GST

PROPERTY DEVELOPMENT AGREEMENTS-CHARGEABILITY TO CAPITAL GAINS

1. INTRODUCTION AND ISSUES INVOLVED

In this era of rapid Infrastructural Development in the country, a lot has been happening in the real estate world. The real estate companies have seen immense growth since the advent of 21st Century. Landowners having land at the prime locations are not going for upfront sale of their property and want to en cash maximum in the real estate boom. Even the real estate developers, could not be expected to have such unlimited resources to first buy the costly chunk of land and then pump in the money to develop the same. So came in the Property Development Agreements. In the layman language the Property Development Agreement can be understood as the agreement wherein the land owner enters into contract with the developer to develop the land by constructing complex on the land and agrees to share the built up area. In typical PDA's the land owner receives some monetary consideration and share in built up area. There can be other mode of settlements also. Now in these cases it normally takes more than one year till all the terms of the contract are fulfilled , so question arises as to whether such agreement would result in "transfer of capital asset" chargeable to capital gains as per Income Tax Act and ,if yes, when is the profit chargeable to tax in the hands of the landlord for the gains arising to him out of the consideration received by him in form of cash and built portion of his share. Property Development Agreements are spread over a period of time and contemplate various stages.

In property development agreements, the land lord gets his share of constructed property after completion of project which normally takes more than couple of years. The constructed portion to be received by the landlord is part of his sale consideration. The revenue contends in this case that once the agreement has been entered into and possession of the land has been given to the developer , the transfer of capital asset is complete and capital gains is fully chargeable to tax irrespective of the fact that sale consideration has not been received by the vendor yet. Whereas the assessee contends that the same is not chargeable to tax till he has got his share of the property. There are other complexities involved which have been discussed in this article. Hence the question arises as to at which of the following stage capital gains would be taxable in the hands of the landlord.

  1. Whether it is chargeable to tax when agreement has been entered into ?
  2. Whether it is chargeable to tax when possession of land has been given to the builder for some survey work etc. ?
  3. Whether it is chargeable to tax when possession of land has been given to the builder for starting the development work?
  4. Whether it is chargeable to tax when various permissions have been received from various authorities , obtaining of which is necessary for the contract to come into operation?
  5. Whether it is chargeable to tax when exclusive possession has been given to the transferee i.e. when transferee gets right of possession to the exclusion of anybody else ?
  6. Whether it is chargeable to tax when whole consideration has been received by the assessee?
  7. Whether it is chargeable to tax when the final conveyance deed has been registered ?

Various courts have given pronouncements on these aspects which are very important to understand the complexities involved in this issue.

2. Basis of taxability

First of all let's have a look at the charging section of the capital gains and other relevant provisions of Income Tax Act,1961 and Transfer of Property Act,1882.

2.1 Section 45(1) : Capital Gains tax liability arises only when the following conditions are satisfied:-
  1. There should be a capital asset.
  2. It is transferred by the assessee.
  3. Transfer takes place during the previous year.
  4. Any profit or gain arises from transfer.
  5. Such profit is not exempt u/s 54-54GA.

It is well established that right in property is also a capital asset, so entering in property development agreement involves a capital asset. Hence first condition is clear.

2.2 Now the main contention that arises is that whether entering in to property development agreements involves transfer of any capital asset and ,if yes , when has that transfer taken place because capital gains is taxable in the year in which the transfer has taken place and the property development agreements generally takes more than one year for all the conditions to be fulfilled.

The department has been contending that once the agreement has been signed and possession of land has been given , the transfer takes place and chargeability to capital gains arises in the year of signing of agreement itself whether the consideration has been received or not. The assessees ,for the obvious reason, does not subscribe to this view.

2.3 What is "transfer"? The same has been defined in Section 2(47) of the Income Tax Act. First four subsections of the Section 2(47) are as follows:-

"Transfer", in relation to a capital asset, includes :-
  1. the sale or exchange or relinquishments.
  2. the extinguishment of any rights therein.
  3. the compulsory acquisition thereof under any law.
  4. conversion into stock in trade.

All the above four sub sections did not cover the situation where otherwise all the rights of ownership used to be bestowed upon the transferee by the transferor but capital gains could not be brought to tax as it was argued on behalf of the assessee that no transfer took place till execution of conveyance. In many cases properties were being sold by way of sale agreement and also execution of General Power of attorney and possession was given on receipt of full consideration without executing the sale deeds and thus capital gain was being avoided. In some cases assesses used to enter into agreements for developing properties with the builders and under agreement with the builders, they used to confer privileges of ownership without executing conveyance. In order to plug these loopholes , Sub Section (v) was introduced to Section 2(47) w.e.f A/Y 1988-89.Section 2(47)(v) states that "transfer", in relation to a capital asset includes:-

"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) "

2.4 Hon'ble Bombay High Court in the Landmark judgement of Chaturbhuj Dwarkadas Kapadia vs CIT1 examined the scope and import of Section 2(47)(v) as under :-

This provision, which covers one of the modes of deemed transfer, lays down that the scope of expression transfer includes "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. Elaborating upon the scope of Section 2(47)(v), their Lordships observed as follows:

"Under section 2(47)(v), any transaction involving allowing of possession to be taken or retained in part performance of the 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 contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under Section 2(47)(v)".

2.5 In order to understand the provisions of section 2(47)(v) of the Income Tax Act , it is important to have a look at the important ingredients of Section 53A of the Transfer of Property Act , which are as follows:-

  1. Any person , contract to transfer for consideration , any immoveable property by virtue of contract in writing signed by him or on his behalf.
  2. There should not be any uncertainty.
  3. Transferee has in part performance of contract has taken possession or part possession of the property or is already in possession and continues to do so in part performance of the contract
  4. Transferee has performed or willing to perform his part of the contract i.e. he has paid or ready to pay the consideration– then –

Notwithstanding that the contract, registered or not ,or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed by the law for the time being in force,the transferor shall be debarred from enforcing against the transferee any right in respect of property, other than the right specifically provided by the terms of contract.

Hence it has to be kept in mind that all the conditions of Section 53A mentioned above have to be fulfilled for the case to come within ambit of Section 2(47)(v).

3. Latest Judicial Precedence

The courts, off late , have been flooded with the litigation on this matter. The dispute that is normally arising is whether such agreements contemplate transfer of the capital asset and ,if yes, about the year of the chargeability of the capital gains i.e. the year in which transfer would deem to have taken place. Let's have a look at the two latest judgements , which on face, gives contradictory view on the subject.

3.1 Case of Charanjit Singh Atwal vs ITO2(Chandigarh Tribunal) Hon'ble Chandigarh Tribunal in this case has supported the view of the revenue while giving a very exhaustive and lengthy judgement.

3.1.1 Facts of the case :-
  1. A tripartite Joint development agreement had been entered into between the Punjab Coop Housing Building Society Ltd. Mohali , of which assessee was a member, and M/s Hash Builders (P) Ltd. and M/s Tata Housing development Company Ltd,. Mumbai as on 25/02/2007.
  2. The members of the society surrendered their allotment rights and the society on behalf of members entered into the joint development agreement in lieu of certain consideration in cash as well as in kind as described in the Joint Development agreement in the previous year 2006-07.
  3. As per the assessing officer, since society had assigned all rights in land belonging to it and also handed over physical vacant possession of property to the developers, assessee became liable to capital gain tax on his share of consideration in view of provisions of Section 2(47)(ii), 2(47)(v) and 2(47)(vi) of the Income Tax Act.
  4. CIT(A) also upheld the order of the assessing officer noticing from irrevocable power of attorney and JDA that developer was authorized to enter upon property not only for purpose of development but also for other purposes such as mortgage, encumbrance or create charge on property in favour of any bank or financial institution for raising funds for the project. It was also apparent that the developer was authorized to sell, transfer ,lease and license premises which were to be constructed on ownership basis.

3.1.2 Ruling of the Chandigarh Tribunal in this case :-

The Chandigarh Tribunal in this case upheld the order of assessing officer and CIT(A) relying on the following contentions of the revenue:-

a) Handing over of Possession
  1. That where an arrangement had been entered into by an assessee in terms of Section 2(47)(v) which has effect of handing over the possession then the transfer is said to have been taken place on date of entering into such arrangement. Irrevocable general power of attorney leads to overall control of property in hands of Developer, even if that means no exclusive possession by Developer, would constitute transfer.
  2. That the combined reading of the irrevocable Special Power of Attorney and JDA clearly shows that the developer was authorized to enter upon property not only for the purpose of development but other purposes also, such as developer was authorized to amalgamate project with any other project in adjacent area or adjoining area.
  3. That the developer had been authorized to mortgage, encumbrance or create charge on property in favour of any bank or financial institution for raising funds for project. In the absence of possession such powers cannot be given.
  4. That all the clauses clearly show that the possession was given by society and/or its member to the developer on execution of irrevocable power of attorney. Through these clauses of JDA and irrevocable power of attorney the developer was able to completely control the property and make use of it not only for the purpose of development but also for the purpose of amalgamation, sale, mortgage etc.
  5. That the position contemplated by clause (v) of section 2(47) does not require handing over exclusive possession. What is required is that the transferee by virtue of possession should be able to exercise control from overall intended purposes. Therefore, it is clear that the assessee's plea that the possession was to be given only at the time of registration of the Joint Development Agreement, is not correct. Once irrevocable power was given then it cannot be said that the possession was not given
  6. Therefore, considering the purpose of insertion of clauses (v) and (vi) of section 2(47) and various clauses of Power of Attorney and JDA it becomes absolutely clear that the society has handed over the possession of the property to the developer.
b) Receipt of Consideration
  1. That the other contention of the assessee is that the money received at the time of execution of JDA can be termed as advance and whatever money has been received has already been shown as capital gain. There is no force in this submission because section 45 provides for taxing of profits and gains arising from the transfer. When section 45 is read along with section 48 it becomes clear that whole of the consideration which is received or accrued is to be taxed once capital asset is transferred in a particular year.
  2. That therefore, it is not only the money which has been received by the assessee which is required to be taxed but the consideration which has accrued to the assessee is also required to be taxed. In view of this assessee's contention is rejected.
c) 'Willingness to perform' on part of transferee
  1. The next contention is that it is necessary for invoking of section 2(47)(v) to comply with the provisions of section 53A of the Transfer of Property Act to the extent that there should be willingness on the part of the transferee to perform his part of the contract.
  2. In this aspect there is no quarrel with the proposition that for invoking section 53A of T.P. Act read with clause (v) of section 2(47), the transferee has to perform or is willing to perform his part of the contract and this requirement has to be absolute and unconditional.
  3. Coming to the facts again, it was contended that Developer i.e. transferee has not obtained various permissions which were required to be taken by the Developer as per different clauses of the JDA.
  4. That the Developer , i.e. transferee have made their sincere efforts for obtaining the necessary permissions/ sanctions which were required under the JDA. However, some of the sanctions could not be taken in time because of the litigation by way of PIL but since none of the party was liable to the other party in view of the clause 26 dealing with Force Majeure it cannot be said that Developer was not willing to perform his part of contract.
  5. That In any case no specific evidence has been shown to prove that the developer was declining to perform particular obligation provided in JDA. In view of this discussion, it cannot be said that transferee i.e. Developer is not willing to perform its part of contract.
d) Taxability of Notional Income and Hardship to transferor
  1. That though it is settled principle of law that notional income cannot be taxed but in case of capital gain section 45 which is charging section and section 48 which is computation section, make it absolutely clear that rigor of tax in case of capital gain would come into play on the transfer of capital asset and total consideration which is arising on such transfer, has to be taxed. Section 48 clearly talks about full consideration received or accruing as result of transfer.
  2. That the second aspect of this contention was that if consideration which has not been received was to be taxed then the assessee would be deprived for claiming exemption under sections 54 and 54EC. As observed above, as per section 45 read with section 48 whole of the consideration, received or accrued has to be taxed. Every person is supposed to know the law and if the transaction is structured in such a way for the transfer of capital asset that some of the consideration would be received later then such person is supposed to know the consequences of the denial of such benefits. However, if the section is interpreted in the manner suggested by the assessee then no person would pay capital gain tax on transfer of a property.
  3. The theory of real income is subject to the provisions of the Act and whenever any specific provisions of the Act is there for charging of a particular item of income, then the same has to be charged accordingly. It may be sometimes hard to the assessee but again it has been held in numerous decisions that Fiscal statutes have to be interpreted on the basis of language used and there is no scope for equity or intent.
  4. Therefore, it can be said that generally speaking notional income could not be subjected to tax but whenever there is a specific provision, the same has to be taxed. Now, in case of capital gain, section 45 read with section 48 very clearly provides that it is the profit "arising" from the transfer of a capital asset which would be subjected to charge of capital gain tax and section 48 clearly provides for taking the total consideration into account while computing the capital gains. It is the whole consideration whether received or accrued, which has to be taxed under the capital gain once transfer of the capital asset takes place. Accordingly, there is no force in this part of the contention.
3.2 Case of M/s Fibars Infratech Pvt. Ltd. vs ITO3 (Hyderabad Tribunal)

In this case the Hon'ble Hyderabad Tribunal has supported the view of the assessee while going through the terms of the agreement.

3.2.1 Facts of the case:-
  1. The AO received information during the relevant financial year that assessee company transferred lands for development to M/s. MAK Projects Pvt. Ltd. The assessee was in receipt of notice u/s 148 .
  2. In response to the said notice the assessee filed its return of income . During the previous year 2006-07 relevant to A.Y. 2007-08, the assessee company had entered into a Development Agreement cum-GPA with M/s. MAK Projects Pvt. Ltd for development of its property.
  3. The assessee submitted that there is no sale in the proposed transaction because the sale is governed by section 54 of the Transfer of Property Act, 1882 whereby the prime factor is receipt of monetary consideration. There is no monetary consideration whatsoever in the Development Agreement entered into by the assessee. Therefore, sale is a mode of Transfer, fails.
  4. The assessee further submitted that any transaction involving 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), then only it is to be considered as a transfer. The development agreement does not fall under the transaction of allowing possession of any immovable property to be taken or in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act.
  5. After examination of all the documents and details filed, the AO, completed the assessment and proceeded to determine the full value of consideration ignoring the plea of the assessee company that the same is not ascertainable in the year under consideration. In other words, it was the prayer of the assessee company that the full value of consideration is only ascertainable in the year of receipt of constructed area for the purpose of computation of capital gain as the same can be worked out with certainty with reference to the cost of construction in the hands of the builder.
3.2.2 The Tribunal held in favour of the assessee as under:-
  1. That the argument of the assessee's counsel is that there is no transfer on account of development agreement cum GPA in terms of section 2(47)(v) of the Act on entering agreement with MAK Projects Pvt. Ltd., as there is no quantification of consideration to be received by the assessee from M/s. MAK Properties Pvt. Ltd.
  2. That the Revenue has placed heavy reliance on the judgment of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT , and it is based on this judgment that the impugned addition has been made by the AO, and sustained by the CIT(A).
  3. It is important to bear in mind that Section 2(47)(v) refers to possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of Section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under Section 53A are satisfied, and when the assessee enters into a contract which is a Development Agreement, in the garb of agreement of sale, it is the date of this Development Agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all Development Agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v).
  4. In order to invoke the principles laid down by the Honble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia , it is, therefore, necessary to demonstrate that the conditions under Section 53A of the Transfer of Property Act are satisfied.
  5. "Willingness to perform on behalf of transferee" is very important. Willingness in the context of Section 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient.
  6. It is thus clear that willingness to perform for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act.
  7. That it has therefore to be considered whether the transferee, on the facts of the present case, can be said to have performed or is willing to perform its obligations under the agreement.
  8. Even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the previous year relevant to assessment year under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 15.12.2006 but no consideration was passed between the parties. As such, the assessee has received no consideration. Admittedly, there is no progress in the Development Agreement in the assessment year under consideration. It is submitted that the Director of Town and Country Planning approved the plan submitted by the assessee company only on 06.03.2007. The assessee submitted that there is no development activity until the end of the previous year relevant to the assessment year 2007-08.
  9. The assessing officer went on to proceed on the sole issue with regard to handing over the possession of the property to the developer in part performance of the Development Agreement-cum-General power of Attorney. In our opinion, the handing over of the possession of the property is only one of the condition u/s 53A of the Transfer of Property Act, but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was willing to perform its obligation under these consent terms.
  10. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under Section 53A of the Transfer of Property Act was not satisfied in this assessment year.
4 Analysis and Conclusion

4.1 In the case of Fibars Infratech Pvt. Ltd. even when the possession of the land had been given to the developer and he had taken all the permissions from various authorities during the relevant assessment year , on which his willingness was conditional, it has been held by the Tribunal that no transfer took place on the basis that no work had been started by the developer and no consideration had been transferred and hence the willingness of the transferee to perform his part of contract was not established

4.2 As compare to that in the case of Charanjit Singh Atwal , though some monetary consideration had been received by the assessee, but the relevant permissions to start the development work had not been taken by the developer in the relevant assessment year. In fact in this case the project could not be started due to various objections being raised by various authorities and 'no objection' could not be obtained by the developer to start the development work. The society , largely comprising of MPs and MLA's , transferred the land to the developer and developer could perform his part of contract only after obtaining no objection certificates from relevant government departments. But in the relevant assessment years i.e. A/Y 2007-2008 and 2008-2009, and in fact even upto the date of the Tribunal order, the project could not be started due to various issues being raised at various levels regarding this project. Now in this case also willingness of the transferee was conditional and depended on the condition of various permissions being received from government authorities to start the development work. In the absence of receipt of the same it cannot be said that transferee was willing to perform his part of contract and hence conditions of Section 53A could not be said to have been fulfilled. The Tribunal itself acknowledged that certain permissions could not be obtained due to PIL in the High Court. Now this resulted in the uncertainty and it is one of the important conditions of Section 53A of the Transfer of Property Act that uncertainty should not be there. The Tribunal set aside this contention of the assessee only on the basis that developer has tried its best to obtain permissions and hence willingness to perform was there. However it is not only the effort on part of transferee that is necessary for the rigor of Section 2(47)(v) to come into operation but it is absolute and certain fulfillment of conditions that is necessary for the sub section to come into operation. But in this case the transfer u/s 2(47)(v) was held to have been happened on the basis of possession having being given to the developer on basis of irrevocable power of attorney and some monetary consideration being paid to the assessee.

4.3 The decision of Chaturbhuj Dwarkadas Kapadia is a land mark decision. It lays down the following conditions for Section 53A and Section 2(47)(v) to be applicable:-

  1. There should be contract for consideration;
  2. It should be in writing;
  3. It should be signed by the transferor;
  4. It should pertain to the transfer of immovable property;
  5. The transferee should have taken possession of property;
  6. Lastly, transferee should be ready and willing to perform the contract.

All the above conditions should have been fulfilled and if any condition is not fulfilled then transfer could not be said to have happened. Most of the times, the agreements contemplate obtaining necessary permissions for change of land use or no objection certificates from the relevant authorities by the developer. This would tantamount to agreement studded with the condition and uncertainty and till the time necessary permissions have been obtained ,it cannot be said that transfer has taken place.

Further there is difference between the conditional willingness to perform and absolute willingness to perform. Conditional willingness may be dependent upon obtaining necessary permissions from the authorities before the project is started or consideration is paid. This would not be covered under Section 53A of Transfer of Property Act and hence would escape the provisions of Section 2(47)(v) of the Act because if the agreement is studded with a condition then it is only a offer and not a contract. Willingness to perform must be absolute for Section 2(47)(v) to come into operation.

4.4 The courts in various cases have held that it is undoubted a huge burden on the transferor to pay capital gains even when he has received no or only part consideration. The section 2(47)(v) was mainly inserted to stop the practice which came into vogue by which certain properties were being transferred without executing the proper sale deeds wherein to avoid capital gains and stamp duty properties were transferred on 'power of attorney'. However rigor of this section can be applied on property development agreements only if all the conditions laid down in Section 53A of Transfer of Property Act,1882 and Section 2(47)(v) of the Income Tax Act are fulfilled. The transferor and transferee should also take due care while finalizing such agreements else the transferor would end up with liability to capital gains without any liquid consideration in his hand.

  1. (2003) 260 ITR 491 (Bombay HC)
  2. (2013) 36 Taxmann.com 10 (Chd Trib)
  3. (2014) Tax Pub (DT) 298 (Hyd Trib)/ITA No. 477/Hyd/2013

CA.ARUN GUPTA
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary Distt Taxation Bar Association,
Ludhiana 09814104273
www.cagds.in arunaru@yahoo.com