The prime objective of any taxation provision is to levy tax on a chargeable incident. To this a reasonable collateral is generally added. Certain events which do not fall strictly in the fold of taxable events or are not in conformity with the real income theory are presumed as taxable incidents. So far so good! However when attempts are often made to use the tax provision to undo or erase certain self-conceived social (malpractices, the basic objective of taxation gets blurred, distorted and sometimes even lost. Naturally then unwanted results ensue. Quite soon thereafter the fallacies forced into the process assume arbitrary and undesirable dimensions. In the well-known absence of any accountability in the administrative system no collector is held responsible for the loss or damage caused to the taxpayers through his perverse acts. Say for example the pre-emptive right to purchase property by the Department. The chapter itself had to be withdrawn due to a series of properties acquired by the tax-collectors at untrue and absurd values to the detriment of the Government. All this happens irrespective of the colour or credo of the ruling dispensation at the relevant time. All rulers have the same propensity. With the efflux of time after elections and installation, the collector appointed by them functions while sitting on the lap of the rulers. Funds are of supreme importance in running the administration. So the urge is to go and collect with means and methods fair or foul. The law be as it may.
2. To curb the utilisation of black money in property transactions several provisions have been incorporated in the tax statute from time to time. Examples are Section 230A, Section 55(2), Chapter XXA, Chapter XXC, Section 50C, Section 50D, Section 285BA, Section 56(2)(vii) all to cite just a few. These provisions, during their tenure had only created bad blood and harassment to the taxpayer. They failed to subserve the avowed objects for which they were enacted. They simply created a plethora of litigation to taxpayers without subserving the purpose for which they were created.
3. Law making is a complex process. While it starts at the behest of the public yet sadly it is not made by the public for its own eventual use. And that is incontrovertibly so howsoever and how-so-much authorities may be tom-toming about the merits or efficacy of our democratic polity and its process. The draftsman begins the draft with the public objective in mind as understood by him. By the time the draft becomes the law many have played with the draft such as the so called ‘legal experts’, the ‘minister’ who had piloted the proposal, the legislators who have incorporated it, and of course the ever important bureaucrat who has cleverly tampered it. Admittedly each has his own interest at heart and has consequently to the extent possible, modulated the provision to serve his goal – the politician to please the public to the extent he could stretch, the bureaucrat to the extent he could use the new frame to promote his collection goals and so on. No wonder, therefore, that the law as made is a conundrum of possibilities and chances. At the stage of application of the law after it is made, the original objective with which the whole law making process started stands obfuscated. Thus even after creating the law the position is as it always was. And if the law is an exemption provision then ambiguity and prevarication with litigation is absolutely certain. Cumbersome compliance norms make the implementation arduous. The net result is generation of wasteful litigation. It is the height of frustration for a taxpayer when even after succeeding in the cumbersome litigation the law is retrospectively amended to undo the verdict handed over by the court in favour of the taxpayer.
4. A citizen can be asked to pay taxes for the causes as espoused by Justice Holmes. Ideally and equitably no law should force the citizen to litigate at his cost for securing his legitimate rights. Provision of justice to the citizen is the topmost proclamation of the Constitution. Yet, how much does the State actually strive to deliver the same to the citizen? The honest answer is hardly any! Rather it adds immensely to the taxpayers’ compliance cost by engaging him in ceaseless litigation, the mental agony and collection – harassments apart. He not only pays the tax, be it disputed or admitted, but also has to bear his litigation expenses. Even if he succeeds before the court, there is no way by which the litigation expenses would be defrayed. The fact that he was forced to litigate because of the assessors’ ignorance or intransigence or objectionable indulgence is of no avail. The State has its own standing machinery for litigation. Addition of a few cases to the pending list of cases hardly costs it anything. But to the taxpayer it definitely does. First, the payment to the Counsels for the appeals before the revenue and quasi-judicial authorities. Next, the payment to Counsel either as Appellants or Respondents for the High Court and the Supreme Court. Higher one goes greater gets the fees. Not only does the appellate procedure involve repetitive appearances of Counsels for procedural compliances even the arguments on merits involve incessant appearances for several imponderable reasons. All that adds up to a considerable outgo for the assessee by way of Counsel fees for the recouping of which there is just no chance.
5. Litigation in general and real estate tax litigation in particular has in the past produced popular decisions such as the ones in Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC); Mahmudabad Properties vs. CIT (1972) 85 ITR 500 (Cal), CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC); K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC); CIT vs. Sultan Brothers P. Ltd. (1983) 142 ITR 249 (Bom); CWT vs. Sheila Kaushish (1989) 180 ITR 362 (Del); C.B. Gautam vs. Union of India (1993) 199 ITR 530 (SC), CIT vs. Poddar Cement(1997) 226 ITR 625 (SC);
Shambhu Investment P. Ltd. vs. CIT (2003) 263 ITR 143 (SC); Chennai Properties, to name just a few relevant ones. While recapitulating the tax cases in the sphere of real estate, the one that comes to mind instantly is the Apex Court decision in Poddar Cement supra. That is for the reason that the Court effected a paradigm shift to gave a futuristic perspective for reading and applying the existing law. While emphasising that a person could be an owner of a property u/s. 22 of the Act if he is entitled to receive income from it in his own right the Court further pointed out that Parliament intends the court to apply to an ongoing Act a construction that continuously up-dates its wording so as to allow for changes since the Act was initially framed. The court added that while it remains law, it is to be treated as always speaking which meant that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law. The Court further added that in construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to apply at a future time in such a way as to give effect to the true intention and so accordingly the interpreter is to make allowances for any relevant changes that have occurred, since the Act’s passing, in law the social conditions in technology and the meaning of words etc. In this way the Court endowed both flexibility and muscle to the law in the context of the ever changing social conditions.
6. The real estate sector is a major component of any economy irrespective of whether ‘Housing for all by 2022’ is the proclamation by the ruler of the day or not. Housing understandably is a basic human need. A roof over one’s head is a rudimentary desire of anyone. Needless to add an affluent will certainly ensure one for himself. An indulgent affluent may even opt to earn rentals by risking to serve the dictum ‘the fools build houses for the wise to live’ and also to lose his sleep! Impetus in various forms and ways to construction coupled with regulations to maintain social balance and equity have been ushered and enforced from time-to-time. The success of those measures have been debatable.
7. Any attempt at promoting housing activity would invariably result in stoking the steel and cement sectors apart from simultaneously providing a developmental impetus for the several other sectors related to fitments, electricals, plumbing, etc. Construction activity is undisputedly a massive employment generator. Industrial impetus and economic acceleration is often sought to be secured by pushing up the activity in this sphere. Tax rewards by way of incentives and / or exemptions are announced from time-to-time for fulfilling these goals. Yet the prodding by the tax administrators, of the hapless participants in those schemes while in assessment, remind of the popular proverb ‘fools dare where angels dread’.
8. With the explosion in the population land availability remaining as it always was, the land use and ownership concepts have undergone a huge metamorphosis. This is not a universal phenomenon and special to our country. New relationships have emerged with the onset of this trend. In some principal metros this trend has been manifesting itself for over five decades or so. The problems and issues which have cropped up in the process provide a useful guide for reformation. Gone are the days when one could expect to acquire a tract of land and construct on it a house for himself. Today even small patches of land say as small as 150 sq. mt. have multi-storeyed apartments on them on stilts. Thus plots, be though small or big, development agreements have now become their concomitants.
9. In the old and developed metros many such buildings jointly owned are in a state of disarray and dilapidation having stood the vagaries of time and weather for over five decades or so. They need urgent fortification or a redo failing which the life of the occupants would be at risk. Realising the need to accommodate more units in the existing space as available, the State has liberalised the covered area norms in phases and continues to do so. Technological developments have induced competence in the capacity of utilisation of the skyward and vertical expansion thereby. Other facilities such as for gas, water supply, sewage disposal, gardens and security, sports and health care are sought to be managed and promoted through the joint and contributory efforts of the occupants. This concept of joint efforts for community convenience and usage and security is finding wide and ready acceptance in the newly emerging cities and habitats. To incentivise this development qua the Finance Act, 2016 the Government has after recognising the long standing demand, a special deduction in respect of profits and gains from housing projects in the form of Sec 80-IBA of the Act. The hassles associated with Sec 80-IB(10) are too well known to need any further elucidation. Will the proposed benefits u/s 80-IBA go the Section 80-IB(10)?
10. The current practice in many suburbs is to get land usage norm altered. Agricultural holdings are being allowed to be converted into township of various classes and kinds at several places. So, ordinarily it is an agriculturist, be it an individual/or family who holds sizable tracts of land, which is amenable to tracting, plotting and eventual development into a habitable complex. Such entity, for want of know-how or where-withal or commercial enterprise or even entrepreunerial attributes enter into a development agreement with builder with a view to setting up the project on the land owned by the agriculturist. The covenants of the agreement are of cardinal importance for they give rise to the first taxable incident. The nature and content of the several clauses in the agreement can make or mar the man and his venture.
11. It is natural for the contributor of land not only to be adequately compensated immediately but also to be assured of qualitative and quantitative returns in the future out of the venture as undertaken. If it is a case of an outright sale of land by the agriculturist to the builder the issues are simple. The agriculturist is to answer the capital gains impost depending on his past pursuits, intentions, land location and other related factors. He has the option to avail of the exemptions ingrained in Section 54 of the Act and parts thereof. It is another matter, whether his tax collector will instantly approve the claims of capital gains or not.
12. The point of taxability of the gain in the hands of the land-owner has been a source of constant irritation and deep agony for them. Any land-owner would naturally desire to receive the consideration for the transfer first and pay the tax thereafter. That does not usually happen. With the developer himself paying to the land-owner in phases which depend on the cycle of receipts, transfer of funds to the land-owner stands deferred. Then there is the clause in the development agreement which provides for the handing over of the possession at a particular time after obtaining the NOC approvals and sanctions whereafter only disbursements are scheduled. To top it all the mood of the tax administrator whose understanding of the terms of the agreement is so critical to the timing of tax incident. All these generally result in the land-owner being fixed for a liability for tax or an amount which may not have been received at the relevant point of time. It is in such circumstances that it becomes crucially necessary to word the terms and the development agreement in such a manner that the taxable incident in the hands of the land-owner is so devised and construed that it does not arise before the receipt of full sale consideration by him. In that lies the ingenuinuity of all who are involved.
13. In a joint development agreement amongst the stakeholders are the flat owners. They would have contracted with the developer for the development of a new property at the site on which their present property stands. The developer gains through the sale of flats on the additional area made available because of FAR relaxations. The flat owner gains by getting a new flat with better facilities in lieu of the ancient, leaking and dilapidated one which was handed-over as part of the deal. In such cases the flat owner would desire to vacate the old flat until the developer is in a position to start work on the new project and for so doing the flat owner would wish to provide the developer the minimum possible time. The developer also in certain situations would be interested to complete the construction as fast as possible so that his liability to house the flat owner in the interregnum period of construction is reduced to the minimum. What would be the point of time when transfer would have to be construed in such cases? For the flat owner the transfer gets effected to him at the point of time when the new flat is made available to him. For the tax collector, however, would choose the point of time when the old flat is handed-over because, in law, the granting of possession is a substantial compliance of the transfer provision. That becomes even worse if some security, refundable or otherwise, is provided to the flat owner by the developer. The collector would be gung-ho with such an arrangement available to him in writing. In such situations it is the expertise in the drafting of the agreement between the flat owner and the developer that would be of paramount importance.
14. There could also be a situation where the original owner of the land has effected a conversion of his investment into stock and trade. After so doing he may have signed the development agreement. With the land being the capital contribution of the land-owner would the transfer stand postponed to the time when the actual exchange of the built-up property takes place. Would it be a case where the contributor of the land and the developer are conjointly treated as an AOP? A proper answer would depend on the terms of the agreement apart from the intentions, conduct and incidents associated with the venture.
15. For a taxable incident to arise would it be necessary for the development agreement to be registered? Is it that if the registration of the development agreement is dispensed with, the Revenue Department would be precluded from imputing a transfer?
16. The Punjab & Haryana High Court in C.S. Atwal vs. CIT (2015) 378 ITR 244 (P&H) (Page 303) laid-down the following principles based on the several decided cases and the several principles of law contained in various texts. The principles are as under:
“1. Perusal of the IDA dated 25-2-2007 read with sale deeds dated 2-3-2007 and 25-4-2007 in respect of 3.08 acres and 4.62 acres respectively would reveal that the parties had agreed for pro-rata transfer of land.
2. No possession had been given by the transferor to the transferee of the entire land in part performance of JDA dated 25-2-2007 so as to fall within the domain of Section 53A of 1882 Act.
3. The possession delivered, if at all, was as a licensee for the development of the property and not in the capacity of a transferee.
4. Further Section 53A of 1882 Act, by incorporation, stood embodied in section 2(47)(v) of the Act and all the essential ingredients of Section 53A of 1882 Act were required to be fulfilled. In the absence of registration of JDA dated 25-2-2007 having been executed after 24-9-2001, the agreement does not fall under Section 53A of 1882 Act and consequently Section 2(47)(v) of the Act does not apply.
5. It was submitted by learned counsel for the assessee-appellant that whatever amount was received from the developer, capital gains tax has already been paid on that and sale deeds have also been executed. In view of cancellation of JDA dated 25-2-2007, no further amount has been received and no action thereon has been taken. It was urged that as and when any amount is received, capital gains tax shall be discharged thereon in accordance with law. In view of the aforesaid stand, while disposing of the appeals, we observe that the assessee appellants shall remain bound by their said stand.
6. The issue of exigibility to capital gains tax having been decided in favour of the assessee, the question of exemption under Section 54F of the Act would not survive any longer and has been rendered academic.
7. The Tribunal and the authorities below were not right in holding the assessee-appellant to be liable to capital gains tax in respect of remaining land measuring 13.5 acres for which no consideration had been received and which stood cancelled and incapable of performance at present due to various orders passed by the Supreme Court and the High Court in PILs. Therefore, the appeals are allowed.”
17. Section 2(47) of the Act amended in 1987 to provide for the part performance of a contract u/s. 53A of the T.P. Act to constitute a valid transfer. The Allahabad High Court in CIT vs. Rakesh Gupta (2011) 336 ITR 277 has held that though prior to the amendment in Section 2(47)(5) of the Act in 1987 the fact that transferor has taken possession of property so that there was part performance as per agreement would not be enough to hold that the transfer of immovable property had taken place of particular relevance is the decision of the Apex Court in Suraj Lamp & Inds. Pvt. Ltd. vs. State of Haryana (2011) 340 ITR 1 (SC) where it was held that though the registration would be a mandatory condition for transfer yet absence of the registration would not disturb the existing genuine details. The construing of a tax incident would much depend on the vagaries of the interpretation.
18. What would be the position of refundable security? What would be the position with regard to the reposing of an advance by the developer with the erstwhile owner? The decision of the Delhi High Court in CIT vs. Delhi Apartments Pvt. Ltd. (2013) 352 ITR 322 holds that the mere provision of an advance cannot result in a transfer
19. So far as the developer is concerned for him it is a business activity. The profits in his case would have to be computed on the basis of books of account maintained by him. The books of account ought to be in conformity with the accounting standards. Two methods of accounting are generally approved in this arena. The first one is percentage completion method and the other one is the completion method. A developer to ensure peace would opt for the latter. However, for the fact that the latter method is beneficial to the developer, the collector cannot impose his performance for the percentage completion method. Generally the controversy in the cases of builders is fuelled by the fact that during the period of the carryover of work-in-progress they would have allotted individual flats conveyed the possession on the purchasers. The Revenue Department would see a transfer in terms of Section 2(47)(4) of the Act in such cases. The builder would trust on a holistic view to be taken. It may be his valid contract. The property in the project would have to be construed at the point of time after the entire project accounts have been closed. As to who is correct would depend upon the interpretation of the agreement and the inter se conduct of the parties and the impact of several decided cases on this point. So it will be happy hunting ground for everybody with no holds barred.
20. There are catenae of cases on this point. Which case ratio satisfies a particular fact situation would depend on the interpretation of the agreement and the analysis of the facts. So each is according to its own. That being the situation no firm conclusions can be drawn from general instances. All one wishes for is that the compounded actions of different stakeholders would ensure that the declared objectives of the Government to provide housing for all by 2022 is fulfilled to everybody’s satisfaction and amicably and peacefully without creating legal hassles down the way.