TMI Blog2008 (10) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains accrued in the previous year relevant to AY 2000-01. May be, the AO might have had to resort to estimating the consideration but the same would have been subject to modification later. Thus, we hold that the capital gain arising on the transfer of land is not chargeable to tax in the year under consideration. It is not in dispute that the land held by the assessee was her capital asset. It cannot also be disputed that the flats acquired by her were also her capital assets. As per the development agreement she has no claim over the land which has been given to the developer and she may not sell any of the flats coming to her share. In that case, despite there being transfer of land as per s. 2(47), the assessee could escape the liability of capital gains tax. Therefore, the stand of the assessee to treat the two transactions as one is too fallacious. It does not merit acceptance. Accordingly, we hold that transfer of land in consideration of the flats constitute one transaction giving rise to capital gains and the sale of flats by the assessee constitute another transaction giving rise to capital gains. Year of Taxability of capital Gain - Transfer of land - HELD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The Department is aggrieved against the grant of exemption under s. 54F of the IT Act, 1961 (the Act). There are other related issues also for our consideration. We shall enlist all the issues once we are through with the facts of the case. 2. The assessee derives income from diagnostic services and declared a total income of Rs. 10.86,111 for the year under consideration which was later revised to Rs. 13,86,111. The assessee had purchased a property at Domalguda, Hyderabad, consisting of land admeasuring 923.77 sq. yds. on 15th Nov., 1969 for Rs. 1,07,065 with a double storeyed building standing on it. The assessee entered into a development agreement with one Shri A.S.R. Prasad on 9th March, 1995 for construction of flats. As per the agreement, the developer was to be handed over the possession of the said land and in turn had to give 45 per cent of the constructed area to the owner, i.e., the assessee and that the assessee was to demolish the existing structure. Accordingly, the assessee demolished the structure in 1999 and handed over the vacant land for development. The builder commenced construction in January, 2000 and completed the construction by 31st March, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54F in respect of flat No. 502 retained by her for her residence. The AO did not allow the cost of the existing structure while computing capital gain. He adopted the indexed cost of acquisition of the land at Rs. 2,25,030 as against Rs. 6,76,710 adopted by the assessee. He ascertained the cost of construction of the new property and considered the fact that the assessee was given 9,000 sq. ft., he worked out the cost of construction of the assessee's 45 per cent share at Rs. 24,90,215 which was adopted as the value of consideration received on transfer of land. Thus, long-term capital gain on transfer of land was worked out at Rs. 22,65,185 and short-term capital gain on sale of flats was worked out at Rs. 6,49,590. 3. The CIT(A) in his exhaustive order concurred with the AO to hold that the assessee had entered into two different transactions resulting into two kinds of capital gains-long-term capital gains on transfer of ownership rights over 55 per cent of the undivided share of land and short-term capital gains on sale of flat Nos. 202 and 401 (part). The main reason to hold that there was transfer of land by virtue of the development agreement was that by the said agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was argued that if 55 per cent of the land is transferred, then the assessee and the developer became co-owners of the entire property. The contention was that in law, ownership and possession of each co-owner extend to whole property and that percentage is relevant only when the property is partitioned. Therefore, according to him, in respect of two co-owners, s. 53A of the Transfer of Property Act (TP Act) cannot apply. 5. Another question raised by the learned counsel was with regard to the words "any arrangement or in any other manner whatsoever" mentioned in cl. (vi) of s. 2(47) could be said to be arising from the development agreement. The contention was that development agreement is only a joint venture which comes to fruition when it comes into a foreseen form. It is basically an agreement for improvement of property so that the fruits of the venture can be enjoyed by the owners. According to him, the enjoyment for the developer is in the form of profits that will arise to him on the completion of the project and the enjoyment for the owner would be in the form of the enhanced value of land on account of the development. Another argument advanced by the learned counsel w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that land can be owned by one and building can be owned by the other. With reference to cls. 13 and 14 to the effect that the owner shall not have any independent or exclusive claim, right or title over the land, it was argued that this can happen even in a mortgage transaction. According to the learned counsel, this was an unwarranted observation and that merely some restriction cannot lead to the conclusion that the assessee was no longer the owner of the land. According to him, this was a brief and abrupt way to draw conclusion that the transaction had concluded. The learned counsel submitted that there could be two different situations viz., (a) to give away absolute rights, or (b) to place some encumbrance not to have absolute rights. The question he posed was, does s. 2(47) contemplate transfer of capital asset even if some right out of the bundle of rights is transferred. According to him, s. 2(47) must contemplate some right absolutely and permanently. The learned counsel disputed the observation of the CIT(A) on p. 6 of his order that the assessee had parted with the absolute right over the land in consideration of the constructed area of 4-1/2 flats. It was contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) has extracted certain recitals from the sale deed executed in favour of the subsequent buyers of the flats. Referring to these recitals, it was contended that these statements are not right in law and therefore cannot be treated as admission on the part of the assessee. The third party may plead estoppels, but in tax proceedings, legal position has to be seen. Revenue cannot use it as an estoppel against the assessee. According to the learned counsel, the effect in the recital can take place only when the transaction is complete and at best, it can be treated only as a statement accepted by two parties. With regard to the observation of the CIT(A) that cost of acquisition of the superstructure cannot be allowed as deduction, the learned counsel stated that no reason has been ascribed by the CIT(A) for such a conclusion. Finally, the CIT(A) upheld the action of the AO of splitting the entire transaction into two, one that of transfer of land from the assessee to the developer, the other of selling the flats by the assessee to the buyers. He did not allow the cost of superstructure in computing the capital gains but accepted the alternative contention of the assessee that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, which is the ground in the Departmental appeal, the learned Departmental Representative relied on the order of the AO. 8. In reply to the arguments of the learned Departmental Representative, the learned counsel had only to say that while interpreting a tax law, the time of accrual of tax liability and the quantum of liability should be certain. 9. We have duly considered the rival contentions and the material on record. Before we embark upon to adjudicate upon the merits of the issues, we would first like to deal with the last plea made by the learned counsel and referred by us at the end of para 6. It pertains to the conflicting views expressed by the various Benches of the Tribunal in similar issues. In this connection, we are tempted to refer to "The Good Faith Thesis" propounded by Steven J. Burton, an eminent jurist. According to him, the Good Faith Thesis permits a meaningful scope for adjudication under law within a constitutional democracy. Familiar jurisprudential treatments of adjudication share a common and undefended commitment to what he calls the "determinacy condition". This condition holds that Judges cannot fulfil their duty to uphold the law unless the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vents starting from the date of executing the development agreement up to the date of sale of flats by the assessee constitute one single transaction, or they are two separate transactions, involving transfer of land as one transaction and sale of flats as the other? (d) If there are capital gains accruing to the assessee in any manner, then the computational aspect of the gains; (e) Is the assessee entitled to deduction of the superstructure in computing capital gains? (f) Is the assessee entitled to exemption under s. 54F of the Act? Effect of development agreement: 11. For immediate reference, we reproduce the provisions of s. 2(47) below: "2(47) 'transfer', in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-owners. In the present case, the whole of the property was owned by the assessee and out of the whole property, she transferred 55 per cent of the land to the developer. By parting away with a part of the property, the transferee does not become a co-owner but acquires interest only in the 55 per cent of the land transferred to him. This is more evident from cl. 14 of the agreement which we reproduce below: "14. The 'owner' shall not put forth any independent or exclusive claim, right or title over the land on which the schedule mentioned premises is constructed except to the extent of undivided share in the land retained by allotted to the owner." (sic). From the abovementioned clause it is more than clear that on the 55 per cent of the land, the assessee has no claim whatsoever. Further, the clause makes it clear that she will have right only to the extent of the undivided share in the land proportionate to the 45 per cent of the built-up area allotted to her. This is the position that emerges when cls. 13 and 14 of the agreement are read together. Therefore, the argument of the learned counsel about the co-extensive possession of both on the entire land holds no water. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the developer only and by no one else. This is the inference that can be drawn from cl. 20 of the agreement. The position of the assessee is no more than any other flat owner and has nothing more than the ownership of the flats along with the proportionate share of the land. Thus, what the assessee is left with is only the husk of the legal title and nothing more. On the other hand, the developer has all the rights of an owner in a practical sense. Enjoyment as an owner only in a practical sense can be attributed to the term "owner". This was the principle laid down way back in 1971 by the Supreme Court in R.B. Jodha Mal Kuthiala vs. CIT (1971) 82 ITR 570 (SC) and applied in the case of Podar Cement (P) Ltd. It is immaterial whether the developer can sell the land or not, but he certainly has the right to exploit it. If the developer does not build more than 4-1/2 flats, the assessee has no recourse and cannot compel the developer to build more. There is no embargo on the developer to make use of the land for any other purpose barring giving 4-1/2 flats to the assessee. Another argument of the learned counsel was that the property was handed over only to enable the developer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no force in the argument of the learned counsel that the handing over of the possession is not in pursuance of part performance of the contract. As is well known, ownership consists of a bundle of rights, the various rights and interests may be vested in different persons, e.g., a mortgagor and a mortgagee, a lessor and a lessee and so on. Mulla in his commentary states that absolute ownership is an aggregate of component rights such as the right of possession, the right of enjoying the usufruct of the land, and so on. These subordinate rights, the aggregate of which makes up absolute ownership, are referred in the TP Act as interests in property. Sec. 5 of the TP Act contemplates that a transfer of property is either a transfer of absolute ownership, or a transfer of one or more of these subordinate rights. Thus, if these principles are applied to the present case, possession of the land being one of the interests in property has been transferred to the developer who also would be enjoying the usufruct of the land. 13. Another argument raised by the learned counsel is that there is no consideration flowing to the assessee for handing over the possession and hence there is no tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each party has the rights and is subject to the liabilities of a seller as to that which he gives, and has the rights and is subject to the liabilities of a buyer as to that which he takes. In nutshell, what s. 118 r/w s. 120 of the TP Act contemplates is that all the rules that apply to a transfer by sale, equally apply to a transfer by way of exchange insofar as they are applicable. Therefore, the transfer in the present case is for consideration and it is immaterial that the consideration may be received in future. The argument of the learned counsel has no force insofar as that in the case of Jugalkishore vs. Raw Cotton Company AIR 1955 SC 376, the Supreme Court held that the words "in present or in future" in s. 5 of the TP Act qualify the word "conveys" and not the word "property". In other words, a transfer of property not in existence operates as a contract to be performed in future, which is specifically enforceable as soon as the property comes into existence. Thus, this argument of the learned counsel also fails. Therefore, in the light of the foregoing discussion, we are of the considered opinion that the development agreement in the present case has the effect of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire piece of land, the assessee was left with nothing but the husk of title and hence it was a transfer as per s. 2(47) of the Act. It can be said that though the agreement was entered into in 1995, it did not give rise to any rights to either party as the implementation of the agreement did not start till as late as December, 1999. Earlier we have noted that the intention of the parties, as it emanates from the agreement, is to effect transfer of land from the assessee to the developer and on handing over the possession, the assessee actually gave shape to the intention. This handing over of the possession was towards the part performance of the agreement. Therefore, as per cl. (v) of s. 2(47), transfer took place in December, 1999, the effective assessment year being 2000-01. 15. As per s. 45(1) of the Act, capital gain arising from the transfer of a capital asset shall be chargeable to tax in the year in which the transfer took place. In the preceding para we have held that since the transfer took place in December, 1999, the capital gain is chargeable to tax in the asst. yr. 2000-01. In his arguments, it was contended that by the learned counsel that if the taxable event w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred by the assessee and the flats allotted to her in consideration for the transfer of land constitute a different capital asset for the assessee. How can transfer of two capital assets transferred on different dates constitute a single transaction for the purpose of capital gains under the Act? It is not a conversion of an asset from one form to the other. Such a conversion is deemed to be a transfer only when a capital asset is converted into stock-in-trade by a person. In the instant case, it is not in dispute that the land held by the assessee was her capital asset. It cannot also be disputed that the flats acquired by her were also her capital assets. The acquisition of the new asset may have been by any mode, but simply because the new asset came to her by way of consideration for transfer of earlier asset, the transfer of new asset does not cease to be a transfer as per s. 2(47) of the Act constituting altogether a new transaction. If the argument of the learned counsel were to be accepted, the assessee can easily defeat the very charging provision of s. 45 of the Act by postponing the sale of the new asset indefinitely. Such a situation is not envisaged under the Act. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the earth. Thus, the building being attached to the earth will pass on to the transferee along with the land. It is immaterial that the said building was demolished by the assessee. It was merely taking upon oneself a responsibility. Further, it also makes no difference if the sale proceeds of the scrap are taken by the owner, i.e., the transferor. This fact does not necessarily lead us to the inference that the building is not transferred along with the land. Thus, unless there is a specific agreement to the contrary, when land is transferred, things attached to it or fastened to anything attached to the earth will also get automatically transferred. At the most, if the owner receives the sale proceeds of the scrap, then while computing capital gains on transfer of land, the proceeds so received may be added to the overall consideration received by the assessee. 20. Having decided about the two deductions as above, we can now embark on the actual computational aspect. However, we do not wish to do so for the reasons that follow. Firstly, the assessee returned long-term capital gains by treating the entire transaction as one transaction, i.e., starting from the transfer of l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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