee’s claim of non-applicability of section 2(47(v) of the Act and observed that the capital gain will be charged to tax as there was a transfer under the provisions of section 2(47)(v) of the Act. The value of the property was determined as on the date of execution of JDA by adopting the guideline value at .5,500 per sq.ft. One acre is 43560 sq. ft. and accordingly, the area available was worked out at 15,48,558 sq. ft. for 35.55 acres. The guideline value for 15,48,558 sq. ft. at the rate of .5,500 per sq. ft. was worked out at .851,70,69,000. Accordingly, the assessing officer computed the capital gains on the deemed sale of 60% of the total area at .511,02,41,400 and added the same to the total income under the head “long term capital gains”.
6.1 After considering the detailed written submissions filed by the assessee as well as considering the facts of the case, the learned Commissioner (Appeals) noticed that the assessing officer treated the above JDA as transfer within the meaning and provisions of section 2(47)(v) of the Income Tax Act. The assessing officer specifically invoked section 2(47)(v) of the Act holing the above agreement as part performance as per section 53A of the Transfer of Property Act. The learned Commissioner (Appeals) observed that in the case of Podar Cements (P) Ltd., 226 ITR 625, the Hon’ble Supreme Court held that the owner is the person who is entitled to receive income from the property in his own right and the requirement of registration of the sale deed in the context of section 22 is not warranted. Moreover, in the absence of any part performance as contemplated under section 53A of Transfer of Property Act, 1882, the Supreme Court held in the case of Suraj Lamp and Industries Ltd. v. State of Haryana (2012) 340 ITR 1 that registration of sale deed alone completes the transfer. The Hon’ble Supreme Court further held in the case of Suraj Lamp and Industries Ltd. (supra) that registration date will be taken as the date of transfer only in the absence of part performance as contemplated under section 53A of Transfer of Property Act. Till 31-3-1988, in the absence of registered conveyance deed if owner of a immovable property had put the purchaser in possession of the immovable property, he was not required to pay capital gains tax. Many owners of immovable property used to take advantage of this legal position by postponing the tax liability by delaying the execution of conveyance deed in favour of the purchasers. Section 2(47) was amended vide Finance Act 1987 with effect from 1-4-1988 by rectifying this loophole by inserting clause (v) as under :–
“(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);”
After the introduction of clause (v) to section 2(47) of the Act, possession was unanimous with transfer and the liability for capital gain tax will arise as soon as possession takes place. However, this position was altered vide the Mumbai High Court decision in the case of Chaturbhuj Dwarkadis Kapadia 260 ITR 491. The Bombay High Court held that Clauses (v) and (vi) were introduced in section 2(47) of the Income Tax Act, 1961, with effect from April 1, 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, 1882, and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property.
Therefore, in these two instances capital gains 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. 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) of the Act. In order to attract section 53A of Transfer of Property Act, 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. 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 the 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. Assessees used to enter into agreements for developing properties with builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loophole, section 2(47)(v) came to be introduced in the Act.
From the above judgement, the salient feature taken into consideration by the Bombay High Court was that once a limited power of attorney was intended to be given to the developer to deal with the property, then the date of contract, viz., August 18, 1994 would be relevant date to decide the date of transfer under section 2(47)(v) of the Act, and, in which event, the question of substantial performance of the contract thereafter would not arise and accordingly previous year 1994-95 was held to be the year of transaction. Similar to clause 8 of agreement in the case of Chaturbhuj Dwarakdas Kapadia, para 6.3 of JDA in the case of the appellant is relevant wherein, the parties have agreed to execute power of attorney to conveyor transfer the undivided shares in the schedule property. Clause 6.3 of the JDA is reproduced as under :–
“6.3 In consideration of the Developer agreeing to construct and deliver the Owners’ Constructed Area as per clause 6.1 above, the Owners hereby agree, bind and undertake to transfer/ convey/ sell to the Developer and/or their nominee(s) or their assignee(s), an undivided 60% share or such proportionate undivided share in the Schedule Property as is proportionate to the Developer’s Constructed Area either in one lot or in several shares or in the form of undivided shares or otherwise at the sole discretion of the Developer. For this purpose, the Owners shall execute and register a power of attorney document in favour of the Developer authorizing the Developer to enter into agreements, sale deeds or other documents to conveyor transfer the undivided shares in the Schedule Property corresponding to the Developer’s Constructed Area, either to itself or its nominees or purchasers. However, the Developer shall not exercise any of its rights under this power of attorney document until the Statutory Approvals are obtained. The parties have executed and registered this power of attorney document simultaneously on entering into this JDA.”
The learned Commissioner (Appeals) observed that the careful wording in clause 6.3 of JDA stating that “the developer shall not exercise any of its right under this power of attorney until statutory approvals are obtained”, is a mere empty words with a view to escape from the clutches of the decision in the case of Chaturbhuj Dwarakdas Kapadia. The intention to transfer the property outweighs the superfluous words described above. The conditions required for attracting the provisions of section 53A of the Transfer of Property Act are fulfilled in this case. There is a contract in writing, signed by the transferor pertaining to transfer of immovable property. The transferee is in possession of the property and is willing to perform its part of the contract. The builder undertook survey of the property, applied for approvals, in spite of delay in approvals the contract has never been cancelled and it is irrevocable in nature. The original title deed is in possession of the developer. Sum of Rs. 10 crores was already paid. Delay in construction due to delay in approval cannot be cited as unwillingness to perform the contract. Similar to clause 8 of agreement in the case of Chaturbhuj Dwarakdas Kapadia, vide GPA entered in the case of assessee on 17-9-2012, the builder is given powers to obtain necessary permissions and approvals from the authorities concerned. In view of these facts, the JDA and GPA entered on 17-9-2012 must be treated as the date of transfer.
6.2 The Authority for Advance Ruling also held that Avoidance or postponement of tax on capital gains by adopting devices such as the enjoyment of property in pursuance of irrevocable power of attorney or part performance of a contract of sale was sought to be arrested by introducing the two clauses, viz. (v) and (vi) in section 2 (47) of the Act. The Authority also held that in order to be a transfer within the meaning of section 2(47)(v), there must be transaction under which the possession of immovable property is allowed to be taken or allowed to be retained and secondly such taking or retention of possession is a part performance of contract falling within the scope of section 53A of Transfer of Property Act.
The Authority followed the judgement of the Supreme Court in the case of Govindrao Mahadik v. Devi Sahai AIR 1982 SC 989, wherein it was held that :–
“In order to be “transfer” within the meaning of 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. 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 consideration. The following passage from the decision of the Supreme Court in Sardar Govindrao Mahadik v. Devi Sahai, AIR 1982 SC 989, 999, highlights the requisite conditions for the applicability of section 53A :–
To qualify for the protection of the doctrine of part-performance it must be shown that there is a contract to transfer for consideration immovable property and the contract is evidenced by a writing signed by the person sought to be bound by it and from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty. These are prerequisites to invoke the equitable doctrine of part performance. After establishing the aforementioned circumstances it must be further shown that a transferee had in part performance of the contract either 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. The acts claimed to be in part performance must be unequivocally referable to the pre-existing contract and the acts of part performance must unequivocally point in the direction of the existence of contract and evidencing implementation or performance of contract.”
It is clear from the above decision that the transferee to the contract must have done some act in furtherance of the contact. In this case, the appellant had applied to various Government agencies for approval and also conducted survey and such other activities relating to improvement of the land and for preparation of the sale for housing project. In this regard, clauses 6(c) and 9 of MOA elaborate the nature of developmental works to be carried out by the developer simultaneously on execution of JDA. The relevant clauses are reproduced as under :–
“6(c) The Second Party after satisfying themselves that the title of the Owners is clear and marketable, shall arrange to clear the site by removing the bushes, shrubs and carry out Government Survey & Private Survey, to arrive at the exact extent of land available for development. However, grown up trees shall not be touched/ removed while clearing the site. The Second Party shall, after the survey, put up fence all around the Boundary line with cement post & Barbed wire fence. The above said activities shall be carried out at Second party’s cost. First party shall sign the necessary applications, letters, undertakings etc. that may be required to be submitted to enable Second Party to take up the above said activities including the Government survey on behalf of First Party.
9.The first Party/Owner agrees to permit the Second Party/ Developer to enter into the Schedule Properties immediately on execution of this MOA to take up survey, soil testing, planning etc., and permit the development activities simultaneously on execution of Joint Development Agreement and registered Power of Attorney for the purpose of obtaining various approvals by the First Party/ Owner in favour of the Second Party/ Developer. Further, the First Party / Owner agree to execute a separate registered Power of Attorney for the purpose of sale of the undivided shares in the property, as per the terms and conditions mutually agreed between the parties, simultaneous to the execu tion of Jo in t Development Agreement.”
The above clauses indicate that simultaneously on entering into JDA the developer carried out a lot of developmental activities. Therefore, the learned Commissioner (Appeals) was of the view that the assessee acted in furtherance of the contract. The contract has not been cancelled and is subsisting. The transferee never sought to cancel the contract because the approval has not come from the Government or delayed. As long as an application is made for the approval and the same is subsisting and the assessee has not cancelled the contract, it cannot be stated that the assessee is not acting in furtherance of the contract. Though the option is available to both the parties to exit from the contract, but such thing was not happened.
6.3 Further the learned Commissioner (Appeals) found relevant to mention in his order that there is another registered General Power of Attorney dated 17-9-2012 entered into between the assessee and M/s. Brigade Enterprises Ltd. Similar to assessee’s case, the GPA was also entered in the case of Jasbir Singh Sarkaria in RE in AAR No. 724 of 2006, dt. 30-8-2007, wherein, it was held that GPA is not a mere licence to enter the land for doing some preliminary acts in relation to the development work but the power of control of the land which is an incidence of possession as has been conferred on the developer under the GPA. The developer armed with GPA cannot be regarded merely as a licensee or an agent subject to the control of the owners. In para 8 of the GPA, in the case of the appellant, it is mentioned that the GPA holder is given powers to execute and register necessary deeds of gifts or other documents as required by such authorities for conveyance of land record for Open Space Reservation (OSR) or for providing public road access or internal road and handing over the same to Chennai Metropolitan Development Authority (CMDA) or Corporation of Chennai (COC) or local authorities. This shows general control of the property by developer. The GPA holder is also given powers to represent the assessee before any authority or to apply and obtain necessary plans, licences, sanctions, permissions and other orders required for the development of the schedule property or obtain occupation certificate or completion certificate or to apply and secure electricity, water and sanitary connection or to engage advocates, etc. The GPA also has been intended to be entered between the parties to conveyor transfer the undivided shares in scheduled property as in clause 6.3 of the Joint Venture Agreement.
6.4 The Authority also contemplated the situation as to what will happen if during the year following the one in which the deemed transfer took place, the proposed venture collapses for reasons such as refusal of permissions, the developer facing financial crunch etc. By that time, the owner would have received only a part of the agreed consideration, but he is obliged to file the return showing the entire capital gain based on the full sale price whether or not received during the year of deemed transfer. In such an eventuality, hardship may be caused to the owner who would have paid full tax. No doubt, such a situation could be avoided if the contention of the applicant is accepted. On deep consideration, however, we find that the construction of the relevant provision should not be controlled by giving undue importance to such hypothetical situations. Normally, the owner executes a power of attorney or does similar act to let the transferee take possession only after the basic permissions are granted and he is satisfied about the ability of transferee/ developer to fulfil the contract. In spite of that, if such rare situations take place, the owner /transferor will not be without remedy. He can file a revised return and make out a case for exclusion or reduction of income. However, if the time-limit for filing a revised return expires, the difficulty will arise. It is for Parliament or the Central Government to provide a remedy to the assessee in such cases.
6.5 Finally, the Authority came to the conclusion that in the instant case, having regard to the terms of the two agreements and the irrevocable GPA executed pursuant to the agreement, the execution of the GPA shall be regarded as the “transaction involving the allowing of the possession” of land to be taken in part performance of the contract and therefore, the transfer within the meaning of section 2(47)(v) must be deemed to have taken place on the date of execution of such GPA. The irrevocable GPA was executed on 8-5-2006, i.e., during the previous year relevant to the assessment year 2007-08 and the capital gains must be held to have arisen during that year. If the rules of interpretation as done in the case of Jasbir Singh Sarkaria by the Advance Ruling are applied to the facts of the appellant case, then the date on which JDA was entered must be taken as transfer as per section 2(47)(v) of the Act.
6.6 In the case of the assessee, the learned Commissioner (Appeals) observed that JDA and GPA have been entered during the previous year, thereby giving possession to the builder even before approval. Para 2.1 of JDA refers to a clarification that;
“such permission to develop the Schedule Property shall not be construed as delivery of possession under section 53-A of the Transfer of Property Act read with Section 2 (47)(v) of the Income Tax Act of 1961. Subject to the Developer being in compliance with their obligations under the JDA, the permission granted in favour of the Developer to develop the Schedule Property shall be kept valid and subsisting by the owners till the Developer completes the development and transfers or otherwise disposes of their share of built up space as per the JDA. The possession of the Schedule Property shall continue to be of retained by the Owners and the same will be handed over to the buyers/allottees as and when the undivided share of land in this Schedule Property is conveyed in favour of the buyers/allottees of the built up space .”
6.7 In view of the insertion of the above clarification, the learned Commissioner (Appeals) opined that it was purposefully put in clause 2.1 of the JDA with a view to avoid taxation, whereas the intended purpose is to hand over possession as it could be seen in several clauses referred in the JDA.
6.8 Before the learned Commissioner (Appeals) the assessee contended in its written submission that the requisite conditions for fulfilling part performance in terms of section 53A of the Transfer of Property Act have not been met and argued that there should be a consideration for transfer of its capital asset to bring the same as transfer within the meaning of section 53A of the Transfer of Property Act. According to the assessee no consideration was received. The amount of Rs. 30 crores as per clause 14 of the JDA was an interest free refundable deposit, which is stated to be not a consideration for the transfer of the property. After considering the above submission, the learned Commissioner (Appeals) observed that it was not the case of the department that the refundable deposit received or receivable is a sale consideration for the transfer of the land property to the builder. As per the GPA, the assessee was in receipt of share in the proposed super structure as a consideration for transfer of a proportionate undivided share of the land. As per JDA, the consideration proposed to be received at the stage of entering into agreement was not in cash but in kind, which is in the nature of share in the super structure going to be built. Rs. 30 crores interest free deposit cannot be taken as a sale consideration. It may be viewed as part consideration in cash but the substantive consideration is in kind which is the share in the super structure and therefore, the contention of the appellant that the advance of interest free refundable deposit must not be viewed as consideration is totally misplaced.
6.9 Further the assessee contended before the learned Commissioner (Appeals) that that the JDA only authorized the developer to do various activities to develop the property and no possession of the nature associated with the rights of ownership is given to the developer. In this regard, in view of the decision in the case of Ravinder Singh Arora, ITA No. 58 & 395 (Hyd) of 2011and in the case of Shri. Suresh Kumar D. Shah, ITA Nos. 420 to 425/Hyd/2011, it was not necessary that the rights of the ownership must be transferred to the developer so as to bring the same under section 53A of the Transfer of Property Act as long as the possession and control over the property is shifted to the developer and the developer is acting in furtherance of the contract.
6.10 Further against the contention of the assessee that the JDA authorizes the developer to have the authority to enter into the said property and is limited to carrying out survey, measurement and to commence development and to do requisite work and things in this regard, which clearly indicates that the authorization does not confer an unbridled right as that of the owner of the property. The argument of the assessee in that paragraph is that the authorization to enter in terms of JDA is limited to perform their contractual obligation under the JDA and that they cannot have any possession that may be enjoyed by the owner of the property. In this regard, the learned Commissioner (Appeals) has observed that the transferee need not be the owner of the property where section 53A of the Transfer of Property Act is invoked. What is required is possession and control of the property and not the ownership of the property. The appellant dearly admitted that the developer is having the right to enter the property, conduct survey, do measurement and is having the right to commence development and to do various works and things as per the JDA. This itself proves that the developer is having a control over the property to carry out the developmental activities, that right to carry out such works are unbridled rights and the owner of the land has no right to stop the developer not to enter or to carry out the developmental activities until otherwise the JDA is terminated which is possible only under special circumstances. As per clause 16 of JDA, it is only the developer who has the sole discretion to terminate the JDA for false representation or breach of the terms of the JDA by the owner, deficit in the ownership title etc. The owner is not given such sole discretion to terminate the JDA. As per clause 3.2 of JDA, if the statutory approvals are not obtained within the stipulated period the parties shall mutually agree on the future course of action including the extension of time required for plan sanction. In the event of the parties mutually agreeing to terminate the JDA in writing, the owners shall refund within 30 days of such notice to terminate, refundable deposits received, any vacant land tax paid and any other amounts paid by the developer to the owner. The JDA will be terminated only after the refund of such amounts by the owners to the developer and not before. Till that time, the developer will have a charge over the property. As per clause 13.6 of JDA the owners shall not deal with the property in manner which is inconsistent to the provisions of JDA during subsistence of JDA. The above clauses of JDA make it clear that the developer is having unbridled title over the property and not the owner.
6.11 Against the further submissions of the assessee that the agreement is not a sale simplicitor but a bundle of obligations to do innumerable things for putting up the project and its consequential sale, the learned Commissioner (Appeals) has observed that the assessee has very much agrees that the developer is permitted to do innumerable things, however, the contention of the assessee is that there is no sale at this stage. In this regard, the learned Commissioner (Appeals) clarifies that in view of part performance as per section 53A of the Transfer of Property Act, by bequeathing the right of possession and the control of the property to the developer, transfer has taken place in terms of section 2(47) of the Income Tax Act r.w. Section 53A of the Transfer of Property Act. The Revenue’s contention is that the control and possession of the property is vested with the developer in the JDA and the JDA is still subsisting and the developer has been acting in furtherance of the contract.
6.12 Against the argument of the assessee that if the plan approval fails, the entire agreement fails resulting in termination of the agreement, therefore it was argued that there cannot be any willingness to perform by the developer unless the plan is approved as it does not make any economic sense to the transferee to proceed with the agreement. In this regard, it was the observations of the learned Commissioner (Appeals) that, as matters stand now, the approval was said to be at the final stages, which was accepted by assessee vide paragraph 5.4 of the written submission. If the approvals required from the competent authorities are at the final stages, there is no question of failure of the plan approval as contended by the assessee in para 5.4 of the written submission. Failure of plan approval arises only if the competent authorities reject the request of approval. Such thing was not happened in this case. The JDA is subsisting and it is not cancelled even on the ground that the plan approval has been delayed. The assessee has been proceeding and acting in a manner with a view to complete the contractual obligation as per the JDA and nowhere it even evinced slightest of the doubt to terminate the contract.
6.13 Against the dispute of the assessee that the developer is never the owner of the property and as per the JDA the land owner and developer perform construction project by joining together by way of owner providing the land and the developer constructing the building, which will be ultimately sold to the buyers on the completion of the project and therefore it was contended that the developer is never entitled to be a buyer and the property is never transferred to him as the owner. In this regard, the learned Commissioner (Appeals) observed that the developer became the owner of the land, not by registration, but as per the part performance of a contract as provided under section 53A of the Transfer of Property Act. In this case, transfer took place because land is given possession to the developer and in consideration of land owner agreeing to give 60% undivided share in the land, the developer agreed to construct and deliver 40% of the super built up area, therefore the transferor is liable for capital gain tax. There is vesting of rights by the land owner to the developer to possess the land and bring such land under its control to do certain developmental activities in terms of the contract. The essence of section 53A of the Transfer of Property Act is that there is a transfer as soon as the possession is vested. The law treats the same as deemed sale. The ITAT, Hyderabad in the case of Ravinder Singh Arora, ITA No. 58 & 355 (Hyd) of 2011, dt. 20-7-20 12 vide para 26 and in the case of Shri. Suresh Kumar D. Shah, ITA Nos. 420 to 425/Hyd/2011, dt. 16-12-2011 vide para 31 held that the fact of legal ownership continued with the owners to be transferred to the developer at a future distant date does not affect the applicability of section 2(47)(v) of the Act. The contention of the assessee that the ownership never shifts to the builder is also not correct because when the ultimate sale takes place in favour of the final buyers, the signatories to the sale deed are both the owner and the developer. The developer possesses inherent title or right over the property till JDA subsists. Further after the completion of project, if final buyer is not available, the developer definitely is the owner for his share of super structure along with the undivided share in the land even if no instrument is registered formally transferring the ownership in favour of the developer. Part Performance comes into operation only to take care of situation like this.
6.14 Before the learned Commissioner (Appeals), it was also submitted by the assessee that it is covered by the provisions of section 45(2) of the Income Tax Act which refers to profits or gains arising from the transfer by way of conversion by the owner of capital asset into stock in trade of business carried on by it. In such circumstances, the incidence of sale occurs only when such stock in trade is sold or otherwise transferred. For the purposes of section 45, the fair market value of the asset on the date of such conversion shall be deemed to be the full value of consideration received as a result of the transfer. Therefore, the assessee argued that in its case that by jointly entering into an agreement with the developer to develop the property, it has carried on business activity and therefore land must be treated as conversion of capital asset into stock in trade and the provisions of section 45(2) of the Act will be applicable in its case. Against the above submissions, the learned Commissioner (Appeals) observed that first of all as per the JDA, the assessee is not carrying on any business activity. The business activity was carried on only by the developer and the land owner is a mere spectator. The owner has no role other than handing over the possession of the land to the developer. He can merely inspect the progress of work and require the developer to properly implement the work of owners constructed area and in this regard, the decision of the architect as to the quality of the material and work, the rate of progress shall be final and binding. The limited role of the owner is restricted to inspect the progress of work that too limited to its share of super structure is to only fulfil its part of the contract and this activity in no way can be equated with the business activity of the assessee. The assessee owns the land and it is not doing any business activity. It is the developer who develops the land and constructs the building. The activity of the developer is the adventure in the nature of trade and for the land owner it is a mere handing over of the possession of the land to the developer. Section 45(2) is not applicable to the case of the assessee. The relevant section applicable is section 2(47)(v) read with Section 53A of the Transfer of Property Act, as per which the transfer takes place during the year in which the JDA was entered giving the right of possession and the developmental activities to be carried on by the developer.
6.15 Against the argument of the assessee before the learned Commissioner (Appeals) that section 50C of the Act is not applicable in its case, in para 9.3 of the written submissions, the assessee contended that section 45(2) of the Act specifically gives the basis to be adopted in determining the Fair Market Value in case of transfers. On the basis provided in section 45(2), fair market value of the asset on the date of conversion must be adopted. The assessee further contended before the learned Commissioner (Appeals) that the specific provision overrides the general provision, hence provision of section 50C do not apply to the assessee having resorted to section 45(2) of the Act. The learned Commissioner (Appeals) has observed that the above submission of the assessee is not applicable because section 45(2) of the Act is not applicable in its case. In this case, the assessing officer adopted the guideline value available in the website of Tamil Nadu Government Land Registration Department. Though the assessing officer referred that section 50C ought to be adopted there was no reference as such to the SRO. The assessing officer took the rates as per the official website of the Land Registration Department of Tamil Nadu Government. Accordingly, the learned Commissioner (Appeals) observed that such value can be adopted as fair market value of the land transferred in terms of section 53A of the Transfer of Property Act. In the case of assessee, section 50D will also be relevant. Section 50D was inserted by the Finance Act 2012 with effect from 1-4-2013. The Section provides that where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. So, in this case also the consideration is in kind which is in the nature of allotment in the super structure to be constructed for transfer of the land. Since the super structure has not come into existence there is difficulty in quantification of the consideration received and therefore the section provides for the fair market value of the asset in question must be deemed to be the full value of consideration received or accrued as a result of transfer.
6.16 Against the submissions of the assessee that as per Section 50C the date of transfer will be the date of agreement of sale for the purposes of calculation of capital gain and placed reliance in the case of Modipon Ltd.,(2015) 154 ITD 369 (Delhi – Trib.) and therefore the assessee contended that 31-1-2000 on which date the MOA was effected must be taken as the date of agreement of sale and not the date on which the JDA was entered. The learned Commissioner (Appeals) was of the view that the Memorandum of Agreement was in a nascent stage which got fructified and fortified by the Joint Development Agreement entered on 17-9-2012. The second General Power of Attorney (GPA-2) was also entered on 17-9-2012. The JDA and the GPA-2 are more definitive. GPA-2 is irrevocable. The rights of the parties have been determined in clear terms both in JDA and the GPA-2 in comparison to MOU. The MOU is mere understanding which got formalized in JDA and GPA. Therefore, the learned Commissioner (Appeals) was of the view that the date of transfer must be taken as on 17-9-2012 instead of 31-1-2012.
6.17 Further, by reproducing relevant paragraphs 15.1, 15.2 and 15.3 of the JDA, the learned Commissioner (Appeals) has observed that the title document is in the custody of the developer who has been given the right of possession of the original title document and also to hypothecate the same to the financial institutions. Though para 15.2 makes it clear that the developer should exercise the right to mortgage only after obtaining the statutory approvals, however, the original title documents pertaining to 35.55 acres of land have been handed over to the developer simultaneous to the payment of second instalment of refundable deposit of Rs. 9,00,00,000 which was to be made on the execution of JDA. The para 15.3 further states that the developer shall retain custody of the original documents for the entire duration of the project. It is clear from this, that the original title deeds have been handed over simultaneous to the signing of JDA and is in possession of the developer till now because the JDA has not been cancelled and is in vogue. The assessee cannot take back the original title deed until the agreement is cancelled. In common understanding, it is the owners who take custody of the original title deeds and not others. By handing over the original title deed to the developer, the assessee virtually lost the right to deal with the property in any manner. The assessee also already in receipt of Rs. 10 crore as part consideration for transfer though titled as interest free advance. The assessee never returned Rs. 10 crore to the developer. The above paragraphs in the Joint Development Agreement make the case strong in favour of the revenue to hold that the property under consideration is in the possession of the transferee.
6.18 The learned Commissioner (Appeals) further observed from paragraphs 3.2, 14.3 and 16.2 of the JDA that the developer is having the first charge over the schedule property and the relevant paras 3.2, 14.3 and 16.2 are reproduced as under :–
“3.2 If the statutory Approvals are not obtained within fifteen (15) to eighteen (18) months from the date of the Owners fulfilling the Conditions Precedent, the Owners and the Developer hereby agree that if there is any delay beyond the time fixed under the JDA, the Parties shall mutually agree on the future course of action including extensions of the time required for plan sanction. Substantial completion of plan sanction process within the time fixed under the JDA (or extended period as may be mutually agree upon) shall be taken into consideration while taking a decision on the future course of action in this regard. In the event of the Parties mutually agreeing to terminate the JDA in writing the Owners shall refund within 30 days of such notice to terminate, (a) all the Refundable Deposits received by them from the Developer without any interest (b) all amounts paid by the Developer towards the Owner’s share of vacant land tax, if any, as provided under clause 11.2 and (c) any other amount paid or advanced by the Developer to the Owners.
14.3 The Developer will have first charge over the Schedule Property and the Owners’ Constructed Area for the interest free Refundable deposit, the amount paid by the Developer towards Owners’ share of vacant land tax and other amounts and advances paid or made by the Developer to the Owners. The Developer shall have a first charge over the Schedule property, including the Owner’s Constructed Area till the refund of the aforesaid amounts to the Developer in the manner provided under this JDA.
16.2 Notwithstanding anything contained in this JDA, it is clarified that the Developer shall have a charge over the Schedule Property and the JDA shall continue to be valid, subsisting and binding on the Parties till the Owners pay all the amounts that are due and payable to the Developer under this JDA. “
6.19 By giving detailed observations against each and every objections raised in the written submissions and by distinguishing the case law relied upon by the assessee as well as by following various case law relevant to the issue in appeal, the learned Commissioner (Appeals) has finally concluded as under :–
“5.3.59 In view of the detailed discussion as above and more particularly in view of the fact that in JDA the assessee being the owner of the land, in consideration for agreeing to transfer 60% share in land to the developer and the developer agreeing to construct and deliver to the owner 40% of the super built up area and GPA was entered to give effect to the JDA and in furtherance of such contract the developer took possession of the property, carried out survey, cleared the area by removing the bushes, shrubs, put up fence all around the boundary line and carried out various developmental activities, and the assessee also fulfilled its part of the contract by giving possession of land to the developer and also by handing over the original title deed to the developer, and further a sum of Rs. 10 crore was paid by the developer to the assessee as interest free deposit and another sum of Rs. 20 crore was agreed to be paid, and although approvals are delayed but now such approvals are in final stages and for the reason that at no times the JDA was cancelled but in fact the contract was extended and the same is subsisting and the first charge is always vested with the developer during the subsistence of the contract and also in view of the judicial interpretation, I am of the considered opinion that the date on which the JDA was entered is the date on which the transfer took place as per Section 2(47)(v) of the Act and the guideline value must be adopted as the consideration for computing capital gains under section 45(1) of the Act and accordingly the guideline value adopted by assessing officer of Rs. 511,02,41,400 is hereby upheld.”
7. Before us, the learned Counsel for the assessee has filed detailed submissions and the specific submissions before the Tribunal are reproduced hereunder :–
“4. SUBMISSIONS OF THE APPELLANT BEFORE THE Hon. ITAT :–
1. Both MOA and JDA are unregistered documents and therefore the decision of the Hon. Supreme Court in CIT v. Balbir Singh Maini (2017) is applicable.
4.1.1. The Hon Supreme Court In CIT v. Balbir Singh Maini, dt. 4-10-2017, has held that if an agreement, like JDA in the present case, is not registered then it shall have no effect in law for the purpose of section 53A of the TOPA. The Hon SC in Para No. 20 has observed as under :–
20.the effect of the aforesaid amendment is that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of section 53A. In short, there is no agreement in the eyes of law which can be enforced under section 53A of the Transfer of Property Act This being the case, we are of the view that the High Court was right in stating that in order to qualify as a “transfer” of a capital asset under section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under section 53A of the Transfer of Property Act A reading of section 17(IA) and section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in section 53A. The ITAT was not correct in referring to the expression “of the nature referred to in section 53A” in section 2(47)(v) in order to arrive at the opposite conclusion.
4.1.2 As has been stated above, there is no contract in the eyes of the law in force under section 53A after 2001, unless the said contract is registered. As the JDA of the appellant was not registered, it has no effect in the eyes of law and therefore no “transfer” can be said to have taken place under the aforesaid unenforceable document.
4.1.3 The rational postulated in the said decision applies to the case of the applicant squarely. Being the final decision of the Apex Court, it is binding on the Appellate Authorities.
2.Real income to be taxed and not the notional or hypothetical income
4.2.1. The Hon ble Supreme Court in CIT v. Balbir Singh Maini has referred to the decision in ED Sassoon & Co. ltd v. CIT (1955) 1 SCR 313 at 343 has held that Income tax cannot be levied on ‘hypothetical income’ and the income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
4.2.2. Therefore to tax an income, some real income must arise and there must be a corresponding debt owed to him by somebody. In the instant case merely by entering into an agreement, no corresponding debt of paying the money is created from the developer. At best his liability is to develop and handover the flats periodically as and when constructed as per the covenants of the JDA.
4.2.3. The observations of the Apex Court in this case are as under :–
25.This Court in E. D. Sassoon & Co. Ltd. v. CIT (1955) 1 SCR 313 at 343held:-
It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in present solvendum in futuro; See W. S Try Ltd. v. Johnson (Inspector of Taxes) ((1946) 1 AER 532 at p. 539), and Web v. Stenton, Garnishees (11 QBD 518 at p. 522 and 527). Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he acquired a right to receive the income or that income has accrued to him.”
26 This Court, in CIT v. Excel Industries, (2014) 13 SCC 459 at 463-464 referrred to various judgements on the expression ‘accrues’ and then held :–
“14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. (CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)) it was held as follows: (ITR p. 148)
“…. Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. “
15.The above passage was cited with approval in Morvi Industries Ltd. v. CIT (Morvi Industries Ltd. V. CIT, (1972) 4 SSC 451:1974 SCC (Tax) 140 : (1971) 82 ITR 835) in which this Court also considered the dictionary meaning of the word “accrue” and held that income can be said to accrue when it becomes due. It was then observed that (SCC p.454, para 11)
’11…. the date of payment . . . . does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. “
16 This Court further held, and in our opinion more importantly, that income accrues when there ‘arises a corresponding liability of the other party from whom the income becomes due to pay that amount”.
17.It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
18.Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is, therefore, not the income of the assessee. “
28.In the present case, the appellant did not acquire any right to receive income in as much as such alleged right was dependent on necessary permissions being obtained. This being the case, in this circumstances, no debt owed to the assessee by the developers and therefore the appellant have not acquired any right to receive any income under the JDA and therefore no profit and gain arose from “transfer” of capital assets so as to attract section 45 and sec48 of the Income tax act.
4.2.4. As the JDA entered into by the appellant pan material, the same as cited in the above decision, there is no real income earned by the appellant and therefore capital gains does not arise.
3.APPLICABILITY OF SECTION 45(2)–BRICK CHAMBER LANDS OWNED BY THE FIRM AS A BUSINESS ASSET CONVERTED INTO STOCK–IN -TRADE
4.3.1. In this respect we submit that the capital asset of land belonging to the assessee Firm was treated as stock-in -trade in the year 1996-1997 itself as per section 45(2) of the Income TaxAct,1961 (after the stoppage of the business in manufacture of bricks), when the entire land measuring 35.50 acres were planned to be utilized for commercial exploitation, either by appellant’s or by the way of joint venture with other suitable builders.
4.3.2. The provisions of section 45(2) provide as under section 45(2) notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock in trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock in trade is sold or otherwise transferred and for purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.’
4.3.3. It is submitted that section 45(2) of the Act contemplates conversion of capital asset into stock in trade and makes an exception to the main charging provision in section 45. The section therefore starts with non obstante clause and provides that conversion of capital asset into stock in trade shall be chargeable to capital gains in the previous year in which such stock in trade is sold or otherwise transferred. Therefore, the time of chargeability to income tax of capital gain arising from the conversion of capital asset to stock in trade is the point when the stock in trade is sold or otherwise transferred, whereas the chargeability of capital gain under section 45 from transfer of capital asset will be in the previous year in which the transfer took place. The meaning of the words, “otherwise transferred”, in s. 45(2), should derive its meaning in its ordinary popular and natural sense, and it does not include a transaction referred to under subsection (47) of section 2 of the Income Tax Act, 1961 in relation to a ‘capital asset’. This is especially so since the transfer under section 2(47) is only with relation to capital asset and not applicable if it is converted into a trading asset. As per section 45(2), the business profit arises to the assessee on the sale of the stock in trade only when the constructed apartments were sold and not at the time when the development agreement was entered into. Reference can be made to the decision of Chennai Bench in the case of P. Gopinath v. ACIT 42 DTR 127 which has taken such view. Section 45(2) therefore is relevant.
4.3.4. The capital gains as on conversion can be offered in the year of actual sale and the difference in sale price and market value on conversion will be offered as business profits. Looking at the situation independently, one can say that the provision of section 45(2) could be relevant and appropriate. The fact of entering into agreements for development of land through such arrangements reflects that the character of holding of land changes factually. What was held as capital asset changes colour especially after the arrangement with the developer (if not before) is made for construction and then sale to the buyers. The interpretation of the words ‘or otherwise’ would not be required as the agreement provide for sale of constructed units to the prospective buyers and therefore the year of charging capital gains would be taken to be year of ‘sale’ as provided in section 45(2). This is important more so as the rights in land remain with the land owner till they are sold to the prospective buyers. The words sale or otherwise transferred’ are mutually exclusive situations. When the same agreement provides for sale of land to the prospective buyers there is no question of going to the word ‘or otherwise’.
4.3.5. Applying the facts of the appellant’s case to the above, it is submitted that the assessee firm M/s. Tamilnadu brick industries has been in the business of manufacture of bricks since 1971 and continued till 1996, when the business was stopped due to the full utilization of the area for bricks manufacture.
4.3.6. After the discontinuance of the business in manufacture of bricks from the year 1996, the Partnership firm started looking for the suitable buyers of the land in piecemeal or joint venture! joint development basis by the late partner, Mr. N.S. Kothandapani
4.3.7. After many offers, the appellant firm found a developer of repute, M!s. Brigade Enterprises limited of Bangalore, a listed corporate major as an interested party and the Memorandum of agreement was entered into for the development of lands measuring 35.55 acres belonging to the Firm with the developer on 30-1-2012 followed by the JDA on 17-9-2012. The said MON JDA inter alia provided for the development of the lands measuring 35.55 acres belonging to the Firm into a Residential complex with land owners retaining 40% of the super built up area.
4.3.8. The above facts and the events prove that the natural and logical course of the brick manufacturing entities after the full exploitation of the lands owned by them, is to convert them into plots for sale or promote building projects either on their own in collaboration with reputed builders resulting in the treatment of the capital asset, i.e. land into a stock-in-trade. Accordingly the appellant has converted the land into stock in trade and therefore the provisions of the section 45(2) should be applied.
4. NO POSSESSION HANDED OVER TO THE DEVELOPER ON EXECUTION OF JDA :–
4.4.1. We bring to the attention of the Hon. ITAT the following important clauses in the JDA dt. 17-9-2012 on the issue of handing over possession of the property indicating that the Owners continue to be owners throughout the subsistence of the agreement and have at no stage purported to transfer rights akin to ownership to the developer.
4.4.2. Permission to Develop: Para 2.1 of JDA Page No. 23. Paper book page.No. 43- Vol.1.)
The Developer is hereby granted leave and license to enter the Sch. Property pursuant to the execution of this JDA and shall thereafter be entitled to commence and complete development of the schedule property in accordance with the approvals and licenses. It is hereby clarified that such permission to develop the schedule property shall not be construed as delivery of possession under section 53-A of TOPA rws 2(47) (v) of the Income Tax Act, 1961. Subject to the developer being in compliance with their obligations under the JDA the permission is granted in favour of the developer to develop the schedule property shall be kept valid and subsisting by the owners till the Developer completes the development and transfers or otherwise disposes of their share of built-up space as per the JD.
The possession of the Schedule property shall continue to be retained by the Owners and the same will be handed over to the buyers! allottees as and when the undivided share of the land in the Schedule property is conveyed in favour of buyers/allottees of the built up space.
Commencement and completion of construction: Para 7 (page no.34 of JDA & page no.54 of Paper book — Vol. I) :–
7.1 The Owners have permitted the developer to enter and exit the Schedule property for the purpose of development only. Provided always that the same shall not be construed as delivery of possession or part performance contemplated under section 53-A of the TOPA. The owners hereby permit and authorize the developer to enter upon the Schedule property only for the purposes of development.
Transfer of Developer’s Share: Para 10 (Page No. 42 of JDA and Page No. 62 of Paper book— Vol. I)
10.1: The Owners agree to convey/transfer to the Developer and/or their nominees or assignees an undivided 60% share or such proportionate share in the Schedule property (proportionate to the developer’s constructed area). Upon obtaining statutory approvals, the Developer shall be entitled to sell convey or deal in any manner with the 60% undivided share or such proportionate share in the schedule property (proportionate to the Developers constructed area) using the power of attorney document granted by the Owners to the developer simultaneous to the execution of the JDA.
Obligation of the Owners: Para 13 (page no.47 & 48 of JDA and Page no.67 &68 of Paper book–Vol.1
13.3: The Developer shall have the power to sell the Developer’s constructed area after obtaining statutory approvals and the proportionate 60% undivided share in the Schedule property and enter into agreements and execute sale deeds and other conveyances in favour of prospective purchasers in respect of the Developer’s constructed area and the proportionate undivided interest in the schedule property and to receive consideration for the same.
Termination and consequences of termination: Para 16- (Page No. 54 of JDA and page no. 74 of paper book–Vol. I)
16.1.iii: In the event of the Developer seeking termination of the JDA for the reasons mentioned above, the Owners shall forthwith refund (a) the entire Refundable deposit and also make good the loss of cost of Development incurred by the developer.
Para 1 of the registered General power of attorney executed on 17/09/2012 (Page no.6 of GPA and Page no. 102 of paper book–Vol. l).
The Principals do hereby appoint, nominate, and constitute M/s. Brigade Enterprises Ltd. …. as our true and lawful attorney for and in our names and on our behalf , inter alia to do all or any of the acts, deeds and things, jointly or severally, that is to say: (1) To sell or otherwise dispose of by way of sale, gift, lease, mortgage, exchange or otherwise, saleable built up area to the extent of 60% of the total saleable built up area … Provided however, the Attorney/s shall be entitled to convey and transfer saleable built up area to the extent of 60% of total saleable built up area, in whole or in portions and proportionate undivided share, right, title, interest and ownership in the Schedule property only after plan sanctions are obtained for the entire project.
4.4.3. From the cumulative reading of various clauses in the joint development agreement and in the power of attorney, it is abundantly clear that the possession in the property was not handed over to the developer and that he was granted the permission to develop and it was expressly agreed that such permission shall not be construed as delivery of possession or part performance contemplated under 53A of the TP Act and that the developer is entitled to sell only after obtaining the plan permissions. Therefore there is no possession granted to the developer even if the provisions of section 2(47)(v) are applicable, for such JDAs and therefore the requirement of part performance fails.
4.4.4. The Developers, M/s. Brigade Enterprises Limited submitted the proposal for the construction of Residential group development before the CMDA 29-5-2013 in File No. B311009412013 (SBC No. 556/2013) for the joint development project. It is submitted that the application for the plan approvals was submitted only after the year ended 31-3-2013, not falling in assessment year 2013 -2014.
4.4.5. The CMDA finally issued the Building permission in Building Plan No. CEBA/WDCN11/00328/2016 dt. 18-11-2016. As the Plan approvals have been received in the previous year 2016-2017, relevant to assessment year 2017-2018, the handing over of the possession could have taken place only in assessment year 2017-2018.
4.4.6. Assuming but not acceding to the fact that the doctrine of part performance is to be applied, it can be applied only after the permission of plan approval is obtained. As the willingness to perform by the developer manifests only thereafter for construction of the building as per the plan, therefore there is no transfer that can be construed under section 2(47)(v) in the year under appeal.
5. Reference to Valuation Cell under section 50C(2) not made :–
5.1 Reference to valuation cell was not made by the AC in spite of the request by the Appellant, as provided in section 50C (2) of the Income Tax Act., particularly when the market value of the impugned property was found to have been raised steeply from Rs. 74.87 crores on 31-3-2012 to Rs. 851.71 crores on 1-4-2012 by the stamp value authorities.
6. Adoption of wrong guideline value as consideration :–
6.1 The huge increase in the Guideline value of the property was due to an upward revision in the value of the lands. Earlier before it was changed, the guideline value was fixed on per acre basis, which was changed to per sq. feet basis, in the revised guideline value. It is a known fact that if a plot of land is divided into plots, the saleable area of such plots will be reduced by at least 1/3rd for the provision of roads, etc., Moreover, a 10% of the lands have to be ceded to the Government/ Corporation, as per the Development rules. In addition the Tamil Nadu Government has also reduced the guideline value by 1/3-6-2017, as the earlier guideline value fixed (as on 1-4-2012) was found to be very high. These issues were not factored by the AC while arriving at the Market value of the property and the AC has simply adopted the guideline value based on the sq. feet basis fixed by the Govt. Had these factors were considered, the guideline value for the saleable area would have been reduced to 40% as compared to the value adopted by the AC as detailed below by an examp le .
|1. The initial extent of the land(say)||100|
|3. Balance available(1-2)||90|
|4. Less: Deduction for Roads @ 1/3 of (3) above||30|
|5. Balance available (3-4)||60|
|6. Less: Reduction in Guideline value in June, 2017 @1/3 of (5) above||20|
7. Therefore Intrinsic Guideline value as a percentage of the original Value works out to 40
7. No Revenue impact and no dispute in determination of tax liability except the year of taxation :–
7.1 It is submitted that there is no dispute on the payment of tax or determination of tax liability, whether under capital gains (long or short) or business income. Only the assessment year in which the income is chargeable to tax is the issue. The large residential housing project launched in the heart of the Chennai city, is estimated to make gross earnings close to about Rs. 1500 crores in the next five years, involving big contribution to the exchequer.
8. Section 45(5A) of the Income Tax Act, introduced from assessment year 2018 -2019 :–
8.1 It is submitted that the legislature has introduced a new section 45(5A) in the Finance Act, 2017, with effect from assessment year 2018 -2019, providing for chargeability of capital gains to income tax as income of the previous year in which certificate of completion for the whole or part of the project is issued by the competent authority applicable to Individuals and HUF, but the amendment is curative in nature, to eliminate the taxation of hypothetical income on the date of execution of JDA itself.
9.RESPONSE TO THE WRITTEN SUBMISSIONS OF learned Standing Counsel. The Point wise reply to the written submissions of the learned JR. Standing Counsel to the Income Tax Dept received on 19-12-2017 is enclosed.
We pray the Hon. Tribunal to consider our above submissions favourably and pass such orders as deemed fit.
7.1 The learned Departmental Representative also filed written submissions and the same are reproduced as under :–
“Written submissions submitted by Departmental Representative :–
A. Facts :–
Memorandum of Agreement :–
1. The Appellant is a partnership firm engaged in the business of brick manufacture. The appellant had entered into Memorandum of Agreement(herein after referred to as MOA) dated 30-1-2012 with M/s. Brigade Enterprises Ltd, Bangalore to develop 35 acres 55 cents on joint development basis recording the mutually agreed terms and conditions with an understanding to subsequently enter into Joint Development Agreement(herein after referred to as JDA). Terms of sharing of the super built up area is agreed between the parties as 40% to the land owner and 60% to the developer. It was agreed that an amount of Rs. 30,00,00,000 by way of interest free refundable deposit to be paid to the appellant as a security deposit.
2. The manner in which the deposits are paid are at Page 8 of Vol-1 paper book.
a. Rs. 1,00,00,000 at the stage of execution of MOA.
b. Rs. 9,00,00,000 at the stage of execution and registration of JDA.
c. Rs. 10,00,00,000 on obtaining all NOCs, approval and plan sanction for the development.
d. Rs. 10,00,00,000 before commencement of project.
3. It was also stated that the developer exercised lien over the property for the deposit paid by it to the appellant.
4. It is also to be noticed that para 9 of the MOA(at page 10 of Vol-1) stated that the appellant agreed to permit the developer to enter into the scheduled properties immediately on execution of MOA to take up survey, soil testing, planning, etc., and permit the development activities simultaneously on execution of JDA and registered Power of Attorney.
5. It is further agreed to execute a separate registered Power of Attorney for the purpose of sale of the undivided shares in the property, as per the terms and conditions mutually agreed between parties, simultaneous to the execution of JDA. (Please see para 9 at page 10 of Vol-1)
II. Joint Development Agreement :–
6. On 17-9-2012, the appellant entered into JDA with the developer M/s. Brigade Enterprises Ltd. The terms agreed upon in the JDA starts at Page 43 of the Vol-1.
2. Permission to Develop :–
3. Statutory Approvals
5. Cost of Construction
6. Sharing of Built up area and car parking area
7. Commencement and completion of construction
8. Marketing & Sale of owners constructed area
10. Transfer of Developers share
11. Taxes, Maintenance charges, Deposits etc., on owners constructed area
12. Maintenance charges/sinking fund/campus corpus fund, etc.,
13. Obligation of the Owners
14. Refundable Deposit (internal page 51 of iDA is missing in Vol-i)
15. Borrowings by the Developer and Documents of Title
16. Termination and Consequences of Termination 17 to 20 are other general covenants.
III. Registered General Powers of Attorney :–
7. On the same day 17-9-2012, the appellant executed and registered two General Powers of Attorney in favour of the Developer, M/s. Brigade Enterprises Ltd. vide Document No. 603/2012(Page 93 of Vol-i) and Document No. 604/2012(Page 112 of Vol-2).
8. Terms of the Document No. 603/2012 starts at Page 102 i.e., 1. To sell or otherwise dispose of by way of sale, gift, lease, mortgage, exchange or otherwise, saleable built up area to the extent of 60% of total saleable built up area…. 2. To receive advances and balance of sale price from any purchaser, transferee, lessee… 3. To sign and execute any agreements to sell, lease, sale deed… 4. To present any agreement to sell, lease, sale deed for registration… 5. To sign and execute necessary documents, declarations, affidavits, undertakings and other documents required for completion of sale and etc.
9. Terms of the Document No. 604/2012 starts at Page 121 i.e., 1. To appear for and represent the principals before the Village Panchayats, Municipal Councils, etc., all offices of State and Central Government and apply for and obtain necessary plans, licenses, sanctions… 2. To apply for and obtain occupation certificates or completion certificates in respect of buildings to be constructed… 3. To apply for and secure electricity, water and sanitary connections.. 4. To deal and correspond with Tamil Nadu Electricity Board… 5. To appear on behalf … 6. To appear for and represent principals…. 7. To engage advocates…. 8. To identify the land required for Open space reservation and to execute and register necessary deeds of gifts or other documents as required by such authorities for conveyance…and etc.
IV. Assessment :–
10. The appellant filed its return of income for the assessment year 2013-14 on 19-7-2013, admitting the total income of Rs. 44,04,628 . The return of income was processed under section 143(1) of the income tax act, 1961(herein after referred to as ‘the Act’). The case was selected for scrutiny and the notice under section 143(2) dated 2-9-2014 was served on the appellant. Subsequently, a notice under section 142(1) was issued on 25-6-2015 and duly served on the appellant. As per the provisions under section 2(47)(v) of the Act, read with the provisions of section 50C of the Act, it was made clear that the appellant had agreed to transfer/sell its 60% of total land of 35 acres to Developer M/s. Brigade Enterprises Ltd. for a consideration which would be equivalent to the cost of 40% of total constructed area forming part of 35 acres residential project. Accordingly, the appellant was requested to explain the applicability of capital gain provisions as p