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TMI Blog2007 (8) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... a. According to the terms of the agreement, the developer should obtain the "letter of intent" from the concerned Government Department and obtain other permissions and sanctions for developing the land at its own risk and cost. The developer will have 84 per cent, share of the entire built up area and the proportionate land area whereas the owners' share will be 16 per cent. The mode of apportionment of the built up area is indicated in clause 21 of the agreement. The consideration for the agreement is the portion of the built up area to be handed over to the owner free of cost. Owners are entitled to visit the site in order to review the progress of the project. It is clarified in clause 18 that the ownership would remain exclusively with the owners till it vests with both the parties as per their respective shares on the completion of the project. The other clauses and the steps contemplated in the agreement are the following (i) Payment of earnest money of Rs. 1 crore at the time of entering into agreement, (ii) Execution of special power of attorney in favour of the developer to enable it to deal with the statutory authorities etc. for obtaining necessary approvals/sanctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to maximum extension of three months. Thus, the entire consideration should be paid within 27 months from the date of the collaboration agreement. Under clause 10 it is provided that if the payment is not made within the maximum period of extension, the owners shall be at liberty to terminate the collaboration agreement by giving 30 days' notice and thereupon it is incumbent on the developer to forthwith cease the development activity on the land and remove itself and its agents therefrom. On receipt of all payments within the prescribed or extended time, the owners shall have to transfer all the rights, title and interest in and over the owners' developed share along with proportionate land and basement underneath by executing requisite documents. The owners shall also grant powers to the developer enabling them to transfer rights and possession and to execute sale deeds etc. in respect of the developer's 84 per cent. share together with proportionate land and basement underneath. The CPA executed earlier in favour of the developer will become inoperative after the title gets transferred to the developer. In the last clause it is stated that all other terms and conditions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the transfer under section 2(47)(v) takes place in the instant case on the date of execution of the agreement itself because under clause 27, it cannot be cancelled by any party. Thus, the Revenue's stand is not consistent and clear. Probably, the Department wants to play it safe in the wake of the subtle legal issue that has arisen. 8 The following revised questions were formulated by the applicant (i) Whether, on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2006-07 and accordingly subject to tax in the assessment year 2007-08 on grant of CLU (change of land use) as detailed in the letter dated March 8, 2006, (annexure P-3) ? (ii) Whether, on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2007-08 and accordingly subject to tax in the assessment year 2008-09 on completion of construction and on receipt of final payment of installment when the share of the developer is eligible for transfer as agreed vide collaboration agreement dated June 8, 2005? (iii) Whether, on the facts and in the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to be the income of the previous year in which the transfer took place'. Since this is a statutory fiction, the actual year in which the sale price was received, whether it was one year, two years, three years, four years etc. previous to the previous year of transfer, is beside the point. The entirety of the sum or sums received in any earlier year or years would be regarded as the capital gains arising in the previous year of transfer. ….In the words of section 45, the capital gains arising from the transfer shall be the income of the previous year in which the transfer took place'. So, the payments of consideration stipulated to be paid in future would have to be attributed, by statutory mandate, to the year of transfer, even as payments made prior to the year of transfer." 12 This Authority in its ruling in the case of Anurag Jain, In re [2005] 277 ITR 1 (AAR) had taken the same view. After referring to sections 45, 48 and 54EB of the Income-tax Act, S.S.M. Quadri J. observed (page 12) "A plain reading of these provisions makes it clear that the germane condition to claim the relief, provided therein, from payment of tax on capital gains, is that the assessee sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. Section 2(47) 16 The other crucial provision is section 2(47) which contains the definition of the term "transfer" in relation to a capital asset. It is an inclusive definition, which takes within its fold not only the transfers that are recognized or understood as such under the general law governing transfer of property but also other transactions that are alien to the normal concept of transfer. The definition of "transfer" was widened with effect from April 1, 1988. Two clauses were added to the inclusive definition of transfer which pertain to transactions in immovable property. They are clauses (v) and (vi) which read as follows "transfer" in relation to a capital asset, includes— (i) to (iv)… (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); 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 arrangements or in any other manner whatsoever) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storied construction in big cities. The definition also does not cover cases where possession is allowed 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. New sub-clauses (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. 11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of 'transfer, the practice of enjoyment of property rights through what is commonly known as power of attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorized the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor." 18 We are concerned here with clause (v) and it is this provision that is invoked by both sides. In order to be "tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to demand transfer of title in his favour. According to the authorized representative, till the last instalment is paid, there is no transaction in the eye of law which authorizes the developer to "retain" possession. 20 We cannot subscribe to any of these extreme but plausible views canvassed by the representatives of the applicant and the respondent. An insight into clause (v) of section 2 (47) for determination of the date of transfer 21 There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling within the scope of section 53A of the Transfer of Property Act. The crucial question then arises—at what point of time the transaction allowing the taking of possession in part performance of such contract had taken place. Incidentally it raises the question as to how the expression "transaction" is to be understood. One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract of transfer. It is at that point of time that the deemed transfer takes place. True, entering into the agreement/contract is a transaction in a broad sense but, when the agreement envisages an event or act on the happening or doing of which alone the possession is allowed to be taken in part performance of the contract, the transaction of the nature contemplated by clause (v) cannot be said to have occurred before that date. The date of entering into the agreement cannot be the determining factor in such a case, even though the agreement envisages a future transaction pursuant to which possession will be allowed to be taken. However, it needs to be clarified that it is not possible to lay down a rigid proposition that an agreement as such can never be construed as a transaction allowing possession to be taken in part-performance. For instance the agreement may provide for immediate transfer of possession of the immovable property contracted to be sold. That may happen where the transferor receives substantial consideration on the date of agreement itself and puts the transferor in possession immediately. In this context, the observations of a Division Bench of the Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possession" by referring to the well known treatises on jurisprudence (page 278) "Possession', implies a right and a fact: the right to enjoy annexed to the right to property and the fact of the real intention. It involves power of control and intent to control, (see Dias and Hughes ) 14… 15. While recognizing that 'possession' is not a purely legal concept but also a matter of fact, Salmond (12th Ed., 52) describes possession, in fact, as a relationship between a person and a thing. According to the learned author, the test for determining 'whether a person is in possession of anything is whether he is in general control of it'." 25 In Salmond's Jurisprudence , at paragraph 54, we find an illuminating discussion on "immediate" and mediate possession". The learned author states "in law one person may possess a thing for and on account of some one else. In such a case the latter is in possession by the agency of him who so holds the thing on his behalf. The possession thus held by one man through another may be termed mediate, while that which is acquired or retained directly or personally may be distinguished as 'immediate or direct'." Salmond makes reference to thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l contend, as is being contended in the present case, that the developer will have such exclusive possession in his own right only after the entire amount is paid to the owner to the last pie. There is then a possibility of staggering the last instalment of a small amount to a distant date, may be, when the entire building complex gets ready. Even if some amount, say 10 per cent., remains to be paid and the developer/transferee fails to pay, leading to a dispute between the parties, the right to exclusive and indefeasible possession may be in jeopardy. In this state of affairs, the transaction within the meaning of clause (v) cannot be said to have been effected and the liability to pay capital gains may be indefinitely postponed. True, it may not be profitable for the developer to allow this situation to linger for long as the process of transfer of flats to the prospective purchasers will get delayed. At the same time, the other side of the picture cannot be over-looked. There is a possibility of the owner with the connivance of the transferee postponing the payment of capital gains tax on the ostensible ground that the entire consideration has not been received and some balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Planning, Haryana, on March 8, 2006. The final licence valid up to May 25, 2008, was issued on May 26, 2006. Irrevocable general power of attorney was executed on May 8, 2006. An amount of Rs. 30 crores was received in five instalments, i.e., March 8, 2006, June 8, 2006, September 8, 2006, December 8, 2006, and March 8, 2007. This is apart from Rs. 2 crores received earlier under the collaboration agreement. 31 First we have to see when under the terms of the contract, the applicant—owners agreed to hand over effective possession to the developer. The "letter of intent" ("LOI" for short) spoken to in the collaboration agreement is a licence granted by the Director of Town and Country Planning in favour of the owners to develop a residential group housing colony on the land in question. Such licence has to be issued under the provisions of the Haryana Development and Regulation of Urban Areas Act, 1975, and the Rules. March 8, 2006, is the date on which such licence was issued. It is in the nature of a provisional licence as it is stated therein that a licence was proposed to be granted to the owners on fulfilment of certain conditions and pre-requisites within the prescribed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit of various charges in terms of the "LOI" within the prescribed time is considered to be an important aspect that sets in motion various other acts directed towards the implementation of the agreement. Clause 16 enjoins that the owners shall file an application in the High Court for withdrawal of the writ petition (relating to a part of this land) not merely after the issuance of the "LOI" but only after the developers deposit the requisite charges as per the LOI. Paragraph 14 makes explicit what is really implicit that the development of land and construction will start after securing the licences and permissions. In this back ground, paragraph 18, at best, grants a licence to the developer to enter upon the land and to do certain preliminary work such as survey, setting up of site/sales office and make necessary arrangements required for future construction and marketing. It cannot be construed as an authority to the developer to get into effective possession for taking up construction work straightaway. It cannot be said to be the intention of the parties that at the moment the provisional licence is received, the owners should allow the developer to take physical possess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and an express declaration to that effect is found in the GPA itself is not without significance. Having regard to the second and supplemental agreement by virtue of which the entire developed property including the owners' share has been agreed to be sold to the developer or his nominees for valuable money consideration, the developer has a vital stake in the entire property. As far as the quality of possession is concerned, he is on a higher pedestal than a developer who apportions built up area with the owner. Even if he is an agent in one sense in the course of developing the land, that agency is coupled with interest. For these reasons, the prefix "irrevocable" is deliberately chosen. As discussed earlier, the owner's limited right to enter the land and oversee the development work is not incompatible with the developer's right of control over the land which he derives from the GPA. Exclusive possession, as already pointed out, is not necessary for the purpose of satisfying the ingredients of clause (v) of section 2(47). We are therefore, of the view that the irrevocable GPA executed by the owners in favour of the developer must be regarded as a transaction in the eye of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng carrying on of any activity for profit", thus : "the activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words it must be an integral part of such purpose." The word "involving" in the expression "involving the actual delivery of possession thereof was construed to mean "resulting in" (vide the decision of the Supreme Court in Duni Chand Rataria v. Bhuwalka Bros, AIR 1955 SC 182). 36 Viewed in the light of the above meanings assigned to the two words "transaction" and "involving', there should be no difficulty in holding that the execution of the irrevocable GPA as a part of the covenant in the transfer agreement is a transaction under which possession is allowed to be taken by the transferee. Allowing the transferee to enter into possession of the land and to have general control and management of the property is an integral part of that GPA and as a result of such transaction possessory rights were conferred on the developer. It was an act done in part performance of the contract. Applicant's contention regarding payment of entire sale price 37 As already noted, it is the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to the consequences mentioned in paragraph 10 which is a clause meant to ensure due payment of instalments. In so far as the developer is ready and willing to perform his part of the contract, that paragraph does not come into play at all. Coming to the expression "retain" in clause (v), the contention of the authorized representative is rather mis- conceived. The expression "retain" is normally meant to apply to the case of a transferee who is already in possession of the property before the con tract is entered into. If in part performance of the contract such transferee is allowed to continue in possession, that would fall within the scope of clause (v). That expression which reflects the language of the later part of the second limb of section 53A is not of much relevance in the context of the present case. The learned authorized representative also sought to place reliance on paragraph 11, which says that on receiving all payments within the due date or the extended date, the owners shall transfer all rights and interest to the developer along with the proportionate land. The said clause is of no avail to the applicant. The fact that legal ownership continues to remain wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r side of the picture as depicted in paragraph 27 (supra) should also be kept in view Departmental Representative's contention re: paragraph 27 of the agreement 40 The Departmental Representative relied on paragraph 27 of the collaboration agreement which says that both the owners and developers will not cancel or back out from the agreement under any circumstances having regard to the considerable expenditure and efforts involved on the part of the developers and the owners' land being "tied up in the project". The learned Departmental Representative submits that the agreement is firm and irrevocable and therefore the date of entering into such agreement can be legitimately treated as the date of transfer. It is difficult to countenance such argument. First of all, it has no bearing on the interpretation of the statutory provision, viz, clause (v) of section 2(47); secondly, the said stipulation in paragraph 27 is merely a re-statement of the obvious—that the parties should respect and abide by the agreement. It does not place the agreement in the instant case on a higher footing than any other agreement for transfer of immovable property. In fact, in the same paragraph, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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