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TMI Blog2008 (10) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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, 2001. He handed over flat Nos. 102, 202, 302, 502 and 401 (part) representing assessee's 45 per cent share in the constructed area. During the year, the assessee sold flat Nos. 202 and 401 (part) for a consideration of Rs. 17,91,000. It was submitted that flat No. 502 was used for the residence and flat Nos. 102 and 302 were sold in the subsequent year and the capital gains thereon would arise in asst. yr. 2002-03. The long-term capital gain on sale of flat Nos. 202 and 401 (part) was computed by adopting the value of the original property at Rs. 5 lacs as on 1st April, 1981. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital 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 the assessee had given away absolute rights over the 55 per cent of undivided land. He also held it to be a transfer under s. 2(47) of the Act. According to the CIT(A), cl. (vi) of s. 2(47) took within its ambit a development agreement on the strength of which a developer could construct a building without being a legal owner of the land. So far as the computational aspect is concerned, he concurred with the AO that the cost of acquisition can be allowed only in respect of cost of land and not in respect of the building thereon which was purchased by the assessee on 15th Nov., 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) 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 was that if there was a transfer of 55 per cent of land in favour of the developer, had the latter any legal right to sell that 55 per cent of the land in his opinion the developer had no such right. It was contended that the development agreement should be viewed as a licence only which becomes irrevocable and can be terminated only in terms of the licence, i.e., the development agreement. 6. The learned counsel then proceeded to assail the order of the CIT(A) on various aspects, both, legally and factually. Referring to the observations of the CIT(A) in para 3 of his order, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contended that the assessee already owned the land and to say that this was the consideration was a fallacious conclusion drawn by the CIT(A). It was also contended that merely because the assessee could not independently dispose of any part of the land, it did not mean that transfer had taken place on the date of the agreement. According to him, it was settled law that a co-owner or a joint-owner as tenant-in-common has possession over the whole land. It was contended that non-performance on the part of the developer need not be spelt out in the agreement as it is spelt out by law itself, li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 there are two transactions, then the cost of acquisition of the two flats sold in asst. yr. 2002-03 be taken as Rs. 5,53,381. He also allowed exemption under s. 54F of the Act to the extent of Rs. 5,53,381. There were certain incidental arguments in addition to what has been narrated above in respect of the legal propositions as also in respect of the computational aspect of the transactions. To these arguments we shall advert to later, if necessary. Before closing his arguments, it was also stated by the learned counsel that there were a few decisions of the Tribunal on the issue, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 they reach the single right result determined by the law. The Good Faith Thesis abandons the determinacy condition completely. It understands the law as a provider of legal reasons, not necessarily results. It understands the legitimacy of adjudication to depend on respect for the reason, not agreement with the results, in cases. Good Faith Thesis claims that Judges are bound in law to uphold the conventional law, even when they have discretion, by acting only on reasons by that law as grounds for judicial decision. A companion thesis-the "Permissible Discretion Thesis"-claims that, when ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in s. 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 AOP 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-cls. (v) and (vi), 'immovable property' shall have the same meaning as in cl. (d) of s. 269 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 12. Another argument of the learned counsel was that the development agreement is a joint venture for improvement of the property so that the fruits of the venture can be enjoyed by the owners. Well, it is neither the case of the assessee nor is there anything on record to show that the profits made on sale of flats other than those allotted to the assessee were to be shared by both the assessee and the developer. The contention that the enjoyment to the assessee would be in the form of enhanced value is quite hypothetical and not worthy of any serious consideration. We firmly believe that it is not a joint ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to carry out the developmental activity and is not in part-performance as envisaged under s. 53A of the TP Act. The agreement is certainly for the development of the land and pursuant to this agreement, the assessee has handed over the possession to the developer. It is in consideration of this handing over of the land that the assessee has been promised to be given 45 per cent of the constructed area. Clause 14 of the agreement debars the assessee from putting forth any independent or exclusive claim, right or title over the land on which the premises is constructed. Thus, if in violation of this clause, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 transfer. He has also stated that the 4-1/2 flats receivable by the assessee cannot be considered as considerations. So far as the necessity of consideration is concerned, it is relevant only for the computation of capital gains under the IT Act. If there is no consideration. capital gains would not be computable and the transaction will be dealt with in some other manner in accordance with law. In the present discussion, we are concerned only with the aspect whether there is transfer or not. It is the transfer of property which is the taxable event under the Act and then to compute the gains, consideration becomes relevant. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transfer as contemplated in s. 2(47) of the Act. Effective date of transfer: 14. Having held that the execution of the development agreement resulted into the transfer of land from the assessee to the developer, the next issue which falls for consideration is as to what is the effective date of transfer. Well, this issue should not detain us for too long a time. The moment the transferee gets the right to make use of the land or to enjoy its usufructs, the transfer is complete. Earlier, we have noted that payment of consideration is not necessarily a sine qua non to the completion of the transaction. Under the TP Act, if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 was the entering into the development agreement, which was in 1995, then also, there would be no tax liability as no consideration was received in that year. What the assessee had received was merely a right to receive 4-1/2 flats which were not in existence at the time of entering into agreement. The same argument may be raised by him in connection with asst. yr. 2000-01. Well, it is well established that it is enough if the assessee has received the right to receive the consideration. It may be quantified later or it may be received later, but these factors do not retard or stall the accrual and hence the gain has to be taxed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. And why talk of postponement at all. She may very well decide not to sell any of the flats coming to her share. The situation would be like this. 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) of the Act, the assessee could escape the liability of capital gains tax. Therefore, as mentioned earlier, 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 considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferred. 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 land to the sale of 1-1/2 flats during the year. However, we have upheld the stand of the Revenue treating the transfer of land as one taxable event, and the sale of flats as the second taxable event. Even in the course of proceedings before us, though the learned counsel handed over some sheets showing the computation according to his view point, the same does not proceed on the basis of two transactions. There also appear to be conceptual differences between the computation made by the assessee and that made by the CIT(A). Most importantly, we have held that the long-term capital gain arising on transfer of land is not taxable during the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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