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Income Tax Officer Versus Shri Sham Kumar

2015 (4) TMI 294 - ITAT HYDERABAD

Development agreement entered by the assessee with a developer under the head Long term capital gain - CIT(A) deleted the addition - whether all that ingredients of transfer within the meaning of the section 2(47) of the IT Act and Section 53 of the Transfer of Property Act, 1882 have been fulfilled in the case? - Held that:- The reading of Clauses 1,5 and 6 of the Development Agreement clearly indicate that the assessee had given only the licence to enter into the land for development of the sa .....

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ral land and the assessee has been carrying out cultivation on this land consisting of 1 acre 14 guntas 83 sq. yards. Thus it is very clear that the agreement has not been implemented by constructing flats on the land. Further it is clear that the Developer was not willing to fulfil his part of contract till date. Till date no construction has come up in the property and even the conversion of the land from agricultural land to housing plot has not been done.

Provisions of deemed tran .....

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sessee is not exigible to capital gains on the entire sale consideration without the accrual of the consideration to the assessee

We are also fortified by the decision of the Coordinate Bench in the case of Bhavya Construction Ltd & Others (2015 (4) TMI 295 - ITAT HYDERABAD). The ratio of the decision is that unless there is willingness on the part of the Developer to perform his part of the Contract, there cannot be a transfer of capital assets as envisaged u/s 2(47)(v) r.w.s. 53A of .....

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he Appellant : Shri Ramakrishna Bandi, DR For the Respondent : Shri B. Satyanarayana Murthy ORDER Per Smt. Asha Vijayaraghavan, J.M. This is an appeal filed by the Revenue directed against the order of the CIT (A)-V Hyderabad dated 30.05.2014 passed for A.Y 2006-07 u/s 143(3) r.w.s. 153C of the I.T. Act. 2. Brief facts of the case are that the assessee is an individual, deriving income from business and other sources. The assessee filed his return of income for A.Y 2006-07 on 28.06.2006 declarin .....

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ented by Sri V. Anand Prasad. According to the Development Agreement, the assessee has given licence to the Developer to enter into the property to make construction thereon on agreed terms. He has also given licence for this purpose to demolish any structures on the existing property. In consideration of the licence for development, the assessee has agreed with the Developer to share the constructed area in the ratio of 55% to the owner and 45% to the Developer. As per the Agreement, the Develo .....

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Developer for the purpose of carrying out the construction and to deal with his share in the constructed area. 3. Assessing Officer opined that the Development Agreement entered into by the appellant with the Developer resulted in taxable capital gains in the year in which the Development Agreement is entered into, and is liable to capital gains tax. The assessee has contended that there is no liability to capital gains tax as no progress has taken place even till the date of the assessment proc .....

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ent is only for the purpose of development and not for the enjoyment of the Developer with any interest therein except the development. As the Developer neither started the development nor obtained sanction for development, the assessee did not given possession of the property and retained the possession till date. All these three clauses according to the assessee operate simultaneously and parallel to each other and one cannot draw inferences from either of them in isolation. The appellant cont .....

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re of the assessee. Therefore, according to the assessee, no consideration has accrued to the assessee resulting in any liability to capital gains tax. The assessee relied on the decision of the Income Tax Appellate Tribunal, 'A' Bench, Hyderabad, in the case of K. Radhika & Others vs. DCIT. 4. A.O. did not agree with these contentions and went on to tax the alleged capital gains as computed by him at ₹ 11,87,05,246/- after relying on the decision of the Income Tax Appellate Tr .....

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bmissions as follows: 13. To sum up our arguments, we wish to say that the possession was given by the appellant for the development of the land into a residential complex consisting of villas and thus, is a licence for the sole purpose of development A reading of Clauses-1, 5 and 6 would clearly indicate this. This possession cannot be taken as one contemplated In Section 53A of the Transfer of Property Act. The Developer did not obtain permission from 2006 to 2014 and therefore, it is very cle .....

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ed to the appellant and therefore, the computation of capital gain contemplated in Section 48 of the Income Tax Act falls. " 6. The CIT (A) elaborately discussed about the liability to capital gains tax in the case of the assessee. The CIT (A) concluded at paras 8.1 which read as under: 8.1 With these principles in the background, when sanction for construction of commercial complex, in the present case, was not obtained till 2014, it is not fair to hold that any consideration has accrued t .....

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y indicate that it is only a license for development and not one contemplated in the Section 53A of the Transfer of Property Act. The reliance of the AO on the decision of the Tribunal in the earlier cases before the Hyderabad Bench loses its relevance in the face of a subsequent decision of the same Tribunal in the case of M/s. Fibars Infratech (P) Ltd. Vs. ITO, on which the appellant placed his reliance. The case before the Bombay High Court in Chaturbhuj Das Dwarakadas Kapadia and that before .....

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.08.2005 with a developer under the head Long term capital gain. 3. The ld CIT (A) ought to have followed the jurisdictional High Court recent decision in ITTA No.245/2014 dated 09.04.2014 in the case of Shri Potla Nageswara Rao vs. DCIT. 4. The ld CIT (A) ought to have appreciated the Hon ble ITAT decision in the case of Sri Brij Gopal D Shah in ITA No.1166/Hyd/2010 dated 12.07.2012 which is similar on facts of the present case. 5. The ld CIT (A) ought to appreciated that substantial payment of .....

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nsideration has accrued to the assessee pursuant to development agreement for the reason that the AO has himself computed the capital gains only on the basis of the fair market value of land given for development and not on the basis of any area constructed by the developer. 8. The CIT (A) ought to have appreciated that the AO computed the consideration value on the basis built up area to the share of the assessee entitled to and by applying rates as per value adopted by S.R.O 8. The assessee re .....

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of consideration to be received by the assessee from M/s. MAK Properties Pvt. Ltd. 46. 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. The 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 . 47. As the Revenue has placed heavy relianc .....

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d 'transfer', lays down that the scope of expression 'transfer' includes "any transaction involving the allowing of, the possession of any immovable property (as defined) 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'. Elaborating upon the scope of Section 2(47)(v), their Lordships observed as follows: "Under section 2(47)(v), any transaction involving allowing of possession to be t .....

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e should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under Section 2(47)(v)". 49. Their Lordships, having made the above observations, took note of the fact that Section 2(47)(v) was introduced in the Act w.e.f. asst. yr. 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lor .....

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in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows: "If on a bare reading of a 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 c .....

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n 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, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v). 52. In order t .....

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ute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or. any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract then, ITA No.1604 of 2014 Sham Kumar Hyderabad notwithstanding that the contract .....

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y the terms of the contract; Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof. (Emphasis, italicized in print, supplied by us now) 53. A plain reading of the Section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in Section 53A of the Transfer of Property Act" it is one of the necessary preconditions .....

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n possession of property; (f) Lastly, transferee should be ready and willing to perform the contract". 54. 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 ag .....

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e than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient....... In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed........" 55. We are in considered agreement with the view .....

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the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act. Let us, therefore, consider whether the transferee, on the facts of the present case, can be said to have 'performed or is willing to perform& .....

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on 29th December, 2006. Later the assessee-company was incorporated on 4th January, 2007. On the basis of this agreement, the AO taxed the capital gain on the transaction treating that there was a transfer in terms of section 2(47)(v) of the Act. Through this is a Development Agreement cum GPA the assessee has not received any monetary benefit. Being so, there is no receipt of any part of the sale consideration. Further, we cannot say that there is any sale in terms of section 2(47)(i), (ii) or .....

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as on 15.12.2006, only the property i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee has to get for handing over the assessee's property for development. The contention of the DR is that the consideration accrued to the assessee in the form of 16 villas comprising of developed land of 9602 sq. yards and built up area of 58606 sft which the assessee has to get on completion of the project. In .....

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t year under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 15.12.2006 but no consideration was passed between the parties. As such, the assessee has received no consideration. Admittedly, there is no progress in the Development Agreement in the assessment year under consideration. It is submitted that the Director of Town and Country Planning approved the plan submitted by the assessee company only on 06.03.2007. The asses .....

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sessment year under consideration. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties which was granted only in the last month of the year i.e., on 6.3.2007. 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. Since there was no amount of investment by the developer in the construction activity dur .....

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there was no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non- incurring of required cost of acquisition by the developer. In the assessment year under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agree .....

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e joint Development Agreement. But the fact remains that the transferee has not performed its obligations under the agreement, in the assessment year under consideration. Even otherwise, the assessing authority has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction work at any time during the assessment year under consideration or any development has taken place in the proje .....

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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. 59. On these facts, it is not possible to hold that the transferee was willing .....

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y 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 dt. 15.12.2006, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case. The .....

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edent. The very foundation of Revenue's case is thus devoid of legally sustainable basis. 60. That is clearly an erroneous assumption, as the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the Revenue authorities to show that there was actua .....

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dditional grace period of 6 months, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discus .....

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uld not have been invoked on the facts of the present case and for the assessee year in dispute before us. In the present case, the situation is that the assessee has received only a meagre amount' out of to consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is .....

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not, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47) (v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital gains could not have been taxed in this assessment year in appeal before us. The other grounds ra .....

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t of the contract during the period from 2006 to 2014. Further it remains as agricultural land till today and there has been no willingness on the part of the developer to carry out the contract. Hence it was submitted that no consideration accrued to the assessee and receipt of a refundable deposit of ₹ 3.00 crores does not mean that consideration is accrued to the assessee and therefore the computation of capital contemplated in section 48 of the Act fails. 11. The ld DR on the other han .....

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or and it was noticed that there was no development in the land and it remained the same as it existed at the time of the Development Agreement. The possession of the land was not taken by the Developer as he did not initiate any development. 13. The land in question continues to be agricultural land and the assessee has been carrying out cultivation on this land consisting of 1 acre 14 guntas 83 sq. yards. Thus it is very clear that the agreement has not been implemented by constructing flats o .....

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o developmental activity on the land which is subject matter of development agreement. The process of construction has not been even initiated and no approval for the construction of the building is obtained. Thus, the sale consideration in the form of developed area has not been received. Mere receipt of refundable deposit cannot be termed as receipt of consideration. Further, as submitted , the Assessing Officer calculated the capital gain on the entire land, even though the assessee has retai .....

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the obligations cast on it under the develop agreement, the capital gains cannot be brought to tax in the year under appeal, merely on the basis of signing of the development agreement during this year. We are supported in this behalf by the decision of the Tribunal dated 3rd January, 2014 in the case of Fibars Infratech Pvt. Ltd. (supra), wherein it was held as follows- 59. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial ye .....

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ious year relevant to the present assessment year, it is only a corollary to this finding that the Development Agreement dt. 15.12.2006, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case. The judgement in the case of Chaturbhuj Dwarkadas .....

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e is thus devoid of legally sustainable basis. 60. That is clearly an erroneous assumption, as the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the Revenue authorities to show that there was actual construction taken place at the impugned prop .....

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e said that such a contract confers any rights on the vendor/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that t .....

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