High Court Of Bombay
Chaturbhuj Dwarkadas Kapadia vs. CIT
Sections 2(47)(v), 45(1)
Asst. Year 1996-97
S.H. Kapadia & J.P. Devadhar, JJ.
IT Appeal No. 24 of 2003
13th February, 2003
Counsel Appeared
S.E. Dastur with P.J. Pardiwala, F.V. Irani & N.R. Modi i/b Rustomji & Ginwala, for the Appellant : R.V. Desai with P.S. Jetley i/b K.B. Rao, for the Respondents.
JUDGMENT
S.H. Kapadia, J. :
Being aggrieved by the order of the Tribunal dt. 29th July, 2002, the assessee has come by way of appeal under s 260A of the IT Act raising the following questions of law for determination by this Court: “(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in concluding that the appellant had transferred the property situated at Gamdevi during the previous year relevant to asst. yr. 1996-97? (ii) Whether, the Tribunal’s conclusion that the appellant had transferred the property situated at Gamdevi during the previous year relevant to asst. yr. 1996-97 was so unreasonable that no person properly instructed could ever have arrived at the same; (iii) Whether, the Tribunal’s conclusion that the appellant transferred the property situated in Gamdevi in the previous year relevant to the asst. yr. 1996-97 was arrived at by considering irrelevant circumstances and without appreciating and considering the relevant factual material and was contrary to the material and the evidence of record was thereby vitiated.”
Facts
2. Assessee is an individual. He had 44/192 undivided share in an immovable property at Gamdevi in Greater Bombay. The entire property consisted of land and 10 buildings. However, a building bearing No. 10 was under requisition by the State Government, which was later derequisitioned. That building was not occupied by tenants. By agreement dt. 18th Aug., 1994, the assessee herein agreed to sell to Floreat Investments Ltd. (hereinafter referred to, for the sake of brevity as “Floreat”), his share of the immovable property for total consideration of Rs. 1,85,63,220 with a right to the said Floreat to develop the property in accordance with the rules and regulations framed under Maharashtra Housing and Area Development Act. For that purpose, the assessee agreed under cl. 8 to execute a limited power of attorney, authorising Floreat to deal with the property and also obtain permissions and approvals from Urban Land Ceiling Authority, Bombay Municipal Corporation and CRZ authorities. Under cl. 9 of the agreement it was, inter alia, provided that on Floreat obtaining all necessary permissions and approvals and upon receipt of NOC under Chapter XX-C of the IT Act, the assessee shall grant an irrevocable licence to enter upon the assessee’s share of the property. Under cl. 11 of the agreement, it was provided that after Floreat was given an irrevocable licence to enter upon assessee’s share of the property and after Floreat having obtained all necessary approvals, Floreat was entitled to demolish building Nos. 1 to 3 and building No. 10 and any other buildings on the property, subject to Floreat settling the claims of the tenants. Under cl. 14 of the agreement, the assessee was entitled to receive proportionate rent till the payment of the last instalment and till that time, the assessee was bound to pay all out goings. Under cl. 20 of the agreement, it was agreed that the sale shall be completed by execution of conveyance. Till date, there is no conveyance. Pursuant to the agreement, Floreat obtained following permissions: (i) Clearance from CRZ authority, dt. 7th Feb., 1996; (ii) letter from ULC for redevelopment of the property, dt. 26th April, 1995. These two permissions were amongst several other permissions obtained. These three permissions, however, are mentioned as they were obtained during the financial year ending 31st March, 1996, relevant to the asst. yr. 1996-97. Similarly, by 31st March, 1996, Floreat had paid almost the entire sale price of Rs. 1,85,63,220, except for the small amount of Rs. 9,98,000. However, the important point which is required to be noted is that BMC issued a commencement certificate permitting construction of a building upto the plinth level only on 15th Nov., 1996. In the meantime, the plan came to be amended. Ultimately, the power of attorney was executed on 12th March, 1999.
The narrow dispute which arises for determination in this appeal is : Whether, the liability of the assessee for capital gains accrued to the assessee during asst. yr. 1996-97 or whether the assessee was liable to pay capital gains tax during the asst. yr. 1999-2000. According to the Department transfer had taken place during the accounting year ending 31st March, 1996, relevant to asst. yr. 1996-97, whereas according to the assessee, the transfer took place only when the assessee executed an irrevocable licence in favour of Floreat to enter upon the property and, therefore, according to the assessee liability arose during the asst. yr. 1999-2000.
Arguments
3. Mr. Dastur, learned senior counsel appearing on behalf of the assessee, contended that the only question which is required to be decided in this case is : Whether the Department was right in inferring possession in favour of Floreat during the accounting year ending 31st March, 1996, relevant to asst. yr. 1996-97. He submitted that in this case, the assessee has paid capital gains tax for asst. yr. 1999-2000. That, this is not a case where the assessee denies transfer of the property. He contended that the only issue which is required to be decided in this appeal was as to whether the transfer, as contemplated by s. 2(47)(v), had taken place during asst. yr. 1996-97 or whether it had taken place during asst. yr. 1999-2000. He pointed out that the decision of the Tribunal was perverse in the sense that reliance was being placed on documents which do not even exist. He submitted that the Tribunal has come to the conclusion of possession being handed over by assessee to Floreat during asst. yr. 1996-97 on basis of 7 permissions obtained from various authorities. However, he submitted that item No. (vi) was a repetition of item No. (iii), whereas item No. (vii) was a repetition of item No. (i). He further submitted that the permission under item No. (iii) did not even exist. He, therefore, submitted that the Tribunal has drawn inferences purely on the basis of conjectures. In this connection, he relied upon the finding of the Tribunal to the effect that Floreat was put in possession for which the Tribunal had relied upon recovery of water charges. In this connection, he invited our attention to the findings of the Tribunal which states that possession of Floreat stood established by letter dt. 18th Feb., 1999, written to the co-owners’ attorneys in connection with reimbursement of water charges from Floreat for the period 1st April, 1997, to 31st Jan., 1999.
The Tribunal has stated in its findings that since reimbursement took place from 1st April, 1997, Floreat was put in possession w.e.f. 1st April, 1997, i.e., from the end of the financial year 31st March, 1996. Mr. Dastur points out that this finding is perverse; that in this case we are concerned with the accounting year ending 31st March, 1996. He pointed out that the day after 31st March, 1996, is 1st April, 1996, and not 1st April, 1997, and if 1st April, 1997, is the date on which Floreat was put in possession then Floreat enters upon possession during accounting year 1997-98 and not during accounting year 1996-97 with which we are concerned. It is for these two reasons mainly that Mr. Dastur has criticized the judgment of the Tribunal as perverse. Mr. Dastur further submitted that even the commencement certificate came to be issued by BMC in December, 1998 and he submitted that under cl. 9 of the contract, the parties had specifically agreed that Floreat will not be put into possession till full payment was effected and till all permissions from various authorities were obtained. He contended that the above facts clearly indicated that Floreat was not put in possession during asst. yr. 1996-97. He contended that the building permission was not obtained during asst. yr. 1996-97. That the development agreement was dt. 18th Aug., 1994, and, therefore, that agreement also did not come within the purview of asst. yr. 1996-97. He further pointed out that even IOD was granted by BMC during the period September to November 1996 and, therefore, even the IOD did not come within the purview of asst. yr. 1996-97. He submitted that even the power of attorney was given on 16th March, 1999, in favour of Floreat. He, therefore, contended that
in this case, there was no transfer of possession during the accounting year ending 31st March, 1996, relevant to asst. yr. 1996-97. Mr. Dastur contended that under s. 45 of the IT Act, capital gains was chargeable to tax in the previous year in which a transfer takes place and that unless such transfer takes place, there was no liability to pay capital gains tax. He contended that the assessee stood divested of his proprietary rights only during the accounting year ending 3lst March, 1999, relevant to asst. yr. 1999-2000 as the assessee granted irrevocable licence to Floreat only in that year. That till such date, the assessee had not parted with possession. He, therefore, contended that in this case s. 2(47)(v) was not attracted during the asst. yr. 1996-97. He contended that there is no evidence whatsoever to indicate that Floreat was put in possession during the financial year 1995-96. He contended that even under the development agreement, possession to Floreat could not have been given without payment of the full purchase price and without obtaining all relevant permissions. He contended that the last instalment was paid during financial year 1998-99 corresponding to asst. yr. 19992000. He contended that under the agreement, irrevocable licence was required to be given to Floreat only on Floreat obtaining all the permissions from various authorities. He submitted that on 7th Feb., 1996, permission was obtained from CRZ authorities. That only a letter of intent for redevelopment was obtained from MHADA on 14th Feb., 1995. He, however, pointed out that the Tribunal has, in its order, referred to permission being obtained for redevelopment from MHADA on 25th June, 1995, which is not in existence. He further submitted that ULC authority granted permission for development, on 26th April, 1995. He, however, further pointed out that there are various discrepancies in the list of permissions given by the Tribunal, as stated above. That, under the agreement, large number of permissions are required to be obtained and only on those permissions being obtained, supported by full payment of consideration, Floreat was to be put in possession. Mr. Dastur accordingly contended that there is no basis for coming to the conclusion that possession was given to Floreat during asst. yr. 1996-97. He submitted that the layout plan was approved on 5th Sept., 1996; that IOD was issued during September to November 1996; that the building plan was amended on 30th March, 1998. He, therefore, contended that there was no reason for the Tribunal to infer possession in favour of Floreat during asst. yr. 1996-97. He contended that in this case, the assessee has not denied transfer of property; that the assessee has paid the capital gains tax for asst. yr. 1999-2000. However, assessee is told by the AO that transfer has taken place during asst. yr. 1996-97 and as a result, assessee is now faced with the consequence of payment of interest of almost Rs. 16 lakhs on a tax demand of Rs. 12 lakhs. That, this was apart from the penalty proceedings.
He contended that payment of substantial price will not amount to transfer. That, the assessee offered the amount to tax during asst. yr. 1999-2000 as it was during that year that an irrevocable licence came to be executed in favour of Floreat. That the assessee had possessory rights on 31st March, 1996. That till 31st March, 1996, the assessee had not obtained BMC permission for constructing the building. That till 31st March, 1996, the assessee had not executed the power of attorney in favour of Floreat. That till 31st March, 1996, assessee had collected rent. That till 31st March, 1996, the property had not been demolished. That till 31st March, 1996, assessee has paid all outgoings. That till 31st March, 1996, assessee has recovered water charges. He, therefore, contended that possession was given only during the year ending 31st March, 1999 when irrevocable licence came to be executed in favour of Floreat.
4. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, contended that in this case the agreement dt. 18th Aug., 1994, was a development agreement. He contended that the agreement, on execution, gave complete control of development over the property to Floreat. He submitted that under cl. 4 there was no forfeiture or termination of the agreement mentioned. He contended that the last payment payable by Floreat was on 15th May, 1995. That, substantial payment was made during the financial year 1995-96. That, the CRZ permission was granted on 7th Feb., 1996. He contended that ULC permission was granted on 26th April, 1995, and in the circumstances, most of the permissions were granted during accounting year 1995-96 and substantial payment was also made during that year and, therefore, it was permissible for the AO to infer possession in favour of Floreat during accounting year 1995-96. He contended that if one reads the agreement plus payments plus permissions obtained, then s. 53A of the Transfer of Property Act would apply and in the circumstances, the Department was right in inferring possession in favour of Floreat from substantial compliance of the agreement during the accounting year 1995-96. He, therefore, contended that no interference is called for to the impugned judgment given by the Tribunal. Scope of s. 2(47) (v)
5. Clauses (v) and (vi) of s. 2(47) reads as under: Sec. 2(47)………………… (v) (w.e.f. 1st April, 1988) 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 s. 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) (w.e.f. 1st April, 1988) any transaction (whether by becoming a member of, or acquiring shares in, a co-operative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property (as defined).” The above two clauses were introduced w.e.f. 1st April, 1988. They provide that “transfer” includes (i) any transaction which allows possession to be taken/retained in part-performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act, and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property [see s. 269UA(d)]. Therefore, in these two cases capital gains would be taxable in the year in which such transactions are entered into, even if the transfer of immovable property is not effective or complete under the general law (See Kanga & Palkhivala s Law & Practice of Income-tax-VIII Edition, p. 766). This test is important to decide the year of chargeability of the capital gains.
Findings
6. At the outset, we may point out that in this case, the assessee does not deny transfer. The only dispute in this case, is whether the transfer took place during the accounting year ending 31st March, 1996, or whether it took place during the accounting year ending 31st March, 1999. In other words, the dispute is confined to the year of chargeability. Under s. 2(47)(v), any transaction involving allowing of possession to be taken over or retained in part-performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act would come within the ambit of s. 2(47)(v). That, in order to attract s. 53A, the following conditions need to be fulfilled. There should be a contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to transfer of immovable property; the transferee should have taken possession of the property; lastly the transferee should be ready and willing to perform his part of the contract. That even arrangements conferring privileges of ownership without transfer of title could fall under s. 2(47)(v). Sec. 2(47)(v) was introduced in the Act from 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 the conveyance. Consequently, assessees used to enter into agreements for developing properties with the builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loophole, s. 2(47)(v) came to be introduced in the Act.
It was argued on behalf of the assessee that there was no effective transfer till grant of irrevocable licence. In this connection, judgments of the Supreme Court were cited on behalf of the assessee, but all those judgments were prior to introduction of the concept of deemed transfer under s. 2(47) (v). In this matter, agreement in question is a development agreement. Such development agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements. That such agreements are only a mode of remunerating the builder for his services of constructing the building [See Gurudev Developers vs. Kurla Konkan Niwas Co.Operative Housing Society (2000) 3 Maharashtra Law Journal, 131] It is precisely for this reason that the legislature has introduced s. 2(47)(v) r/w s. 45 which indicates that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law. In this case that test has not been applied by the Department. No reason has been given why that test has not been applied, particularly when the agreement in question, read as a whole, shows that it is a development agreement. There is a difference between contract on one hand and performance on the other hand. In this case, the Tribunal as well as the Department have come to the conclusion that the transfer took place during the accounting year ending 31st March, 1996, as substantial payments were effected during that year and substantial permissions were obtained. In such cases of development agreements, one cannot go by substantial performance of a contract. In such cases, the year of chargeability is the year in which the contract is executed. This is in view of s. 2(47)(v) of the Act. Before us, it was argued on behalf of the assessee that the date on which possession is parted with by the transferor is the date which should be taken into account for determining the relevant accounting year in which the liability accrues. It was argued on behalf of the assessee that in this case, irrevocable
licence was given in terms of the contract only during the financial year ending 3lst March, 1999, and, therefore, there was no transfer during the financial year ending 31st March, 1996. On the other hand, it was argued on behalf of the Revenue that one has to go by the date on which the developer substantially performed the contract. It was argued on behalf of the Department that since substantial payments were made during the financial year ending 31st March, 1996, and since majority of permissions were obtained during that year, the liability to pay capital gains tax accrued during asst. yr. 1996-97. In this case, the agreement is a development agreement and in our view, the test to be applied to decide the year of chargeability is the year in which the transaction was entered into. We have taken this view for the reason that development agreement does not transfer the interest in the property to the developer in general law and, therefore, s. 2(47)(v) has been enacted and in such cases, even entering into such a contract could amount to transfer from the date of the agreement itself. We have taken this view for a precise reason. Firstly, we find in numerous matters where the AO and the Department generally proceed on the basis of substantial compliance of the contract. For example, in this very case, the Department has contended that because of substantial compliance of the contract during the financial year ending 31st March, 1996, the transfer is deemed to have taken place in that year. Such interpretation would result in anomaly because what is substantial compliance would differ from officer to officer. Therefore, 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 permissions from various authorities, either under power of attorney or otherwise and in the name of the assessee, then the AO is entitled to take the date of the contract as the date of transfer in view of s. 2(47)(v). In this very case, the date on which the developer obtained a commencement certificate is not within the accounting year ending 31st March, 1996. At the same time, if one reads the contract as a whole, it is clear that a dichotomy is contemplated between limited power of attorney authorising the developer to deal with the property vide para 8 and an irrevocable licence to enter upon the property after the developer obtains the requisite approvals of various authorities. In fact, the limited power of attorney may not be actually given, but once under cl. 8 of the agreement a limited power of attorney is intended to be given to the developer to deal with the property, then we are of the view that the date of the contract viz. 18th Aug., 1994, would be the relevant date to decide the date of transfer under s. 2 (47)(v) and, in which event, the question of substantial performance of the contract thereafter does not arise. This point has not been considered by any of the authorities below. No judgment has been shown to us on this point. Therefore, although there is a concurrent finding of fact in this case, we have enunciated the principles for applicability of s. 2(47)(v). We do not find merit in the argument of the assessee that the Court should go only by the date of actual possession and that in this particular case, the Court should go by the date on which irrevocable licence was given. 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.
7. Having laid down broad principles we now come to the facts of this case. This is not the case where the assessee denies transfer. In this case, the assessee has paid capital gains tax for asst. yr. 1999-2000. However, the assessee is told that the year of chargeability is asst. yr. 1996-97 and not asst. yr. 1999-2000. Moreover, this is the first time that we have laid down the guidelines. Further, the assessee has paid the tax for asst. yr. 1999-2000. Generally, this Court does not interfere in concurrent findings of facts. However, in this case, a substantial question of law has arisen on interpretation of s. 2(47)(v). It is for this reason that we have given the guidelines, which may be followed by the Department in all future cases. We have gone through the compilation of documents and from mere substantial compliance of the agreement, one cannot infer transfer in the accounting year ending 31st March, 1996. We may also mention that there are mistakes, apparent on the face of the record, in the order of the Tribunal. The Tribunal has relied upon assessee obtaining 7 permissions. We find that item (vi) and item (vii) are mere repetitions of item (iii) and item (i), respectively. Similarly, the Tribunal has referred to permissions obtained during financial years other than the concerned financial year ending 31st March, 1996, to come to the conclusion that the transfer had taken place during that year. Lastly, the Tribunal has referred to permission dt. 25th June, 1995, for redevelopment of the property vide item (iii). However, in the compilation given by the assessee there is no such permission. The assessee has disputed the existence of this document. Office is directed to take the assessee’s compilation on record and mark “X”. It is for this reason that vide order dt. 29th Jan., 2003, we called upon the CIT (Judicial) to forward to us the R&P. However, learned counsel for the Department has informed us that R&P is not available. There are other apparent errors in the order of the Tribunal. At p. 144 of the paper book, the Tribunal has stated as under.”From the dates it is evident that from the very next day i.e., 1st April, 1997, from the end of financial year ending on 3lst March, 1996, the builder was using the well water against payment of relevant charges to the assessee.” The above quoted findings of the Tribunal is apparently an error because the financial year ended on 31st March, 1996, and the first day of the next financial year was 1st April, 1996 and not 1st April, 1997. According to the Tribunal, the letter dt. 18th Feb., 1999 shows that Floreat came into possession on the day next to 31st March, 1996 i.e., 1st April, 1997. As stated above, the day next to 31st March, 1996, would be 1st April, 1996, and not 1st April, 1997, and even if 1st April, 1997, is taken as a typing mistake, it could only be read as 1st April, 1996, and if 1st April, 1996, is the date on which Floreat/Developer came in possession, then the possession was received by the developer during the financial year 1996-97 corresponding to asst. yr. 1997-98. Therefore, this finding of the Tribunal is erroneous because in this case we are concerned with asst. yr. 1996-97 and not the asst. yr. 1997-98. Taking into account the totality of circumstances, on facts, we allow the appeal of the assessee. We answer the above questions accordingly. Question No. (i) is answered in the negative i.e., in favour of the assessee and against the Department. In view of our answer to question No. (i), it is not necessary to answer question No. (ii) quoted above. As far as question No. (iii) is concerned, we answer the said question in the affirmative i.e., in favour of the assessee and against the Department. Subject to what stated above, appeal stands allowed. No order as to costs.
[Citation : 260 ITR 491]
