Source: http://aiftponline.org/journal/2015/january-2015/real-estate-development-agreements-stage-of-transfer-and-accrual-of-consideration/
Timestamp: 2019-04-25 06:54:30+00:00

Document:
It is in common practice that land owners enter into agreements with developers for development of the property. As per the agreement the developer constructs the building/flats on the land and the built-up-area is normally shared by the land owner and the developer. In certain cases developer may also make some cash payment to the land owner in addition to built-up-area, depending upon the sharing ratio of built-up-area and market value of the land. In such cases a dispute arises as to the stage at which the land owner is liable to pay capital gain pursuant to transfer of land rights and accrual of consideration. Normally the land owner claims that capital gain will arise at the stage when building is complete and the developer has handed over possession of built-up-area to the land owner. The department, however, contends that capital gain has arisen on entering into the agreement and handing over the possession of the land to the developer. An attempt is being made herein to discuss the legal position and relevant case laws relating to this controversial issue.
Venkataramiah v. CIT (1965) 57 ITR 185 (S.C.) It has, further been held by the Courts that date of registration of such document is not relevant for the purpose of transfer under Section 2(47) of the Act. Further, it has been repeatedly held by the courts that as regards transfer of immovable property date of sale deed is relevant, not the date of agreement to sell.
[Hall & Anderson (P) Ltd. v. CIT (1963) 4 ITR 790 (Cal.); CIT v. F.X. Periera & Sons (Travancore) (P.) Ltd. (1980) 184 ITR 461 (Ker.) and CIT v. Ghaziabad Engg. Co. Ltd. (2001) 116 Taxman 268 (Del.)].
In case of development agreements, there is no transfer of legal rights in the land from the owner to the developer at the stage of entering into the agreement. Accordingly, the development agreement does not confer any legal right to the developer and there is no registration of the agreement providing such rights to the developer. Development agreement can be regarded only as an agreement to sell. The rights in the property would pass on to the developer or to the future buyers in the land only at the stage when the building is constructed and proportionate constructed building is handed over to the land owner and necessary documents are executed by the land owner in favour of the developer or to the future buyers. Hence, there is no transfer at the stage of entering into the agreement with the developer of land rights from the land owner to the developer in terms of Transfer of Property Act.
CIT v. Dhir & Co. Colonisers (P.) Ltd.  288 ITR 561 and CIT v. Fair Deal Traders  327 ITR 34 (P&H), wherein the assessees were holding the land as stock-in-trade and they transferred the land pieces to the buyers and received the consideration. The buyers also constructed the property thereon. The documents, however, could not be registered in favour of the buyers because of restriction under Urban Land Ceiling Act. The Hon’ble Court held that the amounts received from the buyers were in the nature of business receipts and notwithstanding that documents were not registered, the land plots under reference could not be treated as stock-in-trade of the assessee. Thus it was held that the mere fact that sale deed had not been executed was not conclusive for holding that the amount received was only earnest money and not trading receipt.
Sardar Govindrao Mahadik and Anr. v. Devi Sahai and Ors. AIR 1982 SC 989, 1982(1) SCALE 191, (1982) 1 SCC 237,  2 SCR 186 has analysed the concept of part performance under section 53A of Transfer of Property Act and after analysing and referring to various case laws observed as under.
In view of above legal position, wherever the department claims it to be transfer under section 2(47) (v) of the Act, it has to satisfy the conditions of section 53A of TPA. Accordingly, it has been a point for discussion and decision by the Tribunal or the Courts in the light of facts of each case, whether conditions of section 53A of the TP Act have been fulfilled and consequentially there is a transfer under section 2(47)(v) of the IT Act notwithstanding that relevant documents have not yet been registered in favour of the developer or the buyer conferring legal rights in the property. Reference can be made to following decisions wherein the issue has come up before the Courts/Tribunal and has been decided in the light of facts of each case.
wherein the Hon’ble Court observed that the development agreement does not transfer the interest in the property to the developer in general law and therefore, section 2(47)(v) has been enacted and in such cases, even entering into such a contract could amount to transfer from the date of agreement itself. Further, it was observed that 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 the chargeability. In the facts of above case the assessee had entered into an agreement with the developer on 18-8-1994 to sell his share of immovable property for a consideration with a right to the developer to develop the property in accordance with the rules and regulations framed by the Government. For the purpose of obtaining necessary permission and approval a power of attorney was executed giving limited powers with the developers. The developer obtained permissions till the financial year ending 31-3-1996 and had also paid almost sale price except for the small amount. Bombay Municipal Corporation, however, issued a commencement certificate permitting construction only on 15-11-1996. Ultimately the power of attorney was executed on 12-3-1999. The assessee paid the tax on capital gain in A.Y. 1999-2000. The department contended that transfer had taken place during year ended 31-3-1996 relevant to A.Y. 1996-97 and accordingly, taxed the assessee in A.Y. 1996-97. The Hon’ble High Court after fully discussing the scope of clause (v) of section 2(47) of the Act and also laying down guidelines for applying the clause held on the facts that the transfer had not taken place in the year ended 31-3-1996 and accordingly, capital gain was not chargeable in A.Y. 1996-97.
In the case of Jasbir Singh Sarkaria reported in 294 ITR 196 (AAR) again scope and implication of clause (v) of section 2(47) of the Act had been analysed in order to decide whether giving of possession with GPA in favour of developer amounts to transfer to give rise to chargeability of capital gain. In the fact of above case initially agreement was entered into with developer for sharing of built-up area. Subsequently, supplementary agreement was executed to sell agreed share in built-up area also to developer for money consideration, payable in installments. In pursuant to above agreement GPA was executed to give total control to developer along with power to execute further agreements for sale of flats to buyers. AAR held that in view of the facts and terms of the agreement, there was transfer of capital asset and capital gain was payable in the year of execution of GPA, notwithstanding that some of the installments for the consideration were yet to be received. It is stated that by virtue of supplementary agreement this was a case of outright sale of land and not a case of development of property.
In the case of CIT v. Ashok Kapoor (HUF) (2007) 165 Taxman 569 (Del.) a question regarding transfer of rights in property and chargeability of capital gain had come up for consideration before the Hon’ble Delhi High Court. In the above case the Hon’ble High Court has taken a view that transfer has taken place at the time of entering into the agreement with the developer for the reason that as per the agreement the dealer had agreed to allocate 50% of share in the property to be built and the builder was allowed to sell the area comprised in the builder’s allocation. On the basis of clauses of the agreement the Hon’ble High Court had held that clause of agreement has all the elements of transfer at the stage of entering into the agreement and, therefore, there was inescapable conclusion that there was transfer of property by the owner to the developer.
considered by High Court of Karnataka the facts were that an agreement was entered into by the land owner with a development company on 30-6-1994. As per the agreement 92% of undivided share in the land was to be transferred to the developer and 8% was to be retained by the land owner. The developer has to handover 8% of built-up-area to the land owner along with consideration of Rs. 30 lakhs. Rs. 10 lakhs have been paid during the year. Subsequently the agreement was modified on 27-2-1996 and consideration was increased to Rs. 40 lakhs in cash and 8.5% of built-up-area. The developer had further made payment of Rs. 25 lakhs, aggregating to Rs. 35 lakhs out of Rs. 40 lakhs payable. The developer had to construct seven blocks of the property. He had put up foundation for all seven blocks. He has also constructed super structure of four blocks. At this juncture the said agreement was cancelled. Another builder was brought in to complete the construction. An agreement dated 8-1-2003 was executed along with earlier builder being a confirming party. The subsequent builder completed the project. Pursuant to notice u/s. 148 of the Act the land owner filed return for assessment year 2003-04 showing capital gain and contended that the possession of land was handed over at the time of entering into the agreement dated 8-1-2003. All the appellate authorities examining the facts held that possession of the land have been handed over pursuant to initial agreement dated 30-6-1994. Consideration had also been substantially received. Substantial work has also been done by the developer pursuant to above agreement. Consequently the transfer had taken place at that stage. The High Court also confirmed the holding of lower appellate authorities.
In the case of CIT v. Smt. Radha Bai, 272 ITR 264 (Del.), however, it was held that though possession had been given to the developer along with right to start the booking of various flats and to receive sale price etc. from prospective buyers but land owners/assessee continued to be the owner of the land till development and receipts were not in the nature of business income from joint business venture with developer.
CIT v. Sadia Sheikh Tax Appeal Nos. 11 & 12 of 2013 decided by the High Court of Mumbai on 2nd December, 2013 (2013) 87 CCH 059 AO found that assessee was liable to pay tax on income by way of short term capital gain. CIT(A) held that provisions of section 2(47)(v) were not applicable for A.Y. and thereby deleted addition made as short term capital gain. ITAT affirmed deletion. The High Court observed that CIT(A) and Tribunal, upon perusal of agreement, found that agreement only permitted development to be carried out by developer. Entire control over property was with assessee. Therefore, execution of agreement could not amount to transfer u/s 53A. CIT(A) and Tribunal based on factual material placed before it and upon interpretation of agreement had found that assessee was liable to pay capital gain in AY 2008-09, as there was no possession handed over to developer u/s. 53A of Transfer of Property Act in A.Y. 2003-04.
Income-tax Officer v. Finian Estates Developers (P.) Ltd.  23 taxmann.com 360 (Delhi – Trib.). In this case also after considering the facts and the legal position the Hon’ble Bench of the tribunal held that the right under the development agreement was merely a contingent right, depending on the grant of licence or approval, as provided for in the agreement. It was only from the date of grant of licence from the competent authority that the developer would actually be vested with the licence to develop the property. Prior to such development, all approvals were to be obtained from the competent authority and it was the responsibility of the developer to do so. It was only when the sanctioned plan and the approvals were obtained, that the developer could commence the development on the scheduled property. The necessary approvals/licence for development had not been shown to have been granted either to the assessee or the developer during the year. Since there was no approvals/licence, obviously, no development could have been carried out. Without these approvals/licence, it could not be said that any development rights came into existence at all. The contingent right under the agreement had not been established to have been fructified into a vested right. Therefore, Assessing Officer was not justified in holding that income had accrued to the assessee and the additions made by the Assessing Officer on this account were to be deleted.
Dilip Anand Vazirani v. ITO (2015) 113 DTR (Mum.) (Trib.) 26 judgment dated 14-11-2014. In the facts of the above case the assessee after entering into in MOUs on various dates finally entered into a development agreement on 25-9-2000 with the developer and between the periods 2000 to 2005 the assessee settled the matter with tenants and purchased tenancy rights from various tenants. In 2005 the assessee received the substantial payments from the developer and the possession was handed over. Finally, the assessee executed a sale deed on 19-5-2005 in favour of developer. The assessee offered tax on capital gain in A.Y. 2005-06 on the ground that substantial payment was received and possession was handed over. The department reopened the assessment for A.Y. 2001-02 and assessed the amount in that year on the ground that the letter of possession was dated 15-5-2000 and development agreement was dated 25-9-2000. The Hon’ble Bench of the Tribunal held that capital gain was not chargeable in A.Y. 2001-02 for the reason that surrounding circumstances show that developer did not start the work of development in A.Y. 2001-02. Though the assessee had given licence to the developer to enter into the property but the property was encumbered with tenancy rights of many persons and release of tenancy rights was completed in January, 2005. Further, the approval from Municipal Corporation also got delayed and the plans were revised subsequent to A.Y. 2000-01.
In view of above, it can be said that the issue has been decided by the courts taking into consideration facts of each case. Broadly it can be said that in the circumstances where pursuant to agreement possession has been given for the purpose of carrying out the development and the developer has also substantially done his part of obligation by way of carrying out the development and also by making payment of consideration substantially to the land owner, there would be transfer of land rights. In the cases where no substantial activity has been done by the developer and there is no effective payment of consideration by the developer to the land owner, there is no transfer of land rights at the stage of entering of the agreement.
In regard to the matter reference can also be made to clause (vi) of section 2(47) of the Act which provides that ‘transfer’ will include any transaction which has the effect of transferring or enabling the enjoyment of any immovable property. Above clause, however, is applicable in the cases of transfer by agreement or arrangement by becoming a member of society, company etc. where registration of documents is not required. Further, above clause read with Explanation and provisions of clause (d) of section 269UA of the Act excludes the transactions of sale, exchange or lease from its scope. Hence, above clause would not be applicable in case of arrangement/agreement between the land owner and developer, as it is a case of exchange of property rights. Further, in case of exchange of property asset should be in existence. In the case of arrangement between the land owner and the developer, property would come into existence later and not at the stage of entering into the agreement. Therefore, it cannot be said that exchange of the capital asset resulting in transfer in terms of section 2(47) of the Act has taken place at the time of entering into the agreement.
407 that full value of consideration has been used in the law for the reasons that law does not deal only with case of sale in which case consideration in money would be available. In the case of development agreement the land owner would transfer the land rights in exchange of built-up-area and, therefore, value of built-up-area which will be received by the land owner from the developer after completion of construction would be “full value of consideration”.
In the cases where as per the agreement land rights have been transferred and full consideration in money terms has been determined and received, there will be no difficulty and the amount of capital gain will be chargeable to tax at the stage of entering into the agreement and receipt of consideration on passing the possession. Since in most of the cases the consideration is not passed on in money terms and consideration is paid either partly or wholly in the form of built-up-area subsequently, both the issues i.e. the stage of accrual of consideration and determination of quantum of consideration are important.
CIT v. Shoorji Vallabhdas & Co.  46 ITR 144 (SC), CIT v. Birla Gwalior (P.) Ltd. 1973 CTR (SC) 349 :  89 ITR 266 (SC) , Morvi Industries Ltd. v. CIT 1974 CTR (SC) 149 :  82 ITR 835 (SC), Godhra Electricity Co. Ltd. v. CIT  139 CTR (SC) 564 :  225 ITR 746 (SC) , CIT v. Bokaro Steel Ltd.  151 CTR (SC) 276 :  236 ITR 315 (SC), CIT v. Modi Rubber Ltd.  148 CTR (Delhi) 448:  230 ITR 817 (Delhi), Devsons (P.) Ltd. v. CIT  241 CTR (Delhi) 344 :  48 DTR (Delhi) 137 :  329 ITR 483 (Delhi). On the basis of above legal principles about ‘accrual of income’ it would be required to be seen as to when the right to the income becomes vested in the land owner. It would also have to be examined as to whether the parties to the agreement have performed their part of the obligation contemplated in the agreement.
Asst. Commissioner of Income Tax v. Sri Ram Builders, (2013) (8) TMI 182 Hyderabad Bench of ITAT upheld the order of CIT(A) to the effect that sale consideration in respect of transfer of 40% of land rights was Rs. 6.30 crores worked out at Rs. 997 per sq. ft. towards 63,226 sq. ft. of buil-up area surrendered in the building constructed in favour of the land owner by the developer, which was 60% share in the said building constructed. The cost incurred by the builder in constructing the building was taken as the basis for arriving at the capital gains.
Though there is no dispute as regards the basis for determination of consideration in the cases of development agreements, the practical difficulty, however, arises in determination of capital gain at the stage of entering into the agreement basically of the reason of time gap between the date of agreement and when the property will be ready for giving possession to the land owner. The period of difference would be uncertain and practically it has been seen that many times because of various reasons it takes quite long time to develop the property and make the same available to the land owner in exchange of land rights. Many times because of dispute between the parties the project may have to be abandoned. More importantly, the land owner would have no resources for making payment of capital gain at the stage of entering into the agreement because at that stage he had not received any consideration from the developer in case agreement provides for sharing of built-up-area after the development of the property. Accordingly, it is almost impossible to determine the consideration at the stage of agreement in the cases of exchange of built up area.
In conclusion it can be stated that keeping in view above issues, transfer in the cases of development agreements would generally take place only at the stage when the property would be ready and built-up-area is actually made available to the land owner in exchange of land rights by him. The position, however, would very much depend on the terms of the agreement and intention of the parties and particularly, the quantum and manner in which the consideration has to be paid by the developer to the land owner. The agreements, in fact, can be drafted in both the ways which can be construed to mean that transfer has taken place at the first stage or the transfer has taken place only when structure is constructed and built-up-area is handed over to the land owner. It can also be reiterated that even future payment of consideration will not be a decisive factor to hold that there is no transfer at the stage of entering into the agreement. Accordingly, the issue is a controversial issue and will also remain to be controversial, subject however to the language of the agreement.
In the last it can also be added in regard to the matter that now provisions of section 50C of the Act are applicable in case of transfer of immovable properties. The above section provides that rates notified by the State Government for the purpose of stamp duty will be deemed to be consideration for the purpose of determination of capital gain on transfer of immoveable property in case actual consideration is less than the same. Since in the case of land development agreements there is a basic difficulty of determination of sale consideration, adoption of notified rate can be an option for the purpose of computation of capital gain. With a view to avoid litigation land owner can also take a view that transfer has taken place at the stage of entering into the agreement and capital gain calculated on the basis of notified rates can be offered for tax in the return of income filed for the year in which the agreement has taken place. In case this mode is adopted, though litigation with the department can probably be avoided but he will be paying tax out of his own funds, if money consideration is not sufficiently available in terms of the agreement and he will also be running the risk of circumstances in which the developer does not carry out his obligation and subsequently the agreement has to be cancelled. In that case it would be difficult for land owner to get the refund of tax already paid by him on the basis of the agreement.

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