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TMI Blog2012 (7) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... t Appellate Authority having recognized that the Development Agreement has been cancelled should have held that no capital gains arise to the appellant. 4. The appellant submits that the First Appellate Authority erred in considering the totality of the facts and circumstances of the case of the appellant. 5. The appellant submits that the Assessing Officer and the learned First Appellate Authority erred in holding a uniform rate for both the built-up area as well as the parking area. 6. On the basis of the above grounds and any grounds that may be permitted to be raised in the course of the appellate proceedings, the-appellant prays that the addition on account of capital gains assessed on the transaction with the developer be deleted. 3. For brevity we consider the facts in the case of Sri B. Jogi Reddy in ITA No. 483/Hyd/2011. Facts of the case, in brief, are that the assessee is an individual deriving income under the head "Other Sources" was originally an assessee on record with the Income Tax Officer, Ward 4(3), Hyderabad with PAN No. AGQPB 2894 M. The assessee is the owner of land admeasuring Ac 2-01 Guntas, situated at Mahadevpur Village, Alwal Municip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the entire area (including car parking area) as Rs. 1276/- per S. Ft. This amount of Rs. 1276/- has been arrived at by the Assessing officer by deducting 12% from the sale price of Rs. 1450/- per S. Ft. which has been taken by the Assessing officer, not from the books of the builder, but from a statement recorded from the Managing Director of the said Janapriya Engineers Syndicate Limited. 3.4 The assessee raised an objection before the First Appellate Authority that the amounts relied on by the assessing officer do not represent correct figures as they are based on a statement recorded by the DDIT from the Managing Director of the company and that the actual numbers should be taken from the books of the builder. The first appellate authority continued the sale rate taken from the said statement, but however increased the rate of profit (to arrive at the cost to the builder) from 12% to 25%. The assessee raised an objection that the same rate cannot be applied both to built up area and parking. This matter was not considered by the first appellate authority. 3.5 One of the clauses of the Development Agreement stipulated that the builder agreed to complete the project withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment agreement has been cancelled, should have held that there occurred no transfer of the land and consequently no capital gains. The AR submitted that when an agreement is cancelled the rights and interests of the land lords have been restored as if the transaction never took place and as such there occurred no transfer as envisaged by the assessing officer. 4.1 The AR drew the attention of the Bench to pages 10 to 16 of the Material Paper Book which contains the copy of the agreement dated 05-04-2010. He submitted that Clause 1 of the agreement categorically states that the development agreement entered into on 04-03-2008 stands cancelled. The AR submitted that in these circumstances the learned Commissioner erred in law and on facts of the case in upholding the assessment. The first appellate authority failed to appreciate the facts of the case and take cognizance of the effect of cancellation of the development agreement. He also drew our attention to the copy of letter dated 30-04-2012 issued by Sub-Registrar, Vallabhanagar in reply to his application dated 27-04-2012 under RTI Act stating that impugned property is noted in prohibitory list issued by the Income Tax Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onveyance deed. It was presented to the courts that the transfer of property was being done through General Power of Attorneys and that through this devise though the real owner of the property changes the registered owner remains the same and that this kind of transactions were outside the purview of the definition of the word "transfer" under section 2(47) of the Income Tax Act. 4.5 The AR submitted that the following extract from the case of Chaturbhuj Dwarakadas Kapadia shows the line of arguments before the Hon'ble Court: Section 2(47)(v) was introduced in the Act from assessment year 1988- 89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance. Consequently, assessees used to enter into agreements for developing properties with the builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loop hole, section 2(47)(v) came to be introduced in the Act. It was argued by the assessee that there was no effective transfer till grant of irrevocable licence. [Para 5] 4.6 The AR submitted that the following e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of taxation of capital gain. The provisions seek to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset. 4.8 The learned AR submitted that this has been considered by the co-ordinate Bench of the Tribunal in the case of K Radhika and others [ITA Nos. 208, 209, 201 and 211 of 2011 ITAT 'A' Bench Hyderabad] vide its order dated 9th August, 2011. The concept of real income was not brought before the Bench in the said cases. The development agreement was entered into on the 04-03-2008 and the share of the assessee in the project (if completed) was about 71400 S.Ft including parking area. The assessing officer taxed the cost of construction of the said area as full value of consideration in the year 2007-08 relevant to the assessment year 2008-09. Thus in the opinion of the assessing officer the project is completed in 27 days and the builder takes his share of 73% and gives the assessee his share of 27% (amounting to 71 thousand odd square feet). 4.9 The AR submitted that the method of computation of full value of consideration itself throws open so many anomalies that the ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA;] 4.13 These two new sub clauses were introduced by the Finance Bill 1987. The Hon'ble Finance Minister in his budget speech stated as under; (para 77 of the speech as published) "77. I understand that for the purpose of taxation of income from houses, our tax laws make a distinction between the real owner who is not a legal owner and a legal owner who is not a real owner. Following the well-established revenue tradition, when it comes to taxing, we tax both the real owner who is not a legal owner and the legal owner who is not a real owner. Concessions available to a house owner are, however, given to a real owner, who is also a legal owner. I propose to simplify the law by clarifying that the real owner, even if he is not the legal owner, will pay the tax and av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty" and also to avoid double taxation and complexities between the real owners and the legal owners when it comes to taxation of property income. The AR placed reliance on the judgment and principles laid down by the Hon'ble Apex Court in the case of Varghese (KP) v. ITO [1981] 131 ITR 597 (SC). In this case weight was given to Finance Minister's speech at the time of introduction of a Bill by the Supreme Court, where even violence to the plain meaning of the language of statute was found permissible with reference to the declared objective of the provision on the basis of the Finance Minister's assurance that the deeming provisions under section 52(2) (now deleted by the Finance Act, 1987 w.e.f. 1-4-1988) may not be invoked in the case of bona fide transactions. It was found to be clearly in the nature of contemporanea expositio furnishing legitimate aid to construction. Such a view was sought to be supported by the rule admitted in Crawford on Statutory Construction described as "practical construction", although non-controlling, is nevertheless entitled to considerable weight and is highly persuasive. 4.16 The AR submitted that this principle in Varghese (KP)'s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement applied the imaginary cost to the built up area as well as to the parking area uniformly in arriving at the full value of consideration. This act of the assessing officer is arbitrary and against principles of accounting and costing as well as determination of real income taxable under the Income Tax Act. The AR submitted that, had the development agreement not been cancelled, there is no denial that transfer of his land has taken place and that he would have gained from it. The issue is how much is the real gain that is to be taxed and what is the criteria in arriving at the real capital gain, whether short tern or long term, that is to be taxed. The issue is how to determine this amount and what is the scientific and evidentially based way of determining it. 4.21 The AR submitted that the assessment is based on imaginary income, arising out of wild estimates, not stemming up from facts and therefore deserves to be quashed. The AR submitted that, on the basis of the above submissions and further submissions that may be permitted by the Tribunal to be made in the course of the appellate proceedings, the assessment of capital gains in his case for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the argument that the handing over of the possession was not in pursuance of part performance of the contract. Possession of the land being one of the interests in property had been transferred to the developer who also would be enjoying the usufruct of the land. If the shield of section 53A was available to the developer, it obviously meant that handing over of the possession was pursuant to the transfer contemplated under the Transfer of Property Act and hence under clause (v) of section 2(47). In the present case, this was not a sale transaction as money was not the consideration but some other valuable consideration was passing to the assessee in the form of 4-1/2 flats. Therefore, the transfer in the present case was for consideration and it was immaterial that the consideration may be received in future. Therefore, the development agreement in the present case had the effect of transfer as contemplated in section 2(47). (Head Note)" 7. The learned DR submitted that the case of the assessee is identical to that of B. Narasimha Reddy (ITA No. 0348/CC-6, HYD/CIT(A)-I/09-10 dated 07.01.2011. Accordingly, the assessee was liable for capital gains in respect of the development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oticeable that by the presence of the deeming provision, the income on account of arousal of the capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place. Due to the presence of this statutory fiction, the actual year in which the entire sale consideration is received, is beside the point but what needs to be judged is the point of time at which the transfer took place either by handing over of the possession or by allowing the entry into the premises or by making the constructive presence of the vendee nevertheless duly supported by a legal document. 11. But the issue do not get settled only by the interpretation of s. 45 and s. 2(47)(v) because the definition of "transfer" not merely prescribes allowing of possession but to be retained in part performance of a contract of the nature referred in s. 53A of the Transfer of Property Act. Therefore, it is further requisite to deal with the relevant section contained in Transfer of Property Act. 12. Transfer of Property Act contains S. 53A under the heading "Part performance" and, for deciding the case in hand, it is necessary to quote the impugned section verbat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t mistake to identify the issue of capital gain with the term "transfer" as defined in s. 54 of Transfer of Property act. At the cost of elaboration, we may like to add that in the past there was a long line of pronouncements; while deciding income tax cases, that unless and until a sale deed is executed and that too it is registered, transfer cannot be said to have been effected. The consequence of said catena of decisions was that no capital gain tax was directed to be levied so long as "transfer" took place as per the generally accepted connotation of the term under Transfer of Property Act. The resultant position was that the levy of capital gain tax thus resulted in major amendments in the income-tax statute. The main objective of those amendments was to enact that for the purposes of capital gains, the transaction involving transfer of the nature referred are not required to be registered under Registration Act. Such arrangement does not include transfer of certain rights vesting to a purchaser; however such "transfer" does confer certain privileges of constructive ownership with connected bundle of rights. Indeed it is a departure from the commonly understood meaning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive possession, so long as the transferee is enabled to exercise general control over the property and to make use of it for the intended purpose. The mere fact that the assessee owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of the agreement, did not restrict the rights of the developer or did not introduce any incompatibility. In a situation like this when there is a concurrent possession of both the parties, even then cl. (v) has its full role to play. There is no warrant to postpone the operation of cl. (v) to that point of time when the concurrent possession would become exclusive possession of the developer. Any other interpretation i.e., possession means exclusive possession, shall defeat the purpose of amendment. The possibility of staggering of payment linked with possession is ruled out by this amendment so that the taxability of gain may not be shifted to an uncertain distant date. We have no hesitation in saying that even if some part of consideration remains to be paid, the transaction shall not affect the liability of capital gains tax so as to postpone the same indefinitely. What is meant in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee has taken any steps in relation to construction of the flats, then it is to be considered as transfer u/s. 2(47)(v) of the I.T. Act. The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of s. 2(47)(v) as per the reasons assigned hereinabove. If the transferee was undisputedly willing to perform its part of the contract, then we have to hold that there is transfer u/s. 2(47)(v) of the Act. Thus, if the possession and control of the property is already vested with the transferee and the impugned development agreement has not been duly cancelled and it is still in operation, it has to be decided that there is a transfer u/s. 2(47)(v) of the Act. We have to see the real intention of the parties. As per the well known cannon of construction of document, the intention generally prevails over the word used and that such a construction placed on the word in a deed as is most agreeable to the intention of the parties. If there are grounds appearing from the face of the instrument affording proof of the real intention of the parties, then that intention would prevail against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd agreement of 20th June, 1996 was Rs. 38,11,934 as on 7th Jan., 1999. In view of the facts and circumstances discussed above, all the conditions of sub-cl. (v) of s. 2(47) are satisfied in this case and therefore, it has to be inferred that a 'transfer' did take place within the meaning of s. 2(47)(v). The argument that the deeds in respect of the sale of flats were not registered/executed is not a relevant consideration so far as provisions of sub-cl. (v) of s. 2(47) are concerned. The completion of 'transfer' of an immovable property as per the general law is not a requirement for the applicability of the provisions of the sub-cl. (v) of s. 2(47). Further, the assessee's plea that subsequently he filed suits which were pending, against the builder/developer with the prayer that the agreements with the builder/developer be declared as cancelled, is merely about suits which were pending and which represent a subsequent event and, therefore, it does not affect the above inference. - Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 180 CTR (Bom.) 107 : [2003] 260 ITR 491 (Bom.) relied on. 17. Thus, this ground is partly allowed for statistical purposes. It is needles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession of the land to the developer. The Assessing Officer asked the assessee as to why capital gain should not be charged based on the development agreement. In response to the said show cause notice the assessee submitted that the builder was given only licence to enter the premises and construct the flats as per the develop agreement and the possession otherwise remains with the assessee. He further submitted that as per the development agreement dated 4-3-2008, possession was given to the builder only to perform the obligations envisaged in the agreement and not in part performance of the contract as enunciated u/s. 53A of the Transfer of the Property Act. 20. The Assessing Officer did not accept the explanation of the assessee. The Assessing Officer observed that the explanation filed by the AR is not acceptable as the transfer of land under development is covered within the meaning of sec. 2(47) of the IT Act. The Development Agreement clearly shows that the construction area to be shared by the assessee and the developer was 27:73 respectively. Therefore, even though it may not be an exchange within the meaning of Transfer of Property Act, there was a transfer within the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AR of the assessee submitted that the assessee was deriving income from other sources and was an assessee on record with DCIT, Central Circle-6, Hyderabad with PAN: AGQPB2894N. During the assessment proceeding, the assessee had filed the cash flow statement for all the years for which notice u/s. 153C had been issued. Assessee submitted that the action of the Assessing Officer in adding the said Rs. 16 lakhs as unexplained money is contrary to law and against the principle of limitation under the provision of IT Act. The Assessing Officer should have accepted the opening balance which pertains to savings before 1-4-2001 and related to the assessment years 2001-02 and earlier years which are outside the jurisdiction of the taxability provision of the Act. The assessee submitted that the principle of limitation clearly establishes that an item of income which pertains to a period which is beyond the time of issue of notice cannot be brought to tax and furthermore, it is well established that the Assessing Officer has no jurisdiction to call for explanation for items that pertain to periods beyond the time limits of notice. Accordingly, the addition made by the Assessing Officer tre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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