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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 ..... CIT(A) erred in confirming the estimation of full value of consideration for the purpose of the computation of capital gain based on the penal clause in the development agreement. 5. The learned CIT(A) has erred in confirming the interest u/s. 234A of the Act. 6. The learned CIT(A) has erred in confirming the interest u/s. 234B of the Act. 3. The assessee raised the following additional grounds: 1. The CIT(A) erred in confirming that the estimated full value of consideration for the purpose of computation of capital gain which was in the womb of the future ignoring the position of law that full value of consideration cannot be estimated under section 48. 2. Without prejudice to the above, the CIT(A) erred in confirming that the income is other wise assessable under an adventure in the nature of trade and the income will be assessable only in the year of sale but not in the year of entering into the development agreement. 4. The assessee filed a petition seeking admission of additional grounds and placed reliance on the judgement of Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT (229 ITR 383) (SC) and also submitted that the issue involved in the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertainable 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. The AO referred to the penal clause of the development agreement and adopted the same as yardstick to estimate the full value of consideration for the purpose of computation of capital gain. The AO worked out the following: S. No. Particulars Amount (Rs.) 1 Full value of consideration 15,61,82,600 2 Less: Cost of acquisition 3,58,51,000 3 Short term capital gains 12,03,31,600 4 Total tax payable with Interest 7,97,92,126 7. Aggrieved with the assessment order, the assessee filed an appeal before the CIT (A)-II, Hyderabad. On appeal, the CIT(A) confirmed the additions made in the assessment order. Against this, the assessee is in appeal before this Tribunal. 8. The learned AR submitted that the land under consideration is an agricultural land. The Conditions specifying it to be an agricultural land are: (i) The land is located 8 km away from the municipal corporation of Hyderabad. (ii) The distance to the agricultural property is approximately 18 k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land in character. 12. The AR further placed reliance on the decision of Tribunal Hyderabad Bench 'B' in the case of Tulla Veerender vs. ACIT (36 taxmann.com 545) wherein held: "that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land." 13. The AR submitted that an asset which does not fall within the scope of section 2(14) would automatically be outside the scope of section 45 of the Act. The nature of the property was converted from agricul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition fails. The only other mode which has to be seen is exchange. In this regard, the AR submitted that on the date of execution of the Development Agreement, exchange as a mode of transfer also fails because under section 118 of the Transfer of Property Act both the properties which are the subject of exchange must exist on the date of transfer. Any right of the assessees existing on the date of Development Agreement is only land owned by the assessees. As regards the consideration which accrues or is receivable, it is only when the project is completed which as on date is pending and since the 16 villas comprising of developed land of 9602 sq. yards and built up area of 58606 sq. ft. in return which the assessee company is entitled on the date of Development Agreement, is non-existent, therefore exchange as a mode of transfer also fails. Accordingly, the transaction does not fall within the ambit of section 2(47)(i), ( ii), (iii) and (iv) of the Income-tax Act, 1961. 16. The AR 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta High Court in the case of Baisakhi Bhattacharjee v. Shayamal Bose [2002] (4) CHN 115 wherein the Calcutta High Court has held that: "Development agreement comes out of the scope of the ambit of section 53A of the Transfer of Property Act. Therefore, section 53A of the TP Act, has no manner of application to a development agreement." 18. The AR submitted that 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; 19. He submitted that this section is also not applicable because it has no effect of transfer nor enabling of any enjoyment by either of the parties on the date of execution of Development Agreement as the owners continue to own the land and the developers have no enjoyment whatsoever as it is only the execution of a project in accordance with the terms of Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as to the payment of consideration or delivery of the deed. "Thus, the seller may retain the deed pending payment of price and in that case there is no transfer until the price is paid and the deed is delivered. The transfer under section 2(47) must mean an effective conveyance of the capital assets to the transferee. Held, that, in the instant case, it was apparent that the parties had clearly intended that, despite the execution and registration of sale deeds, transfer by way of sale would become effective only on payment of the entire sale consideration and in this background of facts, it had to be held that there was no transfer of land conferred by the three sale deeds in question during the period under consideration making the assessee liable for capital gains tax under section 45." 21. Even under the law prior to the amendment from 1.4.1998, the law relating to sale stated that even if the property was registered and until the entire price was paid no transfer took place though registered. This was on the principle that transfer takes place only on the happening of events. The subsequent amendment from 1.4.1988 has not changed this legal position. If a transfer takes pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevalent on the date of agreement but not on factors which would emerge in future. Therefore, when the consideration could not be ascertained on the date of agreement, the question which arises for consideration is whether, merely because there is a change, would it be workable to compute the capital gain. 25. The AR submitted that in the case of Raghurami Reddy vs ITO in ITA No. 296/Hyd/2003 dated 30-7-2004, it was held by the co-ordinate Bench of this Tribunal that when it is not possible to estimate the consideration with reasonable accuracy on the date of signing of the Development Agreement, it is just like counting the chickens before they are hatched and the year of taxability can be only the assessment year in which the flats are handed over by the builder to the assessee and not the year in which the joint venture or development agreement was entered into. Both the AO and the CIT(A) had placed reliance in the case of Chaturbhuj Dwarakadas Kapadia vs. CIT (260 ITR 491) (Bom) and judgment in the case of Jasbir Singh Sakaria vs. CIT (164 Taxman 108) (AT) (AAR) . It is submitted that these two cases are distinguishable on facts. In the case of Chaturbhuj Dwarakadas Kapadia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was executed on 15th December 2006 by the assessee company. He also submitted that on both the dates the land continued to be agricultural land and the land changed its character as non agricultural land only on 27th December 2006. Hence assuming but not admitting it that the transaction amounted to transfer; there cannot be any increase in the value within a short span of one month. 28. The AR submitted that the penal rate was fixed in the Development Agreement to act as a deterrent and to ensure the compliance of the obligations and the promises accepted by the developer. Thus the penal value cannot be equated as the consideration. He submitted that the AO has taken the value of the land and the built up area for arriving at the consideration using penal clauses which is also incorrect as the square feet rate includes the value of land as well as building. The penal clause was deleted by the assessee and the developer through the supplementary deed dated 17.9.2010 and 10.10.2010, which granted extension of time for completing the project. 29. The AR submitted that the CIT(A) referred to an advertisement put on the web site www.abodesindia.com on 16/11/2011, purportedly by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction on the land, which pre-supposes possession of the defendants. Even on the terms contained in the agreement, the defendants were supposed to demolish the building and remove the building materials. which they have done. It also shows that the defendants are in possession of the land, at least prima facie. Therefore, it is difficult on the part of the Court at this stage to come to a prima facie finding on the materials produced that the plaintiff is in possession of the property (Para 6.1) (ii) In order to attract the application of section 53A TP Act., the agreement has to be an agreement for transfer of the land coupled with delivery of possession. (Para 6.2) (iii) As soon as the plaintiff submits to the provision of 1993 Act, and applies for permission under section 3 of the 1993 Act, she accepts herself to be a promoter within the meaning of section 2(g) of the 1993 Act. (para 6.4). (iv) As soon it is not an agreement for transfer and is an agreement for development, the case comes out of the scope and ambit of section 53A TP Act. Therefore, section 53A TP Act has no manner of application in the present case (Para 6.5) (v) Until the provisions of 1993 Act are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cannot undertake construction. (Para 9.3) (xii) Readiness and willingness imply that the plaintiff was prepared to carry out those parts of the contract to their logical end so as they depend upon the plaintiff's performance. 'Ready' means a prepared or having all preparations made to do, something; 'willingness' means a readywill. In other words, the expression implies that he abides by the contract and does not anticipate a breach by the other party. The burden of proving readiness and willingness up to the date of trial is upon the plaintiff and is not discharged simply because the defendant has repudiated the contract: (Para 10) (xiii) Readiness and willingness to perform the contract must be readiness and willingness to perform, but not as the plaintiff evinced it, nor in the way the plaintiff evinced it before the suit, nor in the way the plaintiff wanted to fashion it at the trial, but according to the real agreement between the parties. (Para 10.1) (xiv) The terms of contract performable by the plaintiff may be of two kinds: (1) those to be performed before the other side can be called upon to fulfil his promise and (2) others that may have to be subsequently perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner. It is not only to be shown in a suit for specific performance that the plaintiff has performed some part of the contract, but it has also to clearly show that he was still ready and willing to abide by the essential terms of the contract. Where the plaintiff opted to sue on equity for specific performance instead of a suing for damages, he must comply with the second. Unless the averment regarding readiness and willingness continues up to the date of decree, there is no cause of action for specific performance. Compliance with section 16(c) need only be sub-sequential to the satisfaction of the court, whose duty it is to find out the truth and do justice between the parties. Compliance has only to be in spirit and not to form. It is enough if the averment indicates in substance a continuous readiness and willingness. (Paras 10.4 & 10.5) (xvii) Section 16(c) (of the Specific Relief Act) provides that the plaintiff has to aver that he had always been ready and willing to perform the essential terms of the contract, which are to be performed by him. Thus, it is a mandatory requirement to show that the plaintiff was always ready and willing. The conduct and surrounding circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agricultural land by virtue of the land conversion certificate issued by the RDO on 27.12.2006. It was also submitted that the supplementary Development Agreement cum GPA though executed and also presented for registration on the same day i.e., 15.12.2006, the registration was delayed awaiting approval from the RDO for land conversion and as soon as the approval was received on 27.12.2006 the document was got registered on 04.01.2007. He also submitted that though formal approval was received from the RDO on 27.12.2006, the land had shed its character of agricultural land much before when the application for conversion was made sometime in September 2006 and hence for all practical purposes it was not an agricultural land even at the time of the acquisition of part of the land by the company in November 2006. 32. The DR made reference to the objects of the assessee company in the Memorandum of Association where it has clearly been spelt out the activities to be carried out by the assessee company for which the company has been incorporated and this shows that the assessee would be doing real estate business and the land owned and purchased by it before the Development Agreement wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. (b) The parties hereto shall resolve and settle any differences or disputes arising from and/or touching upon the terms and conditions in this agreement through arbitration by sole arbitrator. In the event of both the parties not being able to settle upon the sole arbitrator, then in such an event, both parties shall nominate one arbitrator each and such arbitrators shall elect a third arbitrator/umpire, before commencement of the arbitration proceedings. The arbitration proceedings shall be conducted in accordance with the provisions of Arbitration and conciliation act, 1996, and shall be conducted in English and the venue of the sittings shall be Hyderabad only. The award passed by such arbitration tribunal shall be final and binding on both the parties. 34. From the above clause, he observed that the land owner has no power to reclaim the possession of the property without referring the matter to the arbitration whose decision is binding on them. Hence it is stated that the possession given is not permissive possession. 35. The DR submitted that as per the terms of the agreement the developer was given unfettered rights over its share of the project as long as it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the constructed area was valued at Rs. 1600 per sq. ft and at these rates the full value of consideration accruing as a result of transfer of assessee's land has been worked out by the AO and the total consideration was arrived at Rs. 15,61,82,600. 38. The DR submitted that the developer M/s MAK Projects Pvt. Limited has put up an advertisement in a website called www.abodesindia.com on 16.11.2011 under property code RS47770. The details of amenities being provided and the specification relating to the construction of the villas are also mentioned in the advertisement. As per the said advertisement the sale price of villas admeasuring 2900-3600 sq. ft. has been mentioned at Rs. 1.25 cr. - Rs. 1.75 cr. If these rates are taken into account the consideration accruing to the assessee will be more than the amount computed by the AO as all the 16 villas which assessee is entitled to receive are admeasuring about 3666 sq. ft of area each. Thus the said advertisement further confirms that the values assigned to the plotted area as well as the built up area in clause 2(d) were true values which were arrived at by the parties keeping in view the superior standards of the construction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that during the appeal proceedings by the CIT(A), the assessee had submitted that the supplementary agreement requires registration under the Registration Act, 1908, but it is not necessary for the purposes of the TP Act, as the original Development Agreement was duly registered and that the supplementary agreement was not varying the entitlement of the share of property of each of the parties to the development agreement; there were two supplementary agreements entered into - One on 17.9.2010 with the assessee company and 4 others and another on 10.10.2010 with Mrs M. Neeraja & Mr. G. Kutumba Rao; and there was no dispute between the parties including the assessee which had to be resolved through arbitration and the supplementary agreement was executed with mutual consent of all the parties concerned because of the recession in the real estate market. 42. The DR submitted that the contention of the assessee is not acceptable because the supplementary agreement is only a self serving document and since it is not registered, the same cannot have any evidentiary value and when there is no dispute between the parties there was no reason why the parties have to resort to amending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early mentioned the rates applicable at the time of execution of the deed. This fact is reinforced by the rates at which the villas were sold by the assessee itself, for instance, as per statement of sale of villas by MAK Projects in respect of house site no. 111, the sale value was shown at R. 45,75,000 while SRO rate was Rs. 4,11,000. In such a situation how can the SRO rate be adopted for the value of the properties received/to be received by the assessee? It is also noted that the average sale price of the built up area sold worked out to Rs. 1633 to Rs. 1675 per sq. ft. and the rate mentioned in clause 2(d) of Rs. 1600 per sq. ft cannot be held to be higher than the market rate. Therefore, the AO is justified in applying the rate as per clause 2(d) since it is based on some concrete material taken out from the Development Agreement and subsequent sale of villas. It may also be noted that the AO has utilized the material from the website not for adopting the rate quoted therein but to show the quality of the construction and the amenities in order to show as to how the SRO rates cannot be applied to the villas sold in the project. In view of the reasons cited above, the rates a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the CIT(A), it is necessary to first appreciate what this judgment lays down. 48. Their Lordships of Hon'ble Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v). 52. In order to invoke the principles laid down by the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under Section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference: Section 53A : Part performance-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, 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, and the transferee has performed or is willing to perform his part of the contract then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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....... In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed........" 55. We are in considered agreement with the views so expressed in this commentary on the provisions of the Transfer of Property Act. 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax the assessee on imaginary reasons. Admittedly, there is no progress in the development of the project. 58. 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. Commencement of building construction had not been initiated as the building approval was granted only on 06.03.2007. Therefore, no income be said to have accrued, as laid down in section 48, in A.Y. 2007-08. More so, building/villas has to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not recorded the findings whether the developer started the construction work at any time during the assessment year under consideration or any development has taken place in the project in the relevant period. He 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. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee's obligations which can give rise to the situation envisaged in Section 53A of the Transfer of Property Act. 59. On these facts, it is not possible to hold that the transferee was willing to perform its obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on the reason that the capital gains could not have been taxed in the in this assessment year in appeal before us. 61. The other grounds raised by the assessee in this appeal had become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessee in the assessment year under consideration. However, we make it clear that the AO is at liberty to examine the taxability of capital gain in any other assessment year when substantial consideration has passed to the assessee with reference to the Development Agreement. 62. Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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