B Mahender Reddy (Huf), Hyderabad vs Department Of Income Tax

2. The solitary issue arising out of the ground raised by the department is with regard to the finding of the Ld. CIT(A) that there being no transfer of capital asset by the assessee to the developer in terms of section 2(47)(v) read with section 53A of the Transfer of Property Act, 1882, capital gain will not arise in the impugned assessment year.

2 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

3. Briefly the facts relating to the issue in dispute are, the assessee is a HUF. On receiving information that assessee has received huge amounts and made deposits in his bank account during the relevant previous year whereas, it has not filed any return of income under section 139(1) of the Act, the A.O. initiated action under section 147 of the I.T. Act, 1961 by issuing a notice under section 148 of the Act on 06.03.2012. In response to the said notice, assessee on 17.05.2012 submitted its return of income declaring total income of Rs.97,280 including agricultural income of Rs.63,000. During the course of assessment proceedings, it was noticed by the A.O. that assessee was the owner of agricultural land admeasuring ac.8.28 gts. in survey No.185, Narsingpalli (v) of Rajendranagar (M) of Ranga Reddy District. It was further noticed that assessee had executed an unregistered development agreement -cum- General Power of Attorney on 28.04.2005 in favour of M/s. Sri Sai Venkateswara Estates, for developing the said piece of land owned by him. Subsequently, this unregistered development agreement was cancelled and assessee entered into a registered development agreement -cum- General Power of Attorney with M/s. Sri Sai Venkateswara Estates on 30.08.2006 for developing the said piece of land into a residential colony after obtaining necessary permission from the authorities. As per the terms of the said development agreement, assessee is to receive 43% of constructed area along with undivided share in land to that extent in exchange of the land given to the developer 3 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

under the development agreement. Further, the assessee entered into a supplementary development agreement on 19.10.2006 modifying certain terms of the registered development agreement by providing that the amount of Rs.51,10,000 received as advance by the assessee from the developer will be treated as non-returnable security deposit.

4. On finding the aforesaid facts, the A.O. called upon the assessee to explain why capital gain will not be charged since there is a transfer of capital asset. In response to the query raised by the A.O., it was submitted by the assessee that though the assessee has entered into a development agreement with the developer during the relevant previous year and has also handed-over possession of the land to the developer but there is no transfer of the asset within the meaning of section 2(47)(v) read with section 53A of the Transfer of Property Act. Due to various factors, the developer has not been able to undertake the development activity even though more than 5 years have lapsed. In sum and substance, it was submitted that as actually no development activity has started by the developer which indicates unwillingness of the developer to perform his part of the contract, neither there is any transfer in terms of section 2(47)(v) nor there is accrual of capital gain. In support of his contention, assessee relied upon the decision of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadi vs. CIT (2003) 260 ITR 491 (Bom.). The A.O. however did not 4 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

find merit in the submissions of the assessee. He observed that not only the assessee has entered into a registered development agreement with the developer during the relevant previous year but he has also handed- over possession of the property to the developer. He also noted that the developer has expressed its willingness to perform his part of contract by applying for permission before the competent authority and in fact, has also paid an amount of Rs.51,10,000 to the assessee towards part- performance of the contract. Thus A.O. relying upon the decision of ITAT, Hyderabad Bench in the case of Krishnakumar D. Shah (HUF) and others vs. DCIT in ITA.No. 1164 to 1167/Hyd/2010 dated 12.07.2012 opined that as all the ingredients of section 2(47)(v) read with section 53A of Transfer of Property Act has been fulfilled, there is a transfer of capital asset during the year under consideration giving rise to capital gain. Accordingly, he proceeded to compute the capital gain which was determined at Rs.4,59,92,944.

5. Being aggrieved of the action of the A.O. in charging capital gain, assessee preferred appeal before the Ld. CIT(A). In course of hearing of appeal, the assessee reiterating what was stated before the A.O. submitted that since the developer failed to even obtain the sanction till 2013, it cannot be said that there is a transfer of asset within the meaning of section 2(47)(v). In support of its contention, assessee relied upon few decisions of the ITAT. The Ld. CIT(A) after considering the submissions of 5 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

the assessee in the light of decisions cited before him, concluded that since till 2013 no development activity has started, it indicates unwillingness on the part of the developer to perform his part of the contract. He was of the view that though the development agreement was entered into and possession of land was given in the year 2006, but the willingness of the developer to carry on development in terms of development agreement has not been taken-up for more than 7 years. Therefore, the transaction will not fall within the scope of section 53A of the Transfer of Property Act. Accordingly, he held that the capital gain will not accrue in the impugned assessment year and thereby, deleted the addition of Rs.4.59 crores being made by the A.O. as long term capital gain.

6. The learned D.R. submitted before us that there is no dispute to the fact that assessee during the relevant previous year has entered into a development agreement with the developer and has also handed-over possession of the land to the developer. It was submitted, assessee has also received an amount of Rs.51,10,000 as non-refundable security deposit from the developer. It is also a fact that the developer has applied for sanction of the plan to start the development activity but it could not be started as sanction was not given by the competent authority due to some difficulties beyond the control of the developer. However, that will not lead to the conclusion that the developer was unwilling to perform his part of the contract in terms of section 53A of the 6 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

Transfer of Property Act. The learned D.R. further submitted that since there is nothing on record to suggest that the developer has expressed his unwillingness to go ahead with the development work, assessee's claim to that effect cannot be accepted. He submitted that since the conditions of section 2(47)(v) read with section 53A of the Act are fulfilled, the capital gain is chargeable to tax for the impugned assessment year. For such proposition, he relied upon the decision of the Hon'ble A.P. High Court in the case of Potla Nageswara Rao vs. DCIT 365 ITR 249 and decision of ITAT, Hyderabad Bench in the case of Krishna Kumar D. Shah (HUF) and others vs. DCIT in ITA.No. 1164 to 1167/Hyd/2010 dated 12.07.2012.

7. The learned A.R. more or less reiterating the submissions made before the departmental authorities submitted that till the date of assessment order, permission could not be obtained by the developer from the competent authority for construction activities. It was submitted that only on 28.03.2014 the plan was approved by the competent authority and building permission was granted. Only thereafter, in the F.Y. 2014-2015, the developer started construction work and the assessee could enter into agreement with some prospective buyers to sell its share in the built-up area. Thus, it was submitted that assessee is contemplating to show the capital gain in A.Y. 2014-2015 and keeping that in view, has paid first installment of advance tax. Thus, in sum and substance, it was submitted by the assessee that 7 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

since there was unwillingness on the part of the developer to perform his part of the contract during the impugned assessment year and as no development activity has taken place, neither there is any transfer of capital asset during the year under consideration nor capital gain will accrue. For such proposition, he relied upon the following decisions.

(1) M/s. Binjusaria Properties P. Ltd., Hyderabad vs. ACIT, Hyderabad ITA.No.157/Hyd/2011 dt.04.04.2014.

(2) ACIT vs. Mr. R. Srinivasa Rao & others, Hyderabad ITA.No.1786/Hyd/2012 dated 28.08.2014

(3) ITO, Hyderabad vs. Mr. Sham Kumar, Hyderabad ITA.No.1604/Hyd/2014 dated 20.03.2015.

8. We have considered the submissions of the parties, perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by the parties. The issue to be decided in the present appeal, precisely is, whether there is transfer of land by assessee to the developer in terms of section 2(47)(v) read with section 53A of the Transfer of Property Act, giving rise to capital gain in the impugned assessment year. There is no dispute to the fact that during the relevant previous year i.e., on 30.08.2006, the assessee had entered into a registered development agreement -cum- General Power of Attorney with M/s. Sri Sai Venkateswara Estates and has also in terms with the development agreement 8 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

handed-over possession of the land to the developer to start the development activity. It is also a fact that assessee has received an amount of Rs.51,10,000 from the developer as non-refundable security deposit in terms with the development agreement. Keeping in view the aforesaid facts, let us examine the relevant statutory provision. The term 'transfer' is defined under section 2(47) of the Act. As per clause (v) of the said provision, any transaction involving allowing of 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, is to be treated as transfer. Thus, section 2(47)(v) has to be read in consonance with section 53A of the Transfer of Property Act. A careful analysis of section 53A of the Transfer of Property Act, would indicate that to constitute a 'transfer' under the said provision, the following three situations must exist.

(i) There must be a written contract between the transferor and the transferee from the terms of which, the fact of transfer can be ascertained with reasonable certainty.

(ii) In part-performance of the contract, the transferee has taken possession of the property or any part thereof.

(iii) The transferee has performed or is willing to perform his part of the contract.

8.1. As far as the first two conditions of section 53A of the Transfer of Property Act is concerned, there is 9 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

no doubt that in the facts of the present case they stand satisfied. The only dispute remains with regard to satisfaction of the third condition i.e., willingness of the developer to perform his part of the contract. As can be seen the registered development agreement -cum- General Power of Attorney was executed on 30.06.2008 between the assessee and developer. It is also evident that after taking possession of the property, the developer not only took immediate steps to implement the project by preparing building plan/lay out, but, as per assessee's own admission, made an application before the competent authority in 2008 seeking building permission. However, the delay in obtaining building permission was firstly because the land was under the growth corridor which required specific clearance from the authorities concerned and secondly, because it was found from the Government order issued on 06.06.2005 that part of the land is treated as Government land. Due to these exigencies necessary permission could not be obtained for starting the development activity. From the aforesaid facts, it is very much clear that the delay in development of project is not due to either any unwillingness or default on the part of the developer to undertake the development activity but because of extraneous circumstances beyond his control which resulted in delay in obtaining the approval from the competent authority. In fact, the assessee has not brought a single piece of evidence on record to demonstrate that at any point of time the developer has expressed his unwillingness to perform his 10 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

part of the contract of undertaking the development activity.

8.2. As can be seen, as per clause 5(1) of registered development agreement, the developer has to complete the development work within 30 months from the date of provisional sanction granted by HUDA. Thus, the commencement of development work is inextricably linked with the sanction of HUDA. Therefore, unless sanction was granted by the competent authority, the developer could not have started the development work. It is evident from record the developer was ready and willing to implement the project as he has applied for building permission/sanction of plan in the year 2008 itself. However, as sanction was not granted, developer could not start the development work. From these facts, it is clear that the delay in starting the development work is not due to unwillingness of the developer to perform his part of the contract. If the assessee's claim that delay was due to unwillingness of developer is accepted, then, there is no reason or logic why assessee should have continued with the development agreement instead of taking step to cancel the same for breach of contract by the developer. Therefore, assessee's conduct itself shows that delay in implementing the project cannot be attributed to the developer. Moreover, the fact that the developer was very much interested and willing to develop the project is evident from the fact that after necessary sanction/approval was granted by the competent 11 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

authority on 28.03.2014 it has started the development work immediately. Under these circumstances, it cannot be said that the conditions of section 2(47)(v) of the I.T. Act read with section 53A of the Transfer of Property Act are not satisfied due to unwillingness on the part of the developer to perform his part of the contract. The Hon'ble A.P. High Court in the case of Potla Nageswara Rao vs. DCIT (2014) 365 ITR 249 (A.P) while interpreting the provisions of section 2(47) of the I.T. Act as well as section 53A of the Transfer of Property Act held that transfer in terms with section 2(47)(v) read with section 53A of the Transfer of Property Act takes place in the assessment year in which the development agreement is entered into and possession is delivered. The observation of the Hon'ble jurisdictional High Court is extracted hereunder for convenience.

"Therefore, we are of the view, while upholding the learned Tribunal's application of law on this fact, that payment of consideration on the date of agreement of sale is not required, it may be deferred for future date.

The element of factual possession and agreement are contemplated as transfer within the meaning of the aforesaid section. When the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. Here, factually it was found that both the aforesaid aspects took place in the previous year relevant to the assessment year 2003-04. Hence, the learned Tribunal has rightly held that the appellant is liable to pay tax on the capital 12 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

gain for the assessment year. Accordingly, we do not find any element of law to admit this appeal."

8.3. Therefore, applying the principle laid down by the jurisdictional High Court as aforesaid and also keeping in view the fact that there is nothing on record to prove that the developer was unwilling to perform his part of the contract as provided under section 53A of the Transfer of Property Act, we are of the view that there is a transfer of capital asset in the impugned assessment year as envisaged under section 2(47)(v) of the Act resulting in capital gain. In our view, Ld. CIT(A) fell into error in not appreciating the aforesaid facts. As far as the decisions relied upon by the learned A.R. are concerned, on careful analysis of the same, we are of the view that they do not apply to the facts of the present case as in those cases the unwillingness of the developer to perform his part of the contract was proved by the concerned assessees by bringing evidence on record. Whereas, in the facts of the present case, the assessee has failed to do so. On the contrary, the material on record demonstrates that developer was all along willing to perform his part of the contract. For the aforecited reasons, while agreeing with the view of the A.O. to the effect that there is a transfer of land by assessee to developer giving rise to capital gain in the impugned assessment year, we set aside the finding of the Ld. CIT(A) on this issue. However, it is seen that the Ld. CIT(A) in para 6.2 of the order, has also recorded certain findings disapproving the adoption of fair market value and computation of capital gain by the Assessing 13 ITA.No.1567/Hyd/2014 Mr. B. Mahender Reddy (HUF), Hyderabad.

Officer. Similarly, Ld. CIT(A) in paras 9 and 9.1. of his order, has observed that the assessee would be eligible to claim deduction under section 54F or 54 of the I.T. Act. These findings of the Ld. CIT(A) have not been challenged before us by the department. Keeping that in view we direct, while computing capital gain the A.O. should look into the observations made by the Ld. CIT(A) with regard to adoption of fair market value and indexed cost of acquisition. He should also decide the issue relating to deduction under section 54 or 54F in accordance with law. Needless to say, A.O. must give fair and reasonable opportunity of being heard to the assessee.

9. In the result, appeal of the department is allowed for statistical purposes.

Order pronounced in the open Court on 26.06.2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated 26th June, 2015 VBP/- Copy to :

1. The Income Tax Officer, Ward-4(3), 5th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.

2. Mr. B. Mahender Reddy (HUF), F.No.203, Challa's Crizenta Panchavati Colony, Manikonda, Hyderabad-89.

3. CIT(A)-V, Hyderabad.

4. CIT-IV, Hyderabad

5. D.R. ITAT 'B' Bench, Hyderabad.

6. Guard File