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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 ..... s 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/sanctions, (iii) Obtaining "letter of intent" not later than March 8, 2006. In case of failure to do so, the agreement shall stand terminated, ("letter of intent" is the licence granted by the Director of Town Planni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the collaboration agreement not inconsistent with the provisions of the supplementary agreement will continue to be binding on both parties. The supplementary agreement has substantially altered the legal relationship an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 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 circumstances of the case, the capital gains accrue/arise to the applicant (assessee) partly during the assessment year 2006-07, assessment year 2007-08 and the assessment year 2008-09 respectively, on receipt of consideration amount in proportion to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer, 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 should invest the whole or any part of capital gains, as the case may be, in the long-term specified asset within six months after the date of transfer of the capital asset. Where the full value of the consideration is paid before or immediately on transfer of the capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overning 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) which has the effect of transferring, or enabling the enjoyment of, any immovable property." The object and analysis of section 2(47)(v) 17 The purpose of introducing clause (v) in conjunction with clause (vi) is to widen the net of tax so as to include transactions that closely resemble transfers but are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "transfer" within the meaning of clause (v), there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. Secondly, such taking or retention of possession as is well known is a facet of the equitable doctrine of part performance of contract falling with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant 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 is itself the "transaction" contemplated by section 2(47)(v). It is enough if the agreement/contract falling within the description of section 53A provides for taking possession at some stage before the ownership is transferred in a manner known to law. This interpretation has no doubt the merit of certainty. Take the date of execution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 High Court speaking through S. H. Kapadia J. in Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 1TR 491, 501 are apposite : we quote the same "If the contract, read as a whole, indicates passing of or transfer ring of complete control over the property in favour of the developer, then the date of the contract would be relevant to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 three types of mediate possession. In all cases of "mediate possession", two persons are in possession of the Same thing at the same time. An allied concept of concurrent possession has also been explained in paragraph 55 of Salmond's Jurisprudence in the following words: "It was a maxim of the civil law that two persons could not be in possession of the same thing at the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mains 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 is left. The mischief sought to be remedied, will then perpetuate. We are, therefore of the view that possession given to the developers need not ripen itself into exclusive possession on payment of all the instalments in entirety for the purpose of determining the date of transfer. 28 While on the point of possession, we would like to clarify one more aspect. What is spoken to in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 time in order to qualify for the final grant of licence. Substantial amounts were to be paid to the concerned authorities towards various charges and the licensee was required to furnish bank guarantee on account of internal development charges. The licensee had to withdraw the case pending in the High Court which seems to relate to a dispute pertaining to acquisition of a part of the land. It is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 possession of the land irrespective of whether there is substantial compliance with the conditions laid down in the provisional licence. Paragraph 15 negates any such inference. The mere receipt of the provisional licence and the limited authority given under paragraph 18 cannot be regarded as a transaction that allows possession to be taken by the developer in terms of the contract. We are of the view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 which allows possession to be taken in part performance of the contract for transfer of the property in question. That transaction took place in the financial year 2006-07. Not only that, during that financial year, the final licence/change of land use permission was also obtained and moreover the owners received substantial consideration to the tune of Rs. 30 crores. We, there fore, hold that the transfer wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 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 contention of the applicant that until and unless the entire sale consideration up to the last instalment is paid the developer will not be in a position to demand the transfer of title to the land in his favour or in favour of his nominee and therefore there is no transfer even according to the expanded definition of transfer contained in clause (v). According to the learned authorised representative, the possession which the developer is authorized to take under the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 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 with the owners or that the transfer of title cannot be demanded by the developer till he pays the entire consideration is really not germane to the applicability of clause (v) of section 2(47). The very purpose of expanding the definition of transfer will be frustrated if the test of ownership and title is applied. The argument of the authorized representative also fails to take into account the well-settled legal position that the payment of entire consideration is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers' 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, the last sentence provides for the consequences of breach by stating that the parties, besides other rights, will be entitled to get the agreement enforced through a suit for specific performance at the risk of the defaulting party. We find no merit in the argument of the Departmental Representative. Summary 41 The following is the summary of conclusions: 1. Where the agreement for transfer of immovable property by itself does not provide for immediate transfer of possession, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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