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TMI Blog2014 (1) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... ship with MAK Projects Pvt. Ltd. - The asset in question is not an agricultural land. The impugned land was converted from agricultural purposes to non-agricultural purposes by permission from competent authority - The registration of supplementary Development Agreement cum GPA was executed on 4.1.2007 though it was presented for registration on 15.12.2006 - The registration was delayed awaiting approval from RDO for land conversion and only after the approval was received on 27.12.2006 the document was registered on 4.1.2007 and at the time of registration of Development Agreement, the land was no more remained as agricultural land and it was non-agricultural land by valid conversion on approval from the competent authority - Decided against assessee. Whether there is transfer on account of development agreement cum GPA u/s 2(47)(v) - Held that:- As per the provisions of Transfer of Property Act - Following Chaturbhuj Dwarkadas Kapadia v. CIT [2003 (2) TMI 62 - BOMBAY High Court] - '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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on the adventure in the nature of trade so as to bring the income under the head 'income from business'. This is so, because the assessee has not sold any undivided share in the landed property to the developer in the year under consideration. The assessee remains to be the owner of the said property and the land was put for development for the mutual benefit – Decided in favour of assessee. - ITA No. 477/Hyd/2013 - - - Dated:- 3-1-2014 - Shri Chandra Poojari And Sri Saktijit Dey,JJ. For the Appellant : Sri B. Ramakrishnan For the Respondent : Smt. Suba Shree Anantha Krishna ORDER Per Chandra Poojari, AM: This appeal by the assessee is directed against the order of the CIT(A)-II, Hyderabad dated 2.1.2013 for A.Y. 2007-08. 2. The assessee raised the following ground of appeal: 1. The order of the CIT(A) is contrary to law, facts and circumstances of the case. 2. The CIT(A) erred in confirming that the agricultural land given for development as a capital asset u/s. 2(14)(iii) of the Act without appreciating the facts in entirety in the correct perspective. 3. The CIT(A) erred in holding the transaction under development agreement-cum-GPA M/s. MAK Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground by ground, we are inclined to decide the entire issue in a cumulative manner. 6. Facts of the case are that the AO received information from M/s. MAK Projects Pvt. Ltd, Hyderabad 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 on 20/10/2011. In response to the said notice the assessee filed its return of income on 23/03/2011. 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 agricultural property situated in Survey Nos. 260 and 262, Thummaloor Village, Maheswaram Mandal, Ranga Reddy District, into a Housing Project as company under incorporation. After examination of all the documents and details filed, the AO, by order dated 28/12/2011, completed the assessment by rejecting claim of the assessee company that the land is not a capital asset, being agricultural land, and therefore no capital gain is assessable. Having held that there is a charge within the meaning of section 45, the land being a capital asset, the AO proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (270 ITR 40) (P H) (ii) M. Venkatesh vs CIT (144 ITR 886) (Mad) (iii) CWT vs E. Uday kumar (284 ITR 511) (Mad) (iv) CIT vs P.J. Thomas (211 ITR 897) (Mad) (v) CIT vs Lilavati Thakorelal Patel (152 ITR 565) (Guj) (vi) M.S. Srinivass Naicker vs ITO (292 ITR 481) (Mad) 10. The AR submitted that in Sarifabibi Mohamed Ibrahim and Others v. CIT (204 ITR 631) (SC) it was held by the Supreme Court that the test of whether a land is agricultural land or non agricultural land is as follows: (i) land which is left barren but which is capable of being cultivated can also be 'agricultural land' unless the said land is actually put to some other non-agricultural purpose, like construction of buildings or an aerodrome, runway, which alters the physical character of the land rendering it unfit for immediate cultivation. (ii) if land is assessed to land revenue as agricultural land under the State revenue law, it is a strong piece of evidence of its character as agricultural and; 11. The AR submitted that in the present case, the land was used for agricultural purpose till the date of sale and the date of conversion which is evidenced by revenue record. Hence it is to be considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolving 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 1 (4 of 1882 ); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co- operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.- For the purposes of sub- clauses (v) and (vi)," immovable property" shall have the same meaning as in clause (d) of section 269UA; 14. The AR further 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. 15. The learned AR submitted that the transaction of Development Agreement is not on account of any relinquishment of any asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g together of land and finance for project development is necessarily a business agreement whereby the landlord allows the developers to enter the land for the limited purpose of developer retaining his share as his award. A look into the provisions of Transfer of Property Act, 1882 clearly shows that allowing possession is to be taken or retained in part performance of the contract alone could be considered as transfer and not permissive possession or any other kind possession. The AR relied on the judgment of jurisdictional High Court in the case of N. Karuna Anr. v. Appropriate Authority Ors. 251 ITR 230 (AP) wherein the High Court held as under: "A perusal of the above referred provision shows that allowing of possession to be taken or retained in part performance of the contract of the nature referred to section 53 of the TP Act, alone could be considered as transfer and not a permissive possession or any other kind of possession delivered by the seller to the purchaser". 17. The AR submitted that though the above judgment of the jurisdictional High Court was rendered in the context of Chapter XXC of the Income-tax Act 1961 and interpretation of section 269UA(f) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers or by acquiring shares in a cooperative society, company, etc., or by way of any agreement or arrangement. Thus the amendments did not cover transactions by way of Development Agreement as they are purely commercial transactions not involving transfer until the happening of the event by which the developers had over a built up area to the owners in lieu of the developers retaining their share in the development of the property. Thus, the mischief whereby money transactions of sale were entered into, full consideration received was not regarded as transfer until they were registered. In the same manner where possession of immovable property was given, full consideration was received and transfer of properties were undertaken under power of attorneys and where consideration was received in full were all escaping the ambit of capital gains tax and to remedy this mischief, the provisions of section 2(47)(v) (vi) were brought forth in the statute. Even the law before the aforesaid enactments, was explained by the Patna High Court in the case of Smt. Raj Rani Devi Ramna v. CIT [1993] 201 ITR 1032 (Patna) wherein it was held as under: "In the absence of any provision to the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d wholly and exclu- sively in connection with such transfer. (ii) The cost of acquisition of the asset and the cost of any improvement thereto. " 23. The AR submitted that the consideration that accrues to the assessee depends on the facts of the case on the date of execution of Development Agreement. The constructed area of the project is not in existence and that this is subject to so many factors like non-sanction of municipal application, disputes, escalation of cost, non-availability of men and material on account of statutory prohibitions, etc. Thus, the entire consideration is the womb of uncertainty. The consideration is not capable of being ascertained. The consideration in money's worth i.e., built up area of the immovable property which is to come into existence after a period of time cannot even be estimated. Therefore, accrual of income itself fails. Capital gain is also a mode of income and unless there is an accrual of income by way of capital gains, the charging section under section 48 fails. Therefore, the question of computing and levy of any capital gains on the date of execution of Development Agreement, on the basis and assumption of consideration which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able of being determined. Therefore, without prejudice to any of the aforesaid submissions, the AR submitted that the computation provisions cannot be involved and, therefore, the charge to capital gains fails. He further submitted that the Director of Town and Country Planning approved the plan submitted by the assessee company only on 06.03.2007. The AR submitted that there is no development activity until the end of the previous year ending 31.3.2007. Commencement of building process had not been initiated as the building approval was provided only on 06.03.2007, therefore, no income be said to accrue as laid down in section 48. Until permission is granted, a developer cannot undertake construction. As a result of this lapse by the transferee, the construction was not taken place in the assessment year under consideration. For this proposition the AR relied upon the decision of the Tribunal Chennai Bench in the case of Vijaya Production Pvt. Ltd. vs. Additional CIT (134 ITD 19) (TM). 27. Hence, the AR submitted that since there is no amount of investment by the developer in the construction activity during the previous year relevant to the assessment year 2007-08 in this proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year 2007-08, the average sale price of each villa works out to Rs. 45 to Rs. 47 lakhs and that if translated as average sale price per square feet of built up area works out to Rs. 1550 per square feet. Therefore, he submitted the value adopted by the AO is not justified. 30. The AR submitted that the AO alternatively held that if income is not assessable under the head 'capital gains', it can be assessed under the head 'profits gains from business and profession' on the ground that the development agreement is an adventure in nature of trade. The assessee has not sold the undivided share in the land during the assessment year. It can be treated as an adventure in the nature of trade only when there is a sale of the land within a short span of time. In the instant case, the land is only put to development and not sold. Hence it cannot be considered as adventure in the nature of trade. It would be taxable only in the year when the undivided share in the land is sold. He relied on the following judgements/decisions: (a) Baisakhi Bhattacharjee vs. Shayamal Bose Ors. [2002 (4) CHN 115] (Cal.) wherein held : (i) In the present case, it has not been shown nor has a findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th its grammatical variation. (Para 8) (viii) The agreement at page 18 (page 113 of the P. B.) in clause XII provides negative covenants restraining the wner/defendants from terminating the agreement. But this is qualified by a condition that so long the developer act in terms of these presents and her acts and deeds are not prejudicial and contrary thereto, the owners shall not be entitled to terminate this agreement in any manner and shall not prevent or be a party to any act or deed, which may prevent the developer from constructing the said building or performing this contract. (Para 9) (ix) Failure to get the registration or withdrawal of registration under the provisions of 1993 Act has to be construed in the light of the conditions under which the negative covenant is qualified. (Para 9.2) (x) An agreement is a contract. Contract is valid if it is contrary to law. Therefore, all agreements or contracts are subject to the provisions or law for the time being in force. Admittedly, though the agreement was entered into before the commencement of the 1993 Act, yet the provisions of the said Act are applicable to the agreement. Inasmuch as, as soon the 1993 Act came into fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucement to its, as contemplated under section 18 SR Act. The word "ready" implies that the plaintiff has taken steps to make himself eligible to undertake the performance of the contract, which are the primary ingredients that makes a person eligible and entitle to make the construction. The word "willingness" implies that he is inclined to do what is required. Unless it is shown that these ingredients are satisfied, no case for specific performance can be said to have made out. The averment of readiness and willingness in the pleading is not a empty formality. (Para 10.2) (xv) The requirement of law is simple. The continuous readiness and willingness on the part of the plaintiff to perform his part of the contract through out from the commencement of the agreement till the hearing of the suit. But that does not mean the plaintiff has to move around, showing his readiness at every stage. It is a finding of fact whether such readiness and willingness is established or not. The readiness and willingness cannot be determined through a straight jacket formula. It has to be determined from the totality of facts and circumstances relevant to the case and also to the conduct of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... create a special equity. (Paras 13.1 13.2)" (b) CIT vs. Smt. Najoo Dara Deboo (38 Taxmann.com 258) (All) wherein the High Court held as under: "9. It may be mentioned that the capital gain can be charged only on receipt of the sale consideration and not otherwise. How can a person pay the capital gain if he has not received any amount. In the instant case, the assessee has honestly disclosed the capital gain for the assessment year 1998-99 to 2000-01, when the flats/areas were sold and consideration was received. During the year under consideration, only an agreement was signed. No money was received. So, there is no question to pay the capital gain. When it is so, then we find no reason to interfere with impugned order passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein." (c) Mrs. K. Radhika Ors. vs. DCIT (149 TTJ 736) (Hyd) wherein the Tribunal held that "handing over of the possession of the property is only one of the conditions u/s. 53A of the TP Act, but it is not the sole and isolated condition and it is necessary to go into whether or not the transferee was "willing to perform its obligation under the consent terms; on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into development agreement for an integrated township with MAK Projects Pvt. Ltd., clearly establishes the fact that the asset in question is not an agricultural land. Therefore, the contention of the AR that the asset in question is not a capital asset exigible to income tax cannot be accepted. 33. The DR submitted that on the issue of the transfer/ chargeability to tax, the contention of the assessee that no charge is created u/s 45 in the year of Development Agreement even assuming that the subject land is a capital asset because the full value of consideration cannot be ascertained with certainty on the date of Development Agreement cannot be accepted. As pointed out by the DR as per clauses 1 2(a) (page 17 of the Development Agreement) the owners granted irrevocable rights to the developer not only for the purpose of' development but also for executing and registering sale deeds to the prospective purchasers and the landlords were prohibited from interfering with the development work at any point of time as per clauses 27 to 30 of the agreement, there is transfer of the rights in the property to the developer for the development of the property, thereby the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther relied on the following cases: i) Jasbir Singh Sarkaria 164 Taxman 108 (AAR) ii) R. Kalanidhi Vs. ITO Chennai 314 ITR (AT) 266 Chennai iii) CIT Vs. K. Jeelani Basha (Chennai) 256/282 (Madras) iv) Maya Shenoy Vs. ACIT 124 TTJ 692 (Hyd) v) T. Achyutha Rao Vs ACIT 1-3(1), Hyd 106 ITD 388 (Hyd) vi) CIT Vs. Dr T.K. Oayalu (2011)- TIOL-559-HC-KAR-IT 36. The DR submitted that execution of Development Agreement by the landlords amounted to transfer within the meaning of section 2(47)(v) of the IT Act. He submitted that the clauses of the agreement clearly show that there has been a transfer exigible to capital gains during the year under consideration. 37. Regarding the quantification of the consideration receivable by the assessee company of its entitled share of the areas under the development agreement, the DR submitted that it could be ascertained with a reasonable certainty on the date of transfer. As per Schedule-D to the agreement, the assessee company is entitled to receive 16 villas comprising 9602 sq. yards of plotted area along with 58606 sq. ft of built up area. As per clause 2(d) of the agreement, it was agreed upon among the parties to the document that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing provided is spread on a sprawling 50,000 sq. ft. and is world class in every aspect, as per details available on the said website. The specifications of villas mentioned in the website show that the villas are being constructed with superior quality, furnishings including laminated wooden flooring for master bedroom, vitrified tile flooring in other areas of the villa(s) and other fittings of superior brands. Hence, the SRO rates which are meant for normal constructions of ordinary quality without any luxurious decorations are not applicable to the kind of the project being developed. 40. The DR submitted that according to the assessee clause 2(d) of the development agreement was incorporated as a penal clause only to compensate the affected parties for variation, if any, that may occur in the allotted plotted area and built up area at the time of handing over of possession of villas by the developer. The assessee also requested to adopt SRO rates for the purpose of computing the consideration. It was further submitted that the compensation clause was later removed by way of supplementary agreement which was entered into on 17.09.2010. The removal of the clause in the supple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he owners (in Schedule-B) is delayed beyond the period specified in clause 9(a) above, the developer shall pay compensation to the owner at Rs. 5/- per month per sq. ft of built up area allotted to the share of the owners as per schedule-D. This is the penal clause but not the clause 2(d), while clause 2(d) has been intended only to compensate the areas of shortage after completion of the project in respect of the agreed share between the owners and the developer. It is once again emphasized that clause 2(d) is not a penal clause and therate quoted therein is the prevailing market rate at the time of entering into the Development Agreement and this argument is supported by the fact that the sale rate of villas by the owners and the developers which is between Rs. 1633 -1675 per sq. ft. as per the details furnished by the assessee. Now the assessee's contention that the construction could not be completed, that is why they have to revise the terms of the agreement with regard to the rate, has no basis because the original agreement was very categorical about the allocation of the share of plotted and built up area and the rates applicable and also the clause for penalty for delay in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity on 27.12.2006 and the registration of supplementary Development Agreement cum GPA was executed on 4.1.2007 though it was presented for registration on 15.12.2006. It was an admitted fact that the registration was delayed awaiting approval from RDO for land conversion and only after the approval was received on 27.12.2006 the document was registered on 4.1.2007 and at the time of registration of Development Agreement, the land was no more remained as agricultural land and it was non-agricultural land by valid conversion on approval from the competent authority. Being so, we do not find any merit in the argument of the assessee's counsel that the land is agricultural land. This ground is dismissed. 45. The next 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. 46. We have heard the rival contentions at considerable length. We have also perused the material on record and duly considered factual matrix of the case as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ileges of ownership without executing conveyance, and to plug that loophole, Section 2(47)(v) came to be introduced in the Act. 50. There was no dispute on whether or not the conditions of Section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon'ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows: "If on a bare reading of a contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under Section 2(47)(v)." 51. 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 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in order that a contract can be termed to be "of the nature referred to in Section 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon'ble Bombay High when their Lordships observed as follows: "That, in order to attract Section 53A, the following conditions need to be fulfilled. (a) There should be contract for consideration; (b) It should be in writing; (c) It should be signed by the transferor; (d) It should pertain to the transfer of immovable property; (e) The transferee should have taken possession of property; (f) Lastly, transferee should be ready and willing to perform the contract". 54. Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla-The Transfer of Property Act" (9th Edn. : Published by Butterworths India), at p. 448, observes that: "The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration on 29th December, 2006. Later the assessee-company was incorporated on 4th January, 2007. On the basis of this agreement, the AO taxed the capital gain on the transaction treating that there was a transfer in terms of section 2(47)(v) of the Act. Through this is a Development Agreement cum GPA the assessee has not received any monetary benefit. Being so, there is no receipt of any part of the sale consideration. Further, we cannot say that there is any sale in terms of section 2(47)(i), (ii) or (iii) of the Act so as to say that there is sale, relinquishment, extinguishment or compulsory acquisition. 57. Now we will proceed with reference to the exchange as mentioned in section 2(47)(i) of the IT Act, 1961. To say that there is an exchange u/s. 2(47)(i) of the Act, both the properties which are subject matter of the exchange in the transaction are to be in existence at the time of entering into the transaction. It is to be noted that at the time of entering into development agreement as on 15.12.2006, only the property i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-incurring of required cost of acquisition by the developer. Hence no consideration can be attributed to the AY 07-08. Nothing is brought on record by authorities to show that there was development activity in the project during the assessment year under consideration and cost of construction was incurred by the builder/developer. Hence, it is to be inferred that there was no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non- incurring of required cost of acquisition by the developer. In the assessment year under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agreement. The developer has not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredient that make a person eligible and entitled to make the construction. The act and conduct of the developer in this assessment year has to be seen to decide the taxability on transfer. Being so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO and upheld by the CIT(A), cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case. The judgement in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (supra) undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as 'willingness to perform' has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. The Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue's case is thus devoid of legally sustainable basis. 60. That is clearly an erroneous assumption, as the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the Revenue authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X
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