Authority For Advance Rulings
Jasbir Singh Sarkaria, In Re
Section 2(47)(v), 45
P.V. Reddi, J., Chairman & A. Sinha, Member
AAR No. 724 of 2006
30th August, 2007
Counsel Appeared :
G.K. Jain, for the Applicant : Raman Kant Garg, for the CIT concerned
RULING
P.V. Reddi, J., Chairman :
Facts :
1. Broadly, the question that has to be answered in this case turns on the year of chargeability of the incomeattributable to capital gains. The applicant, who is a citizen of USA, is the co-owner of agricultural land of an extent of 27.7 acres. The other co-owners are his brother and sister. The applicant is entitled to 4/9th share therein. The applicant and other co-owners having decided to develop the land by constructing a residential complex thereon through a ‘developer’ entered into a ‘collaboration agreement’ on 8th June, 2005 with M/s Santur Developers (P) Ltd., New Delhi. On behalf of the applicant, the agreement was signed by his brother and power of attorney holder Mr. Karanbir Singh Sarkaria. According to the terms of the agreement, the developer should obtain the ‘Letter of Intent’ from the concerned Government Department and obtain other permissions and sanctions for developing the land at its 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 cl. 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 cl. 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 developer to enable it to deal with the statutory authorities etc. for obtaining necessary approvals/sanctions. (iii) Obtaining ‘Letter of Intent’ not later than 8th March, 2006. In case of failure to do so, the agreement shall stand terminated. (‘Letter of Intent’ is the license granted by the Director of Town Planning to develop the land for the proposed purpose subject to payment of prescribed charges and compliance with other conditions). (iv) On fulfillment of the requirements laid down in the ‘Letter of Intent’, owners will have to execute irrevocable general power of attorney in favour of the developer, inter alia, authorizing it to book and sell dwelling units out of developer’s share and collect the money for the same. However, the sale deeds can only be executed after the owners receive their share of the constructed area. [vide cl. 15] (v) After filing application for change of land use (licence), the developer shall take steps to earmark the built-up area of the owners in accordance with the tentative building plan and both the parties are entitled to lease out or sell the area falling to their respective shares as per the agreed allocation and to receive payments. [vide cl. 26] (vi) The owners, on completion of the construction of their built-up area, shall grant power in favour of the developer to enable it to transfer rights, title and interest to the extent of its share in favour of buyers of the units. (vii) Subject to the fulfillment of the obligations enjoined upon the developer, the owners shall not interfere with the execution of the development and construction work.
2. Three months later, an agreement styled as ‘Supplementary Agreement’ was entered into on 15th Sept., 2005 between the applicant and other co-owners on the one hand and M/s Santur Developers (P) Ltd. [M/s Santur Developers (P) Ltd. is hereafter referred to as “developer” or “transferee” for the sake of brevity] on the other. In essence, it is an agreement to sell the 16 per cent share of the owners in the built-up area to the developer or its nominee for a consideration of Rs. 42 crore. 2.1. The salient features of the 2nd agreement are : Apart from Rs. 2 crores which the owners have received under the collaboration agreement, the balance sum of Rs. 40 crore is payable by the developer to the owners in six instalments starting from 8th March, 2006. The time for payment of instalment money may be extended subject to payment of interest/liquidated damages as per cls. 8 and 9. The last instalment of Rs. 10 crore was payable on or before 8th June, 2007 subject to maximum extension of three months. Thus, the entire consideration should be paid within 27 months from the date of collaboration agreement. Under cl. 10 it is provided that if the payment is not made within 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 developers 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 GPA 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 collaboration agreement not inconsistent with the provisions of the supplementary agreement will continue to be binding on both parties. 2.2. The supplementary agreement has substantially altered the legal relationship and rights and obligations of the parties. The transaction is not the usual development agreement under which the developer constructs on the owner’s land and hands over a part of the built-up area to the owner as consideration. It is an assorted type of arrangement under which the developer builds on the land of the owners and ultimately, in consideration of payment of stipulated price to the owners, the developer requires the owner to part with his title in favour of the developer or his nominees. Instead, the developer could have straightway purchased the land outright by paying consideration to the owners and utilized the land in whatever manner he pleased. But, that was not done for the apparent reason that the developer either wanted to avoid or reduce the stamp and registration expenses, or to get over the possible difficulties in obtaining the licence/permission. The questions and contentions
3. Broadly the question is about the year of chargeability of income attributable to capital gains. Integrally connected to it is the identification of the previous year in which the deemed transfer within the meaning of cl. (v) of s. 2(47) of the IT Act had taken place.
4. Whereas it is the contention of applicant that the transfer can be said to have taken place only when the entire consideration of Rs. 42 crore has been received by the owners in terms of the supplementary agreement, it is the contention of the CIT that the capital gains arise during the year in which any of the following activities take place, i.e. : (a) Obtaining permission for change of land use by the developers; (b) Construction/development of land; (c) Receipt of payments by the applicant from 8th June, 2006 onwards as per the supplementary agreement. It is also contended that the last payment made by the developer on completion of the building has no bearing onthe issue. As an alternative, it is submitted by the CIT that capital gains accrue in the year in which different instalments of amounts have been received by the assessee. In the course of arguments, the Departmental Representative contended that the transfer under s. 2(47) (v) takes place in the instant case on the date of execution of agreement itself because under cl. 27, it cannot be cancelled by any party. Thus, the Revenue’s stand is not consistent and clear. Probably, the Department wants to play safe in the wake of subtle legal issue that has arisen.
5. 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 asst. yr. 2007-08 on grant of CLU (Change of Land Use) as detailed in the letter dt. 8th March, 2006 (Annex. 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 asst. yr. 2008-09 on completion of construction and on receipt of final payment of instalment when the share of the developer is eligible for transfer as agreed vide collaboration agreement dt. 8th June, 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 asst. yr. 2006-07, asst. yr. 2007-08 and the asst. yr. 200809 respectively, onreceipt of consideration amount in proportion to its payment by the developer, who is allowed to carry out the development activity after grant of CLU and other required permissions ?
[The 4th question—opening with the words “any other question ………..” is too general and omnibus and need not be referred to]. Relevant provisions of IT Act Sec. 45
6. In order to decide the issue, the relevant provisions of the IT Act, 1961 (for short ‘the Act’) should be noticed. Sec. 45 of the Act is the charging section in regard to capital gains. It lays down that any profit or gains arising from the transfer of a capital asset effected in the previous year, shall be deemed to be the income of the previous year in which transfer takes place. The section can be analyzed thus : (a) transfer of a capital asset effected in the previous year, (b) resultant profits or gains from such transfer, (c) those profits or gains would constitute the income of the assessee/transferor, (d) such income shall be deemed to be the income of the same previous year in which the transfer had taken place. Two aspects may be noted at this juncture. Firstly, the expression used is‘arising’ which is not to be equated with the expression ‘received’. Both these expressions and in addition thereto, the expression ‘accrue’ are used in the IT Act either collectively or separately according to the context and the nature of charging provision. The second point which deserves notice is that by a deeming provision, the profits or gains that have arisen would be treated as the income of the previous year in which the transfer took place. That means, the income on account of arisal of capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place. The effect and ambit of the deeming provision contained in s. 45 has been considered in decided cases and leading text books. The following statement of law in Sampath Iyengar’s Commentary (10th Edn.—Revised by Shri S. Rajaratnam) brings out the correct legal position :
“Sec. 45 enacts that the capital gains shall by fiction ‘be deemed to be the income of the previous year in which the transfer took place’. Since this is a statutory fiction, the actual year in which the sale price was received, whether it was one year, two years, three years, four years, etc. previous to the previous year of transfer, 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 s. 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.”
7.This Authority in its ruling in the case of Anurag Jain, In re (2005) 195 CTR (AAR) 117 : (2005) 277 ITR 1 (AAR) had taken the same view. After referring to ss. 45, 48 and 54EB of the IT Act, S.S.M. Quadri, J. observed : “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 in the previous year in which such transfer takes place, no difficulty arises. Where, however, the full value of the consideration is agreed to be paid at a future date or is paid in instalments over a period, after the previous year in which the transfer of the capital asset took place, the capital gains would, nonetheless, be treated as income of the previous year in which the transfer took place irrespective of the actual date of payment of the consideration and any hardship that may be caused to the transferor unless otherwise provided in the Act. In such a case the assessee obviously cannot avail of the benefit of the aforementioned provisions. In the absence of any provision in the Act ameliorating the hardship caused in a case of payment of the full value of the consideration beyond the relevant previous year, there is nothing which this Authority can do to relieve the assessee of the hardship.” 7.2. In T.V. Sundaram Iyengar & Sons Ltd. vs. CIT (1959) 37 ITR 26 (Mad), a Division Bench of Madras High Court while construing s. 12B of the IT Act, 1922, clarified the import of the expression ‘arise’ as follows : “Sec. 12B does not require that profits should have been actually received. It is sufficient if they have arisen. Throughout the IT Act the words ‘accrue’ and ‘arise’ are used in contradistinction to the word “receive” and indicate a right to receive. This was explained by Fry, L.J., in Colquhoun vs. Brooks. The learned Judge observed : ‘I think, therefore, that the words ‘arising or accruing’ are general words descriptive of a right to receive profits.’ See also CIT vs. Anamallais Timber Trust Ltd. To attract the operation of s. 12B it is therefore sufficient if the profits arose. They need not have been actually received.” Thus the criterion of right to receive the profits/gains was applied in that case. 7.3. The legal position does not therefore admit of any doubt that the actual receipt of the entire sale consideration during the year of ‘transfer’ is not necessary for the purpose of computing capital gains. Sec. 2(47)
8. The other crucial provision is s. 2(47) which contains the definition of the term ‘transfer’ in relation to a capital asset. It is an inclusive definition, which takes within its fold not only the transfers that are recognized or understood as such under the general law governing transfer of property but also other transactions that are alien to the normal concept of transfer. The definition of ‘transfer’ was widened w.e.f. 1st April, 1988. Two clauses were added to the inclusive definition of transfer which pertain to transactions in immovable property. They are cls. (v) and (vi) which read as follows : ‘”Transfer” in relation to a capital asset, includes— (i) to (iv) : xx xx xx (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 of1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other AOP 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 s. 2(47)(v) 8.1. The purpose of introducing cl. (v) in conjunction with cl. (vi) is to widen the net of taxation so as to include transactions that closely resemble transfers but are not treated as such under the general law. For instance, there is no valid sale under the Transfer of Property Act unless a deed of conveyance is duly executed and registered. An agreement of sale by itself does not create any right or interest in or over the immovable property (vide s. 54 of Transfer of Property Act). A long line of pronouncements under the IT Act have taken the view that unless and until a sale deed is executed and registered, transfer cannot be said to have been effected and consequently, capital gains do not arise. So also in the case of a development agreement pure and simple, there is no transfer according to the generally accepted connotation of the term ‘transfer’ because the developer develops the land of the owners and raises constructions thereon and by an inter se arrangement, the owner directly or through the agent (developer) executes the transfer deeds to the buyers of dwelling units over a period of time. The resultant situation was that the levy and assessment of tax on the income attributable to capital gains had to be postponed indefinitely. Avoidance or postponement of tax on capital gains by adopting devices such as the enjoyment of property in pursuance of irrevocable power of attorney or part performance of a contract of sale was sought to be arrested by introducing the two clauses viz. (v) and (vi) in s. 2(47). A reference to the CBDT’s Circular No. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses : “11.1 The existing definition of the word ‘transfer’ in s. 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co- operative society, company, or AOP or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions, of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storeyed constructions in big cities. The definition also does not cover cases where possession is allowed 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. Now sub-cls. (v) and (vi) have been inserted in s. 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-cl. (vi) of s. 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.”
9. We are concerned here with cl. (v) and it is this provision that is invoked by both sides. In order to be ‘transfer’ within the meaning of cl. (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 within the scope of s. 53A of the Transfer of Property Act. Sec. 53A is not a source by which title to immovable property could be acquired but it only serves as a shield to defend one’s lawful possession obtained pursuant to a contract for transfer of immovable property for consideration. The following passage from the decision of Supreme Court in S. Govind Rao vs. Devi Sahai AIR 1982 SC 989 highlights the requisite conditions for the applicability of s. 53A : “To qualify for the protection of the doctrine of part performance it must be shown that there is a contract to transfer for consideration immovable property and the contract is evidenced by a writing signed by the person sought to be bound by it and from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty. These are prerequisites to invoke the equitable doctrine of part performance. After establishing the aforementioned circumstances it must be further shown that a transferee had in part performance of the contract either 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. The acts claimed to be in part performance must be unequivocally referable to the pre-existing contract and the acts of part performance must unequivocally point in the direction of the existence of contract and evidencing implementation or performance of contract.” Two view points :
10. As to the date of deemed transfer under cl. (v), two extreme view points are put forward on behalf of the applicant and the Department. Whereas it is the contention of the Departmental Representative that the date of execution of the supplementary agreement is itself the date of transfer giving rise to capital gains, it is the case of the applicant that the transfer takes place only after the full consideration of Rs. 42 crores is received by the owners and the developer is in a position to demand transfer of title in his favour. According to the Authorized Representative, till the last instalment is paid, there is no transaction in the eye of law which authorizes the developer to ‘retain’ possession.
11. We cannot subscribe to any of these extreme but plausible views canvassed by the representatives of the applicant and the respondent. An insight into cl. (v) of s. 2(47) for determination of the date of transfer :
12. 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 s. 53A of the Transfer 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 s. 2(47)(v). It is enough if the agreement/contract falling within the description of s. 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 of agreement as the relevant date of transfer and pay the tax on capital gains that would arise based on the price stipulated in the agreement—that is what this interpretation leads to. But there are other aspects, which cannot be ignored. 12.1. It is usual that in an agreement for transfer of immovable property, there will be a specific provision for passing on the possession at a particular stage. For that reason, it cannot be said without anything more that the agreement itself is the transaction “involving allowing of the possession to be taken” or that the agreement and such transaction simultaneously take place. If the agreement which provides for possession to be given at a future point of time is to be regarded as ‘transfer’ under cl. (v), nothing would have been easier than to say so in explicit teems and it is not at all necessary to refer to a transaction that gives possessory rights to the transferee. The legislature advisedly referred to “any transaction” with a view to emphasize that it is not the factum of entering into agreement or formation of contract that matters, but it is the distinct transaction that gives rise to the event of allowing the contractee to enter into possession that matters. That transaction is identifiable by the terms of the agreement itself and it takes place within the framework of the agreement. In other words, an agreement/contract may be the broad framework within which the transaction involving taking possession could take place as per the terms thereof. But, the agreement/contract, on its own may not allow possession to be taken instantaneously, but it may spell out a transaction by which the possession will pass at the future point of time. Under the terms of a contract, normally, a series of acts or transactions that would at one point of time or the other take place in furtherance of the contract will be recorded. What is contemplated by s. 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance of the contract of transfer. It is at that point of time that the deemed transfer takes place. True, entering into the agreement/contract is a transaction in a broad sense but, when the agreement envisages an event or act on the happening or doing of which alone the possession is allowed to be taken in part performance of the contract, the transaction of the nature contemplated by cl. (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 Bombay High Court speaking through S.H. Kapadia, J. in Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 180 CTR (Bom) 107 : (2003) 260 ITR 491 (Bom) are apposite : we quote the same : “If the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability.” That was also a case of development agreement. On the facts, the Revenue’s stand that the date of execution of agreement should be the relevant date of transfer under cl. (v) was not accepted. Meaning of ‘possession’ and how should it be understood in the context of cl. (v)
13. The next question is, in what sense we have to understand the term ‘possession’ in the context of cl. (v) of s. 2(47). Should it only mean the right to exclusive possession—which the transferee can maintain in his own right to the exclusion of everyone including the transferor from whom he derived the possession ? Such a criterion will be satisfied only after the entire sale consideration is paid and the transferor has forfeited his right to exercise acts of possession over the land or to resume possession. In our view, there is no warrant to place such a restricted interpretation on the word ‘possession’ occurring in cl. (v) of s. 2(47). Possession is an abstract concept. It has different shades of meaning. It is variously described as “a polymorphous term having different meanings in different contexts” [per R.S. Sarkaria, J. in Supdt. & Legal Remebrancer, W.B. vs. Anil Kumar (1979) 4 SCC 274] and as a word of “open texture” [see Salmond on Jurisprudence, para 51, Twelfth Edition, Indian reprint]. Salmond observed : “to look for a definition that will summarize the meanings of the term ‘possession’ in ordinary language, in all areas of law and in all legal systems, is to ask for the impossible”. In the above case of Anil Kumar, Sarkaria, J. speaking for a Three Judge Bench also referred to the comments of Dias and Hughes in their book on jurisprudence that “if a topic ever suffered too much theorizing it is that of “possession”. Much of the difficulty is caused by the fact that possession is not a pure legal concept, as pointed out by Salmond. The learned Judge then explained the connotation of the expression “possession” by referring to the well known treatises on jurisdprudence : “’Possession’, implies a right and a fact : the right to enjoy annexed to the right to property and the fact of the real intention. It involves power of control and intent to control. (see Dias and Huges)
14………………………..
15. While recognizing that ‘possession’ is not a purely legal concept but also a matter of fact, Salmond (12th Edn., 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 : ’.”
13.1. In Salmond’s Jurisprudence, at para 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 someone 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 para 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 time. As a general proposition this is true : for exclusiveness is of the essence of possession. Two adverse claims of exclusive use cannot both be effectually realized at the same time. Claims, however, which are not adverse, and which are not, therefore, mutually destructive, admit of concurrent realization. Hence, there are several possible cases of duplicate possession. Mediate and immediate possession co-exist in respect of the same thing as already explained. Two or more persons may possess the same thing in common, just as they may owe it in common……..” 13.2 On a fair and reasonable interpretation and on adopting the principle of purposive construction, it must be held that possession contemplated by cl. (v) need not necessarily be sole and exclusive possession. So long as the transferee is, by virtue of the possession given, enabled to exercise general control over the property and to make use of it for the intended purpose, the mere fact that the owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of agreement does not introduce any incompatibility. The concurrent possession of the owner who can exercise possessory rights to a limited extent and for a limited purpose and that of the buyer/developer who has general control and custody of the land can very well be reconciled. Clause (v) of s. 2(47) will have its full play even in such a situation. There is no warrant to postpone the operation of cl. (v) and the resultant accrual of capital gain to a point of time when the concurrent possession will become exclusive possession of developer/transferee after he pays full consideration.
13.3. Further, if ‘possession’ referred to in cl. (v) is to be understood as exclusive possession of the transferee/developer, then, the very purpose of the amendment expanding the definition of transfer for the purpose of capital gains may be defeated. The reason is this : the owner of the property can very well contend, as is being contended in the present case, that the developer will have such exclusive possession in his own right only after the entire amount is paid to the owner to the last pie.
There is then a possibility of staggering the last instalment of a small amount to a distant date, may be, when the entire building complex gets ready. Even if some amount, say 10 per cent, remains 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 cl. (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 overlooked. There is a possibility of the owner with the connivance of the transferee postponing the payment of capital gain 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. 13.4. While on the point of possession, we would like to clarify one more aspect. What is spoken to in cl. (v) of s. 2(47) is the ‘transaction’ which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession or the instances of possessory acts exercised is not very relevant. The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. It is enough if the transferee has, by virtue of that transaction, a right to enter upon and exercise acts of possession effectively pursuant to the covenants in the contract. That tantamounts to legal possession. We are referring to this aspect because the Authorized Representative has submitted when he appeared before us in the last week of May, 2007 that even by that date the development work could not be commenced for want of certain approvals, and therefore, the developer was “not willing to take possession of the land”. Such an unsubstantiated statement which is not found in the original application or even written submissions filed earlier need not be probed into especially when it is not his case that the developer was not allowed to take possession in terms of the agreement. When the transfer as per cl. (v) of s. 2(47) took place in the present case
14. In the light of the above discussion and interpretation placed on s. 2(47)(v), we have to consider when in the instant case, the transaction amounting to transfer took place. Before considering this crucial point, it is appropriate at this juncture to take note of the important events that occurred subsequent to the execution of the agreement dt. 15th Sept., 2005. Provisional licence (called as ‘letter of intent’ by the applicant) was issued by the Director of Town and Country Planning, Haryana, on 8th March, 2006. Final licence valid upto 25th May, 2008 was issued on 26th May, 2006. Irrevocable general power of attorney was executed on 8th May, 2006. An amount of Rs. 30 crores was received in five instalments i.e., 8th March, 2006, 8th June, 2006, 8th Sept., 2006, 8th Dec., 2006 and 8th March, 2007. This is apart from Rs. 2 crores received earlier under collaboration agreement. 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 Haryana Development and Regulation of Urban Areas Act, 1975 and the Rules. 8th March, 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 fulfillment of certain conditions and prerequisites within 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 then that final licence could be granted. Such licence was in fact granted on 26th May, 2006. It may be noted that 8th March, 2006 (the date of LOI) falls within the financial year 2005-06 which is also the year in which the two agreements were entered into. The final licence date falls within the next year. Now, we shall consider whether by virtue of the stipulation in para 18 of the collaboration agreement, the right of possession has been conferred on the developer on the date on which the so-called ‘letter of intent’ was issued.
15. It is stated in para 18 of collaboration agreement that on issuance of Letter of Intent, the owners will allow and permit the developer to enter upon and survey the land, erect site/sales office, carry out site development work and do activities for advertising, sales promotion, construction, landscaping, etc. and any other activity incidental to marketing, construction, development, execution and completion of the project on the land. Though this clause, read in isolation, may be suggestive of passing on possession (in the sense in which we have explained earlier) on the date of issuance of Letter of Intent itself, it is really not so. Para 18, in our view, should be read along with and subject to para 15. Under para 15, it is stipulated that on fulfillment of the requirements laid down in the Letter of Intent, which is a provisional licence, the owners should execute an irrevocable General Power of Attorney (GPA) in favour of the developers or their nominees inter alia authorizing them to book and sell the dwelling units falling to their share. Thus, only after the deposit of requisite charges with the Urban Development authorities as per the conditions stipulated in the provisional licence and the developer taking necessary steps pursuant to the provisional licence that the general power of attorney will be executed. Para 16 though not directly on point gives an indicia that the deposit of various charges in terms of the ‘LOI’ within the prescribed time is considered to be an important aspect that sets in motion various other acts directed towards the implementation of the agreement. Clause 16 enjoins that owners shall file an application in the High Court for withdrawal of the writ petition (relating to a part of this land) not merely after the issuance of ‘LOI’ but only after the developers deposit the requisite charges as per the LOI. Para 14 makes explicit what is really implicit that the development of land and construction will start after securing the licenses and permissions. In this background, para 18, at best, grants 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 straightway. 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. Para 15 negates any such inference. The mere receipt of provisional licence (LOI) and the limited authority given under para 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 the crucial event or step that tantamounts to a “transaction allowing the possession to be taken” is the execution of irrevocable GPA in accordance with what is laid down in para 15 of the collaboration agreement. Such GPA was executed by the owners in favour of the developer on 8th May, 2006, i.e. during the financial year subsequent to the year of agreement. What, then, is provided for under that GPA ? That is really crucial. Terms of GPA and how it is crucial 15.2. A copy of the irrevocable GPA executed in terms of para 15 of the agreement has been furnished by the applicant. It authorizes the developers : (i) to enter upon and survey the land, prepare the layout plan, apply for renewal/extension of licence, submit the building plans for sanction of the appropriate authority and to carry out the work of development of a multi-storeyed residential complex; (ii) to manage and control, look after and supervise the property in any manner as the attorney deems fit and proper; (iii) to obtain water, sewage disposal and electricity connections. The developer is also authorized to borrow money for meeting the cost of construction on the security and mortgage of land falling to the developer’s share. The other clauses in the GPA are not relevant for our purpose. The GPA unequivocally grants to the developer a bundle of possessory rights. The acts of management, control and supervision of property are explicitly mentioned. It is fairly clear that the GPA is not a mere licence to enter the land for doing some preliminary acts in relation to the development work. The power of control of the land which is an incidence of possession as explained supra has been conferred on the developer under this GPA. The developer armed with GPA cannot be regarded merely as a licensee or an agent subject to the control of the owners. His possession cannot be characterized as precarious or tentative in nature. The fact that the agreement describes the GPA as irrevocable and an express declaration to that effect is found in the GPA itself is not without significance. Having regard to the second and supplemental agreement by virtue of which the entire developed property including the owners’ share has been agreed to be sold to the developer or his nominees for valuable money consideration, the developer has a vital stake in the entire property. As far as the quality of possession 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 cl. (v) of s. 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 the 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, therefore, hold that the transfer within the meaning of cl. (v) of s. 2(47) of IT Act took place during the financial year 2006-07 corresponding to the asst. yr. 2007-08 and the entire capital gains including that attributable to the instalment amount remaining unpaid by 31st March, 2007 has arisen during the financial year 2006-07 (asst. yr. 2007-08). ‘Transaction’ and ‘Involving’—Meaning
16. To reinforce our conclusion, it may not be out of place to turn to some dictionaries which explain the meaning and ambit of the words “transaction” and “involving”. In The Law Lexicon by P. Ramanatha Aiyer (Reprint Edition 2002), it is stated that “transaction” has a very wide meaning and that in the ordinary sense of the word is some business or dealing which is carried on or transacted between two or more persons. A passage in AIR 1950 Madras 486 is quoted in that law dictionary. It says that the term “transaction” in the realm of law bears, as pointed out in the Concise Oxford Dictionary (Third Edition), the sense of any act affecting legal rights….” In Black’s Law Dictionary (7th Edition), the meanings given are : (1) the act or an instance of conducting business or other dealings, (2) something performed or carried out; a business agreement or exchange, (3) any activity involving two or more persons. Some of the meanings given in New Shorter Oxford Dictionary are : 1 …..an agreement, a covenant. 2. The action of passing or making over a thing from one person to another. 3. …..carrying on or completion of business. 16.1. The expression “involve” according to the New Shorter Oxford Dictionary means, unfold, envelope, include, contain, comprehend. The Supreme Court, in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers’ Association (1979) 13 CTR (SC) 378 : (1980) 121 ITR 1 (SC), after referring to almost the same dictionary meanings interpreted the word ‘involving’ occurring in the phrase “involving carrying on of any activity for profit”, thus, “The activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words it must be an integral part of such purpose.” The word ‘involving’ in the expression “involving the actual delivery of possession thereof” was construed to mean ‘resulting in’ (vide the decision of Supreme Court in Dunichand vs. Bhuwalka Bros. AIR 1955 SC 182. 16.2. 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 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 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 reg. payment of entire sale price
17. As already noted, it is the contention of the applicant that until and unless the entire sale consideration upto 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 cl. (v). According to the learned Authorized Representative, the possession which the developer is authorized to take under the terms of the agreement coupled with the GPA must be such that could be ‘retained’ by the developer. He argues that such retention is possible only when the entire sale consideration is received by the owners. Stress is laid down on the word ‘retain’ in cl. (v) and the argument is built-up on the strength of para 10 of the supplemental agreement. Para 10 (already referred to in brief) provides for the consequences of delay or default in making payments by the developer. In such an event, it is stipulated that the owners shall be at liberty to issue a notice to the developer giving 30 days time to either fulfill his obligations or terminate the collaboration agreement. In case of such termination, the developer should forthwith cease all activities on the land and “remove themselves and their agents therefrom”. Though the Authorized Representative has not specifically said so, in effect and in substance, he wants to say that the possession which the developer initially gets is only permissive in nature and it can only assume exclusive, indefeasible character on the payment of entire amount. Till then, his possession is risky and liable to be resumed any time. Such type of possession is not what is contemplated by cl. (v) of s. 2(47) according to the Authorized Representative. We have already pointed out that possession given to the developers in terms of irrevocable GPA is not merely permissive or precarious in nature, and that exclusive possession akin to what is held by an absolute owner is not required. The possibility of evicting the defaulting developer as per law and in accordance with the stipulation in para 10 does not make a dent on the quality of possession obtained/obtainable by means of GPA executed as per the terms of the agreement. The nature and character of possession which the developer is entitled to obtain under the GPA cannot be assessed merely by reference to the consequences mentioned in para 10 which is a clause meant to ensure due payment of instalments. Insofar as the developer is ready and willing to perform his part of the contract, that para does not come into play at all. Coming to the expression ‘retain’ in cl. (v), the contention of the Authorized Representative is rather misconceived.The expression ‘retain’ is normally meant to apply to the case of transferee who is already in possession of the property before the contract 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 cl. (v). That expression which reflects the language of later part of the second limb of s. 53A is not of much relevance in the context of the present case. The learned Authorized Representative also sought to place reliance on para 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 cl. (v) of s. 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 not necessary to give legal recognition to the possession secured by way of part performance of the contract. The readiness and willingness of the transferee who is put in possession to fulfill his obligations is sufficient to invoke the doctrine of part performance.For all these reasons, the contention of the Authorized Representative of the applicant cannot be sustained. We have to advert to one aspect which has caused some concern to us. What will happen if during the year following the one in which the deemed transfer took place, the proposed venture collapses for reasons such as refusal of permissions, the developer facing financial crunch, etc. By One point of concern that time, the owner would have received only a part of the agreed consideration, but he is obliged to file the return showing the entire capital gain based on the full sale price whether or not received during the year of deemed transfer. In such an eventuality, hardship may be caused to the owner who would have paid full tax. No doubt, such a situation could be avoided if the contention of the applicant is accepted. On deep consideration, however, we find that the construction of relevant provision should not be controlled by giving undue importance to such hypothetical situations. Normally, the owner executes power of attorney or does similar act to let the transferee take possession only after the basic permissions are granted and is satisfied about the ability of transferee/developer to fulfill the contract. In spite of that, if such rare situations take place, the owner/transferor will not be without remedy. He can file a revised return and make out a case for exclusion or reduction of income. However, if the time-limit for filing revised return expires, the difficulty will arise. It is for the Parliament or the Central Government to provide a remedy to the assessee in such cases. Moreover, the other side of the picture as depicted in para 13.3 (supra) should also be kept in view. Departmental Representative’s contention re: para 27 of the agreement
19. The Departmental Representative relied on para 27 of the collaboration agreement which says that both the owners and developers will not cancel or back out from the agreement under any circumstances having regard to considerable expenditure and efforts involved on the part of the developers and the owners’ 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 statutory provision, viz., cl. (v) of s. 2(47); secondly the said stipulation in para 27 is merely a restatement 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 para, 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
20. The following is the summary of conclusions : Where the agreement for transfer of immovable property by itself does not provide for immediate transfer of possession, the date of entering into the agreement cannot be considered to be the date of transfer within the meaning of cl. (v) of s. 2(47) of the IT Act. To attract cl. (v) of s. 2(47), it is not necessary that the entire sale consideration upto the last instalment should be received by the owner. In the instant case, having regard to the terms of two agreements and the irrevocable GPA executed pursuant to the agreement, the execution of GPA shall be regarded as the “transaction involving the allowing of the possession” of land to be taken in part performance of the contract and therefore, the transfer within the meaning of s. 2(47)(v) must be deemed to have taken place on the date of execution of such GPA. The irrevocable GPA was executed on 8th May, 2006 i.e. during the previous year relevant to the asst. yr. 2007-08 and the capital gains must be held to have arisen during that year. Incidentally, it may be mentioned that during the said year, i.e. financial year 2006-07, a final licence was granted and the applicant/owners received nearly 2/3rd of the consideration. Once it is held that the transaction of the nature referred to in cl. (v) of s. 2(47) had taken place on a particular date, the actual date of taking physical possession need not be probed into. It is enough if the transferee has by virtue of that transaction a right to enter upon and exercise the acts of possession effectively.
Ruling
21. In view of the foregoing discussion, we answer the first question in the affirmative; that is to say, the capital gains arise during the financial year 2006-07 and shall be subjected to tax for the asst. yr. 2007-08. Consequentially, question Nos. 2 and 3 are answered in the negative. Accordingly, the ruling is given.
[Citation : 294 ITR 196]
