Transfer of immovable property - capital gains -

NEW DELHI, SEPT 24, 2007 : IN a highly interesting and eruditely interpretational ruling which may have serious implications for the bulk transfer of landed property for setting up Special Economic Zones across the country and the liability of capital gains on the transferors, the Authority for Advance Ruling has held that 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. 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. Brief facts of the case : 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 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. 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 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. 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. 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 8th June, 2007 subject to maximum extension of three months. Thus, the entire consideration should be paid within 27 months from the date of Collaboration agreement. Under clause 10 it is provided that if the payment is not made within the maximum period of extension, the owners shall be at liberty to terminate the collaboration agreement by giving 30 days' notice and thereupon it is incumbent on the developer to forthwith cease the development activity on the and 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 developer's 84 per cent share together with proportionate land and basement underneath. The GPA executed earlier in favour of the developer will become inoperative after the title gets transferred to the developer. In the last clause it is stated that all other terms and conditions of Collaboration Agreement not inconsistent with the provisions of the supplementary Agreement will continue to be binding on both parties. Now the question before the Authority 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. The contention of the applicant is 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. But the contention of the Commissioner of income-tax is that the capital gains arise during the year in which any of the following activities take place : (a) Obtaining permission for change of land use by the developers (b) Construction/ development of land (c) Receipt of payments by the applicant from 8.6.2006 onwards 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 DR 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 concelled by any party. On the basis of facts the Authority framed broadly three questions : Following revised questions were formulated by the applicant: a. Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2006-07 and accordingly subject to tax in the assessment year 2007-08 on grant of CLU (Change of Land Use) as detailed in the letter dated 8.3.2006 (Annexure P-3)? b. Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2007-08 and accordingly subject to tax in the assessment year 2008-09 on completion of construction and on receipt of final payment of installment when the share of the Developer is eligible for transfer as agreed vide Collaboration Agreement dated 8.6.2005? c. Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) partly during the assessment year 2006-07, assessment year 2007-08 and the assessment year 2008-09 respectively, on receipt of consideration amount in proportion to its payment by the Developer, who is allowed to carry out the development activity after grant of CLU and other required permissions? To answer these questions, the Authority observed that ++ the expression used in Sec 45 is 'arising' which is not to be equated with the expression 'received'. By a deeming provision, the profits or gains that have arisen would be treated as the income of the previous year in which the transfer took place. That means, the income on account of arisal of capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place; ++ The legal position emanating from various judicial pronouncements does not 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) which contains the definition of the term 'transfer' in relation to a capital asset 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; ++ 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. 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); ++ the agreement to transfer the entire right, title and interest of the owners for a consideration 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 what point of time the transaction allowing the taking of possession in part-performance of such contract had taken place? 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 is one good answer; ++ 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; ++ what does the word 'possession' mean in the context of 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". Much of the difficulty is caused by the fact that possession is not a pure legal concept, as pointed out by Salmond. The 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; ++ if 'possession' referred to in clause (v) is to be understood as exclusive possession of the transferee/develope r, 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; In the light of these observations the Authority held that 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 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. 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, it further held. Finally, it was ruled that the capital gains arise during the financial year 2006-07 and shall be subjected to tax for the assessment year 2007-08.