aar on property developing

8/3/2019 AAR on Property Developing

1/41

BEFORE THE AUTHORITY FOR ADVANCE RULINGS(INCOME TAX) NEW DELHI

==========

30th Day of August, 2007

P R E S E N T

HONBLE MR. JUSTICE P.V. REDDI (CHAIRMAN)

MR. A. SINHA (MEMBER)

A.A.R. NO. 724 OF 2006

Name & address of Mr. Jasbir Singh Sarkariathe applicant 1649, Woodland Avenue,

Edison,New Jersey 08820, USA

Commissioner concerned Commissioner of Income-tax-IIChandigarh.

Present for the applicant Mr. G.K. Jain, CA

Present for the department Mr. Raman Kant Garg,Joint Commissioner of Income-tax,Chandigarh

R U L I N G(Delivered by Honble Chairman)

Facts:

1. Broadly, the question that has to be answered in this case

turns on the year of chargeability of the income attributable 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

8.6.2005 with M/s. Santur Developers Pvt. Ltd., New Delhi. On

1


2/41

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

clause 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 clause 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 8.3.2006. In case of

failure to do so, the agreement shall stand terminated. (letter

2


3/41

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

developers 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

clause 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 clause 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.

3


4/41

(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 15.9.2005 between the applicant

and other co-owners on the one hand and M/s. Santur Developers

Pvt. Ltd.^ 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 8.3.2006. The time for payment of

installment money may be extended subject to payment of

interest/liquidated damages as per clauses 8 and 9. The last

installment of Rs. 10 crore was payable on or before 8 th

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

clause 10 it is provided that if the payment is not made within

the maximum period of extension, the owners shall be at

^M/s. Santur Developers Pvt. Ltd. is hereafter referred to as developer or transferee for the sake of

brevity.

4


5/41

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 alongwith 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 developers

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

owners land and hands over a part of the built up area to the

5


6/41

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 out-right 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 clause (v) of section 2(47) of the Income-tax

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 Commissioner

6


7/41

of Income-tax 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 8-6-2006onwards as per the supplementary agreement.

It is also contended that the last payment made by the

developer or completion of the building has no bearing on the

issue. As an alternative, it is submitted by the Commissioner 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 sec. 2(47)(v) takes place in the instant case on the

date of execution of agreement itself because under clause 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 andaccordingly subject to tax in the assessment year 2007-08 on grant of CLU (Change of Land Use) as detailed inthe letter dated 8.3.2006 (Annexure P-3)?

ii. Whether on the facts and in the circumstances of thecase, the capital gains accrue/arise to the applicant(assessee) during the financial year 2007-08 and

7


8/41

accordingly subject to tax in the assessment year 2008-09 on completion of construction and on receipt of finalpayment of installment when the share of the Developeris eligible for transfer as agreed vide CollaborationAgreement dated 8.6.2005?

iii. Whether on the facts and in the circumstances of thecase, the capital gains accrue/arise to the applicant(assessee) partly during the assessment year 2006-07,assessment year 2007-08 and the assessment year2008-09 respectively, on receipt of consideration amountin proportion to its payment by the Developer, who isallowed to carry out the development activity after grantof CLU and other required permissions?

[The 4th question opening with the words any otherquestion .. is too general and omnibus and neednot be referred to]

Relevant provisions of I.T.Act

Section 45

6. In order to decide the issue, the relevant provisions of the

Income-tax Act, 1961 (for short the Act) should be noticed. Section

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 theassessee/transferor

(d) such income shall be deemed to be the income of thesame previous year in which the transfer had takenplace.

8


9/41

6.1. 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 Income-tax 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.

7. The effect and ambit of the deeming provision contained in

Sec.45 has been considered in decided cases and leading text books.

The following statement of law in Sampath Iyengars Commentary (10th

Edition Revised by Shri S. Rajaratnam) brings out the correct legal

position :

Section 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.

9


10/41

.In the words of section 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.

7.1. This Authority in its ruling in the case of Anurag Jain, In re1

had taken the same view. After referring to sections 45, 48 and

54EB of the I.T Act, SSM 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,

none the less, 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

10


11/41

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 Ayyangar and Sons Ltd. vs CIT2, a

Division Bench of Madras High Court while construing section 12B

of the Income Tax Act, 1922 clarified the import of the expression

arise as follows :

Section 12B does not require that profits should have

been actually received. It is sufficient if they have arisen.

Throughout the Income-Tax 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 v. 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 Commissioner of Income-Tax v. Anamallais

timber Trust Ltd. To attract the operation of section 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.

1(2005) 277 ITR Page 1

11


12/41

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.

Section 2(47)

8. The other crucial provision is section 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

with effect from 1.4.1988. Two clauses were added to the inclusive

definition of transfer which pertain to transactions in immoveable

property. They are clauses (v) and (vi) which read as follows:

Transfer in relation to a capital asset, includes

(i) to (iv) : xx xxx xx 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 section

53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or

acquiring shares in, a cooperative society, company or other

association of persons 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.

237 ITR Page 26

12


13/41

The object and analysis of Sec. 2(47)(v)

8.1. The purpose of introducing clause (v) in conjunction with clause

(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 T.P.Act). A

long line of pronouncements under the Income-tax 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 section 2(47). A

13


14/41

reference to the CBDTs Circular No. 495 dated 22.8.87 provides an

insight into the background and objective of the said clauses :

11.1 The existing definition of the word transfer in section

2(47) does not include transfer of certain rights accruing to a

purchase, by way of becoming a member of or acquiring shares

in a co-operative society, company, or association of persons 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 theprivileges of ownership without transfer of title in the building

and are a common mode of acquiring flats particularly in multi-

storied construction 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 section 53A of the Transfer of Property Act, 1882. Now

sub-clause (v) and (vi) have been inserted in section 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-clause (vi) of section 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 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 clause (v) and it is this provision

that is invoked by both sides. In order to be transfer within the

14


15/41

meaning of clause (v), there must be a transaction under which the

possession of immoveable 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 section 53A of the Transfer of

Property Act. Section 53A is not a source by which title to immoveable

property could be acquired but it only serves as a shield to defend

ones lawful possession obtained pursuant to a contract for transfer of

immoveable property for consideration. The following passage from

the decision of Supreme Court in S. Govind Rao v.Devi Sahai3

highlights the requisite conditions for the applicability of section 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 andfrom which the terms necessary to constitute the transfer can be

ascertained with reasonable certainty. These are pre-requisites

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

3AIR 1982 SC 989

15


16/41

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 clause (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

installment 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 Clause (v) of Sec. 2(47) for determination 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 section 53-A

of the Transfer Property Act. The crucial question then arises at

16


17/41

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 section

2(47)(v). It is enough if the agreement/contract falling within the

description of Section 53-A 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 immoveable

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 clause (v), nothing would

have been easier than to say so in explicit terms and it is not at all

17


18/41

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 section 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 clause

(v) cannot be said to have occurred before that date. The date of

18


19/41

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 vs CIT4 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

Revenues stand that the date of execution of agreement should be the

relevant date of transfer under clause (v) was not accepted.

Meaning of possession and how should it be understood in the context of clause (v)

13. The next question is, in what sense we have to understand the

term possession in the context of clause (v) of section 2(47). Should

4 260 ITR 491

19


20/41

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

clause (v) of section 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 and Legal Remebrancer, W.B. vs Anil Kumar)5 and

as a word of open texture (see Salmond on Jurisprudence, Para 51,

Twelth 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 3 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:

5 (1979) 4 SCC 274

20


21/41

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 Ed., 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 Salmonds 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 some one 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 Salmonds 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

21


22/41

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.

1. Mediate and immediate possession coexist in respect of the

same thing as already explained.

2. Two or more persons may posses 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 clause (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 section

2(47) will have its full play even in such a situation. There is no

warrant to postpone the operation of clause (v) and the resultant

accrual of capital gain to a point of time when the concurrent

22


23/41

possession will become exclusive possession of developer/transferee

after he pays full consideration.

13.3. Further, if possession referred to in clause (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 installment 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 clause (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

over-looked. 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

23


24/41

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 clause (v) of section 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

24


25/41

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 clause (v) of sec. 2(47) took place in the

present case

14. In the light of the above discussion and interpretation placed

on Section 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-dated 15.9.2005.

14.1. Provisional licence (called as letter of intent by the

applicant) was issued by the Director of Town and Country

Planning, Haryana, on 8.3.2006. Final licence valid upto 25.5.2008

was issued on 26.5.2006. Irrevocable General Power of Attorney

was executed on 8.5.2006. An amount of Rs.30 crores was

received in five installments i.e. 8.3.2006, 8.6.2006, 8.9.2006,

8.12.2006 and 8.3.2007. This is apart from Rs. 2 crores received

earlier under Collaboration Agreement.

15. 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

25


26/41

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 pre-requisites within prescribed

time in order to quality 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 26.5.2006. 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.

26


27/41

15.1. 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

27


28/41

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

28


29/41

agreement. Such GPA was executed by the owners in favour of

the developer on 8.5.2006, 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 & 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-storied

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 developers 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 Suprahas been conferred on

29


30/41

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 pre-fix irrevocable is

deliberately chosen. As discussed earlier, the owners limited

right to enter the land and oversee the development work is not

incompatible with the developers 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 clause (v) of section 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

30


31/41

contract for transfer of the property in question. That transaction

took place in the financial year 2006-2007. 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 clause (v) of section 2(47) of

Income Tax Act took place during the financial year 2006-2007

corresponding to the assessment year 2007-2008 and the

entire capital gains including that attributable to the installment

amount remaining unpaid by 31.3.2007 has arisen during the

financial year 2006-2007 (assessment year 2007-2008).

Transaction & 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 Blacks Law dictionary (7th Edition), the

31


32/41

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 ManufacturersAssociation6, 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 Bros7.

6121 ITR 1

7 AIR 1955 SC 182

32


33/41

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.

Applicants 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

installment 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 clause (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 clause (v) and the argument is built up

on the strength of para 10 of the Supplemental Agreement. Para 10

33


34/41

(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 clause (v) of section 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

34


35/41

to the consequences mentioned in para 10 which is a clause meant

to ensure due payment of instalments. In so far 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

clause (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 clause (v). That expression which

reflects the language of later part of the second limb of Sec.53-A 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 clause (v)

of section 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

35


36/41

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.

17.1. For all these reasons, the contention of the authorized

representative of the applicant cannot be sustained.

One point of concern

18. 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 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

36


37/41

take possession only after the basic permissions are granted and is

satisfied about the ability of transferee/developer to fulfill the

contract. Inspite 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.

DRs 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 DR 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.

clause (v) of section 2(47); secondly the said stipulation in para 27

is merely a re-statement of the obvious - that the parties should

respect and abide by the agreement. It does not place the

37


38/41

agreement in the instant case on a higher footing than any other

agreement for transfer of immoveable 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:

1. 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

clause (v) of Section 2(47) of the Income-tax Act.

2. To attract clause (v) of section 2(47), it is not

necessary that the entire sale consideration upto the last

installment should be received by the owner.

3. 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 section 2(47)(v) must be

deemed to have taken place on the date of execution of such

38


39/41

39

GPA. The irrevocable GPA was executed on 8.5.2006 i.e.

during the previous year relevant to the assessment year

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.

4. Once it is held that the transaction of the nature

referred to in clause (v) of section 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 assessment year 2007-08. Consequentially, questions No. 2

and 3 are answered in the negative.

Accordingly, the ruling is given.

Sd/- Sd/-(A. SINHA) (P.V. REDDI)MEMBER CHAIRMAN


40/41

GPA. The irrevocable GPA was executed on 8.5.2006 i.e.

during the previous year relevant to the assessment year

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.

4. Once it is held that the transaction of the nature

referred to in clause (v) of section 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 assessment year 2007-08. Consequentially, questions No. 2

and 3 are answered in the negative.

Accordingly, the ruling is given.

Sd/- sd/-

(A. SINHA) (P.V. REDDI)MEMBER CHAIRMAN

F.No.AAR/724/2006 Dated: 06.09.2007

(A) This copy is certified to be a true copy of the advance ruling and is sent to:1. The Applicant.2. The Commissioner of Income-tax-II, Chandigarh.3. The Joint Secretary (FT&TR-II), M/Finance, CBDT, Bhikaji Cama Place, New Delhi.4. The Joint Secretary (FT&TR-II), M/Finance, CBDT, Bhikaji Cama Place, New Delhi.

5. The Guard file.(B) In view of the provisions contained in Section 245S of the Act, the ruling should not be given forpublication without obtaining prior permission of the Authority.

(Batsala Jha Yadav)Addl. Commissioner of Income-tax

40


41/41

aar on property developing

Documents