TMI Blog2011 (9) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... Dated:- 9-9-2011 - G.C. GUPTA, VICE-PRESIDENT, CHANDRA POOJARI, JJ. ORDER Chandra Poojari, A.M. The appeals by different assessees and cross appeals by the Revenue are directed against the separate orders of the CIT(A)-I, Hyderabad. 2. First we will take up the assessees' appeals in ITA Nos. 208 to 211/Hyd/2011 and Revenue appeals 328 to 331/Hyd/2011 wherein the issue involved are inter-related. 3. Brief facts of the case are that Mr. K. Srinivasa Rao and remaining three co-owners referred to above had specified shares in immovable property land admeasuring 11 acres 33 guntas vide Sy. No. 1, 2, 3, 9(P), 10(P), 11, 12, 13, 14 in Pokkalwada Village, Ranga Reddy District, Hyderabad which was the subject matter of the Development Agreement. The extent of owner share in land as enumerated in the table given below: Sr. No. Name of the person Extent of land % of shares in the land Share of long term capital gain as assessed by CIT(A) (Rs.) Acres Guntas 1. K. Srinivasa Rao 06 08 50.93 6,77,26,736 2. Smt. K. Venkayamma 03 25 29.77 3,95,88,159 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to conclusion that the date of transfer is 11-5-2005 when the Development Agreement was executed relied on the decision of ITAT, Hyderabad "A" Bench in the case of Smt. Shantha Vidya Sagar Annam v. ITO in I.T.A. No. 885/Hyd/2003 wherein it was categorically held that the date of Development Agreement is the date of transfer for computing capital gain of the transfer of property. 6. Further, the assessing officer computed the capital gain in respect of the transfer of 12 acres of land which would be received by the assessee by way of net plotable area of 15,106 sq. yard and 31 flats measuring 1,13,295 sq.ft i.e. 45% of constructed area as consideration to these assessees. He arrived at the capital gains as follows: Cost of 1,13,295 sq.ft. built up area @ Rs.1,162 per sq.ft. (based on the Sworn statement of MD of M/s APL) Rs. 13,16,48,790 Cost of 15,106 sq. yards of developed plots Rs. 12,08,48,000 Full value of consideration Rs. 25,24,96,790 Less: Indexed cost of acquisition Rs. 2,00,000 12 acres 497/259 Rs. 46,05,405 Long term capital gains Rs. 24,78,91,385 7. On the basis of the percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... netary consideration whatsoever in the Development Agreement entered into by the assessees. Therefore, sale is a mode of Transfer, fails. The transaction of development agreement is not on account of any relinquishment of any asset as the rights in the property continued to belong to the owner neither is there any extinguishment of right nor any compulsory acquisition under law. Therefore the definition of section 2(47) in relation to capital asset either a sale, relinquishment, extinguishment or compulsory acquisition fails. The only other mode which has to be seen is exchange. In this regard, he 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 is the subject of exchange must exist on the date of transfer. Any right of the Appellants existing on the date of Development Agreement is only land owned by the Appellants. 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 built up area of 45% to which the co owners are entitled on the date of developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it is the Appellants view that the provisions of section 2(47)(v) is not applicable to the facts of the case. Further, he drew our attention to the decisions of the Calcutta High Court in 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." 13. He submitted that the above judgment was also not considered by any of the judgments delivered on the subject. Therefore, the March of Law on the subject whereby the provisions of section 53A of the TP Act was held not applicable to development agreements. 14. According to the AR, section 2(47)(vi) of the IT Act is also not applicable as 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 agreement in the nature of toil and labour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as soon as the instrument is registered, for the true test is the proof of an operative transfer, if there is a condition precedent 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." 15. He submitted that 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an event of the developer handing over the built up area to the owner which is non existent and therefore the charging section and computation provisions fail. 19. He submitted that when the development agreement was entered into on 11-5-2005 the value of 45% of the built up area which was to be received by the assessees is not known. This cannot be determined as they are non existent on the date of entry into development agreement. The entire consideration which is an event of the future cannot be predicted for various reasons like high fluctuation costs, sanction not being received, project being abandoned or temporarily suspended etc. As on date the entire development of the project undertaken by the assessees and the developers is on a standstill. Thus whether a charge per se could result in capital gain and fastens a liability in the said year when consideration is neither known nor ascertainable? In this regard, the Assessing Officer has totally lost sight of the principle laid down by the Hon'ble Supreme Court in the case of CIT v. BC Srinivasa Setty [128 ITR 294 (SC)]. The Court has evolved a very crucial principal of universal application regarding the year of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent on the factors prevalent on the date of agreement by 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 be scheme be workable to compute the capital gain? The answer is in negative. For this proposition, he relied on the order of this Tribunal in the case of Sri Raghurami Reddy ITO in ITA No. 296/H/2003 dated 30-7-2004 which is squarely applicable to the facts of the present case. He submitted though this case law was brought to the knowledge of the Assessing Officer it was not considered. 21. He submitted that while working out the consideration, the Assessing Officer has estimated the consideration to be received on a future date i.e. upon completion of construction. For the purpose, the Assessing Officer has worked out the consideration on the basis of estimated cost to be incurred by the builder in future for completion of the venture. This method of relating back the cost of consideration to the developer as consideration is fallacious for the following reasons: (a) In the case of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of events having a bearing on quantification of consideration cannot be foreseen at the initial stage with reasonable certainty. Factors such as extent of constructed area, quality of construction, exact area falling to the share of land owner, possibility of breach of agreement and non approval of the project by regulatory authorities resulting in scraping of the project altogether, are some of the future events which introduces an element of uncertainty rendering the working of consideration an impossibility on the date of entering into the agreement. Therefore, the consideration though specified in the agreement by way of certain percentage of the constructed area, the same cannot be converted into money's worth or worked out with certainty to work out full value of consideration either by obtaining the estimated expenditure from the builder or on the basis of fair market value. 22.2. Any attempt to levy tax in such cases by inventing some notional method to work out full value of consideration would militate against the theory of real income. It is because of indeterminate nature of various factors and element of uncertainty that influences a contract under a develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity 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. Further he submitted that the order of the Tribunal in the case of Dr. Maya Shenoy v. ACIT (124 TTJ 692) (Hyd.) is not applicable to the facts of the case. Similarly, he submitted that in the case of Dr.T. Achyut Rao v. ACIT (106 ITD 388) (Hyd.), wherein the Tribunal held that there is a transfer under section 2(47)(v) of the IT Act, since the condition laid down in section 53A of Transfer of Property Act 1882 has been satisfied. However, in the present case, the condition laid down under section 53A of the Act has not been satisfied. Hence, it cannot be said that there is a transfer in the present case as envisaged under section 2(47)(v) of the IT Act. 25. He submitted that the reliance placed by the Assessing Officer in the case of Chaturbhuj Dwarakadas v. CIT (260 ITR 491) (Bom) and the decision in the case of Sri Jasbir Singh Sakaria (AAR 724 of 2006) on the issue of taxability on the date of development agreement is misplaced. 26. According to the learned counsel for the assessee the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Calcutta High Court in the case of Madgul Udyog v. CIT (184 ITR 484) (Cal.). 28. Regarding the doctrine of binding precedent, he submitted as follows: (i) All the decisions were rendered by two co-equal benches of the jurisdictional Tribunal. Therefore a later decision rendered by a coequal bench cannot override the former. (ii) It is settled principle that the authorities are not bound to follow a decision which came at a later point of time but may follow one which according to it is better in point of law and fact. (iii) Even in a case where there is direct conflict between the decisions of co-equal benches, the authorities are to follow the judgment which states the law more elaborately and in conformity with the scheme of the Act. (iv) Judged in the context of the above principle, it would appear that the order in the case of Raghuram Reddy (supra) is preferable for the following reasons: a. The case was fully argued by both parties b. The decision was reached after full consideration of all aspects of law and fact. c. There is nothing to indicate that the decision conflicts with well established principles or fails to go with a definite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on date. The assessees have not been handed over the built up area as a date. The consideration accruing or arising is the value of 45 per cent of built up area as allowable to the assessees. He relied on the order of the Tribunal in the case of DDIT v. G. Raghuram (134 TTJ 87) (Hyd.) wherein it was held that "The consideration accruing or arising is the cost of construction of the project by the developer. This is unknown and cannot be estimated even under the best principles of accountancy as it is non existent on 11-5-2005." 34. If this is so on the facts of the case of the assessee the entire project is on a standstill and the assessee as owners have not received any of the built up area to which they are entitled. Therefore no income be said to accrue as laid down in section 48. He submitted that the transferee originally made a payment of Rs.10 lakhs on 11-5-2005 and another payment of Rs.90 lakhs on the same day. However, out of this a sum of Rs.50 lakhs was refunded by the landlord to the developer on 5-3-2009. The project has not been completed till date due to very bad market conditions and hence the possession of the constructed flats has not been handed over to Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, the learned DR relied on the orders of the Assessing Officer and the CIT(A) and submitted that provisions of section 2(47)(v) of the IT Act is an intrusive definition and relied on the order of the Tribunal in the case of Taher Alimohammed Poonawala v. Addl. CIT (124 TTJ) (Pune) and the order of the Tribunal in the case of Dr. Maya Shenoy v. ACIT (124 TTJ 692) (Hyd.) and judgment of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (260 ITR 491), 39. We have heard the rival contentions at considerable length. We have also perused the material on record and duly considered factual matrix of the case as also the applicable legal position. Learned representatives have addressed us on different aspects of the matter and also filed written submissions along with the judicial precedents which are placed on record. 40. As Revenue has placed heavy reliance on the judgment of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), and it is based on this judgment that the impugned addition has been made by the AO, and sustained by the CIT(A), it is necessary to first appreciate what this judgment lays down, and perhaps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under section 2(47)(v)." 44. It is important to bear in mind that section 2(47)(v) refers to "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" and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under section 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be in writing; (c) It should be signed by the transferor; (d) It should pertain to the transfer of immovable property; (e) The transferee should have taken possession of property; (f) Lastly, transferee should be ready and willing to perform the contract". 47. Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla-The Transfer of Property Act" (9th Edn. : Published by Butterworths India), at p. 448, observes that: "The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee's willingness to perform his part of the contract in terms covenanted thereunder." Willingness to perform the roles ascribed to a party, in a contract is primarily a mental disposition. However, such willingness in the context of section 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment was obtained not in this assessment year and it was obtained only on 17-9-2006 from the Hyderabad Urban Development Authority. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties. Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. In fact, the building plan was not got approved by the builder in the assessment year under consideration. Until permission is granted, a developer cannot undertake construction. As a result of this lapse by the transferee, the construction was not taken place in the assessment year under consideration. There is a breach and break down of development agreement in the assessment year under consideration. Nothing is brought on record by authorities to show that there was development activity in the project during the assessment year under consideration and cost of construction was incurred by the builder/developer. Hence it is to be inferred that no amount of investment by the developer in the construction activity during the assessment year in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under section 53A of the Transfer of Property Act was not satisfied in this assessment year. Once we come to the conclusion that the transferee was not 'willing to perform', as stipulated by and within meanings assigned to this expression under section 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present assessment year, it is only a corollary to this finding that the development agreement dated 11-5-2005 based on which the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal before us. The other grounds raised by the assessees in their appeals have become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessees in the assessment year under consideration. Consequently, the appeal filed by the revenue in ITA Nos. 328 to 331/Hyd/2011 have become infructuous and dismissed accordingly. 51. Now we will take up ITA Nos. 416, 417 418/Hyd/2011 of the Revenue Appeals. In these appeals the grievance of the Revenue is with regard to treating the gain arising out of the transaction in sale of land as capital gain instead of business income. Brief facts of the issue are that consequent to a search operation in the case of Sri K. Srinivasa Rao, notices under section 153C of the IT Act were issued to the assessee in response to which the assessee filed returns of income for the assessment years under consideration admitting total income as below: Assessment year Income returned Agricultural income 2002-03 Rs.2,52,593 Rs.1,88,145 2003-045 Rs.6,31,709 Nil 2004-05 Rs.11,33,261 Nil 52. In the assessments mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) 13.08.01 1,57,500 (AO- G21) 21-6-2001 1,25,000 A2-G20 13-7-01 3,75,000 2,50,000 Sy No.248 of Vattinagulapalli village Total gain out of the above said transactions: 15,45,000 Assessment year 2003-04 30-10-95 4,03,188 A10-G18 (1) 28-6-02 (2) 28-6-02 (3) 1-7-02 1,31,250 A0-G35 3,93,750 A2-G25 9,00,000 A6 Total 14,25,000 10,21,812 Survey No. 233 of Vattinagulapalli Village, Out of Ac.10-18 gts. The assessee has sold Ac.9.20 gts to three different customers 18-7-2002 1,35,500 A2 G07 21-2-03 3,26,500 1,89,000 Survey No. 234 of Vattinagullapalli village. 26-7-2000 4,50,000 A8-G14 30-4-02 10,03,500 11,82,000 The assessee has purchased Ac.8-22 gts. At Sy.No.88 Kokapet village on two different dates. The same was sold through two different sale deed each admeasuring Ac.4-11 gts. On 30-4-02 3-1-2003 3,75,000 A0-G08. 30-4-02 10,03,500 Total gain/profit earned out of the transaction : Rs.23,92,812 Assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en belt, a fact not known to the appellant. The land was purchased for retaining the same it was sold under compelling circumstances to realise the investment and to avoid any future dispute. Because of restriction in exploitation of the land, the appellant sold the land to the same party as mentioned above. Kokapet land S. No. 102 (P) 2000-01 (31-5-2000) A3-G29 2001-02 (13-8-01 19-12-01) On coming to know about impeding acquisition by Govt., the land was sold to avoid further litigation. After sale acquisition notice served, sold to one party without any plotting. Registered for their convenience in different names. Vattinagulapalli S. Nos. 233 234 1995-96 (30-10-95) A10-G18 28-6-2002 1-7-2002 This land was falling in bio-conservation zone/green belt. This fact was not within the knowledge of the appellant. Although purchased to retain the same, it was sold under compelling circumstances to realize the investment to avoid any future dispute. Sold to one party without any plotting. Registered in various names as per convenience of the party. Kokapet S. No. 88 2001-01 (sic) (26-7-2000) A18-G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dors and in fact a case was filed in OS No. 113 before the Addl. District Judge, LB Nagar. Hence, to avoid any future complications, the said land was sold. Considering the above facts, we cannot hold that the assessee engaged in the real estate business. It is also fact that the assessee has been offered capital gain in subsequent years which has not been disturbed by the assessing officer. For example, for the assessment year 2006-07 the assessee had shown in her return long term capital gain in respect of sale of land, measuring 4 acres 89 guntas and no adverse view has been taken by the assessing officer on this. If the revenue authorities were of the opinion that the assessee is in the business of real estate, the assessing officer would have taken a consistent stand in respect of all the transactions. It is also admitted fact that there is no regular activity of purchasing and selling of land and there is nothing on record to show that the land was purchased for the purpose of selling the same. Even if the land was developed and was sold after converting into plots with a view to secure the better price it cannot come within the purview of adventure in the nature of trade and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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