1. What constitutes Transfer in Joint Development Agreement (JDA)?
Section 2(47) of the Act defines “Transfer” in relation to capital assets means sale, exchange or relinquishment of the assets etc.
Clause (v) of sub-section 47 of section 2 provides that 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 shall also be considered as transfer.
Conditions precedent u/s. 53A of the TP act to be fulfilled – to come within the ambit of section 2(47) (v) of the Act
i. There should be a contract for consideration.
ii. The contract should be in writing and signed by the transferor.
iii. It should pertain to transfer of immovable property.
iv. The transferee should have taken possession of property.
v. Transferee should be ready and willing to perform the contract.
vi. After amendment to Registration Act in 2001, the agreement has to be compulsorily registered.
2. No transfer u/s. 2(47)(v) r/w Sec 53 A of the TP Act if the JD agreement is not registered – as the conditions of section 53A not satisfied
• CIT vs Amrik Singh Basra (2017) 248 Taxman 180 (P&H)
• C. S. Atwal v. CIT; 378 ITR 244 (P & H).
• CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC)
• CIT v. G. Saroja (2008) 301 ITR 124 (Mad.)
3. Transfer takes place on parting with possession of land to developer
• Bertha T. Almeida v. ITO 2012 6 TaxCorp (A.T.) 26585 (Mum ‘B’ – Trib.)
• Krishna Kumar D. Shah (HUF) v. DCIT (2012) 53 SOT 557 (Hyd-Trib.)
• S. Ranjith Reddy v. DCIT (2013) 144 ITD 461 (Hyd ‘A’ Trib.)
• Chiranjeev Lal Khanna v. ITO (2011) 132 ITD (Mum-Trib.) 474; (2012) 144 TTJ 607 (Mum)
4. Development Agreement granted Irrevocable licence to developer to enter into possession of property and POA executed to deal with the property – held transfer
• Bombay HC in case of Chaturbhuj Dwarkadas Kapadia v. CIT (2003) 260 ITR 491 (Bom.)
• Followed by Karnataka HC in case of CIT & Ors. v. H.B. Jairaj 2016 TaxCorp (DT) 65830 (Kar-HC)
• G. Sreenivasan v. DCIT (2013) 140 ITD (Coch-Trib.) 235
5. Point of Time of Taxation of Capital Gains arising due to Land Development Agreement
JDA – effect of registration/Non-Registration u/s. 2(47) (v) of the Act.
The Apex Court in case of CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC) while construing a JDA in relation to land in which the possession was delivered held that
Prior to 2001 – if no registration of JDA but possession of property handed over under transaction – amounts to transfer.
After amendment 2001 – if no registration of JDA but possession is already given – no legal effect for purpose of section 53A – All the six conditions specified in 53A to be fulfilled for the JDA to have efficacy in the eyes of law – No Transfer and provision of section 2(47)(v) not applicable.
Contrary decision in case of D. Venkata Suryanarayana Raju v. ITO 2017 TaxPub (DT) 953 (Vishkha-Trib.), held that it could not be said that no transfer takes place only in absence of registration of agreement & hence STCG charged.
6. Other Cases
• When the DA of land itself did not survive and advance being received – not liable to tax as capital gains – CIT v. Bhatia Nagar Premises Co-op. Society Ltd. (2017) 246 Taxman 387 (Bom); Fardeen Khan v. ACIT (2015) ITR 487 (Mum-Trib.)
• Transfer is complete where DA was entered into and possession handed over – in such cases consideration mentioned in agreement for sale considered for purpose of assessment of income – Potla Nageswara Rao v. Dy. CIT (2014) 365 ITR 249 (AP-HC)
• No development rights in land transferred but advance money received – not taxable – CIT vs. DLF Commercial Project Corporation (2015) 66 (I) ITCL 300 (Del-HC)
• Relinquishment of rights in land upon entering into LDA – CG accrues – ITO v. N.S. Nagaraj (2015) 152 ITD 262 (Bang ‘A’- Trib.)
• Possession of land being conditional – i.e. till completion of formalities – not taxable as CG – ACIT v. Jawaharlal L. Agicha (2016) 161 ITD 429 ( Mum-Trib.)
• Land always in physical possession of owner and agreement cancelled later on – no transfer u/s. 2(47)(v) – Suresh Kumar D. Shah v. Dy. CIT (2016) 160 ITD 237 (Hyd ‘B’- Trib.)
• JDA for pro rata transfer of land and part of land not transferred – sec. 53A not attracted for part of land – hence no transfer u/s. 2(47)(v) – Punjabi Co-operative House Building Society v. CIT & Anr. (2016) 386 ITR 116 (Haryana-HC); ACIT v. Hardev Singh Arshi 2017 TaxPub (DT) 1266 (Chd-Trib.);
• Owner transferring share in land for receipt of share in superstructure – it was held that different capital gains depending upon period of holding – the CG on land was LTCG and Superstructure as STCG – The Statement Ltd. v. Asstt. CIT (2007) 295 ITR (AT) 388 (Kol-Trib.)
7. Compensation by developer in Slum Rehabilitation Project
Jawaharlal L Agicha, Mumbai v. DIT, in ITA No.1844/Mum/2012 dated 28-9-2016
Facts
• Owner agreed to enter into an agreement with developer (on stamp paper of ₹ 100) for carrying out slum rehabilitation project involving relocation of slum dwellers in a consideration in kind plus carrying out requisite development on its own cost or provide money to owner for construction.
• Clause in DA that Developer would be in a position to use land only after issuance of requisite permission from SRA.
• Advance money was received by the owner from developer.
Whether on entering of development agreement gives rise to transfer of impugned land?
It was held NO Transfer arises as NO SANCTION from SLUM REHABILITATION AUTHORITY and on basis of following:
a. No letter of intent has been issued by SRA, hence no question of transfer of land for development arises – relied upon decision of:
• Apex Court in case of Ramchandra Mahadev Jagpat & Others in SLP (civil) No.10281/2006
• ITAT Mumbai in case of ACIT v. Mrs. Geetadevi Pasari 104 TTJ 375 (Mum.)
b. Possession not handed over and it is one of essential element to be considered for ascertaining transfer of property – relied upon decision of Apex Court in case of Ajay Kumar Shah Jagati v. CIT 168 taxman 53.
c. The DA was not registered and hence 2(47) (v) r.w.s 53A does not give rise to valid transfer – relied upon C.S. Atwal v. CIT 378 ITR 244 (P&H HC).
d. The advance money received will be treated in accordance with the provisions of section 51 of Act.
8. Pune ITAT decisions in the context of Joint Development
A. Vilas Babanrao Rukari (HUF) v. ITO in ITA No. 1640/PUN/2014 dated 25-5-2018
Facts
• Owner converted the land held as capital asset to stock-in-trade
• Land owner entered into DA with the developer where possession was handed over for limited purpose for carrying out construction work
• Exclusive possession of the property in legal sense remained with the land owner which was finally handed over at the time of execution of sale deed of the constructed flats.
• Did not receive any consideration for handing over the possession of property to the developer, but had right to receive certain fixed share in amount of gross sales (Revenue Sharing).
The issues raised in the cross appeals are two-fold –
(a) Taxability of capital gains on conversion of land owned by the assessee into stock-in-trade, and
(b) Business profits to be assessed in the hands of assessee for exploitation of stock-in-trade.
Provisions of the Act
a. Conversion of capital asset to stock-in-trade is transfer as 2(47) (iv) becomes applicable.
b. However, sec 45(2) provides that the CG on conversion is chargeable to tax in PY in which stock-in-trade sold or otherwise transferred.
c. Further, the mode of computation of capital gains provides that the fair market value of the said asset on the date of conversion or treatment shall be deemed to be the full value of consideration received or accrued as a result of transfer of capital asset.
Issue
The dispute has arisen only to the year of taxability of such business profits.
a. The advances/ amount received accrues/ arises only in the year in which the flats were fully developed and handed over to the flat buyers
b. The year under appeal is the year when the assessee received advance which does not culminate in any completion of transaction and assessability of the amount as business profits in the hands of assessee. Accordingly, we hold so. The other aspect of the issue is that since the amount is not assessable to tax as his business profits in the year under consideration, the capital gains arising on conversion of capital asset into stock-in-trade is also not to be taxed in the hands of assessee in the year under consideration but in the year in which the business profits are to be taxed.
B. Ashok Gordhandas Kirpalani v. ITO in ITA No. 1647/PUN/2014 dated 27-5-2016
The Pune Bench of Tribunal held that contribution of land to AOP formed for joint development of property is not a transfer of capital asset under section 45(3) of the Act because it is not a case of transfer of land but joint pooling of resources by different parties and no parties were transferring any kind of interest/ right in the property. The agreement was not registered.
The land is not transferred to AOP. Therefore, interest free security deposits received against the contribution made by the land owner is not taxable as capital gain.
C. Ali Akbar Jafari v. DIT in ITA No. 1256 & 1257/PUN/2010 dated 26-2-2013
• Land owner in business of real estate and when an opportunity for development arises he develops the plots into housing project and commercial project.
• The plots and developments rights in the plots are reflected, under the head ‘current assets’ in his balance sheet.
• Land owner introduced land and the development rights held as stock-in-trade as a capital contribution to AOP (Joint Venture) & computed his profit on introduction of his stock-in-trade as his capital in the said AOP.
• The profit on introduction of development rights should be treated as business income.
The Tribunal held that the provisions of section 50C are not applicable with respect to sale of land as sale of land was not capital asset.
Section 45(3) of the IT Act, 1961, the profits and gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals in which he is or becomes a partner or member by way of capital contribution or otherwise shall be chargeable to tax as his income of the previous year in which such transfer takes place.
This section further provides that in such case, for the purpose of Section 48, the value of the capital asset recorded in the books of the partnership firm or the association of persons or the body of individuals shall be deemed to be the full value of consideration received or accruing as a result of such transfer.
Section 50C provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
D. Appasaheb Baburao Lonkar v. ITO in ITA No. 888/PUN/018 dated 2-1-2019
Disputed sale of property vis-à-vis non-receipt of full monetary consideration
The assessee pleaded that transfer could not be considered only on the basis of agreement registered because neither possession was transferred nor consideration was received in respect of the impugned land without considering the legal position that there was no transfer of land within the meaning of S.2(47)(v) and S.53A of the Transfer of Property Act.
The Tribunal held we find guidance from the ratio laid down by the Apex Court in CIT v. Balbir Singh Maini Civil Appeal No.15619 of 2017 that where the transaction has not materialised, then no profit or gain which arises from the alleged transfer of capital asset could be brought to tax under section 45 r.w.s. 48 of the Act.
Conclusion
On basis of various judicial decisions cited above it can be said that the question of whether there is transfer or not / capital gains accrues or not in JDA is always been a subject of litigation as there is no consensus between the point of view of A.O. and the assessee with respect to the various provisions of Act. However, the analysis of provisions is a subjective matter which depends upon the terms and conditions and various clauses in the Joint Development Agreement with respect to the title clause, Payment clause etc. Hence, crucial
care has to be taken in drafting of Joint Development Agreement so as to avoid/minimise litigations.
The Budget 2017, has provided ramping revolution in the taxability of JDAs putting an end to the ever existing disputes by introducing Section 45(5A) by Finance Act, 2017 effective from A.Y. 2018-19:
“With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.”
These amendments remove the considerable hardships faced by the assessee and are a welcome step which will improve the sentiments of the developers and land owners leading to increase in the supply of land to developers.
[Source: Article printed in the souvenir of NTC held on 10th & 11th May, 2019 at Pune]