Sudha Giri, Hyderabad vs Assessee

This is an assessee's appeal against the order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad dated 22-08-2014. Assessee has raised as many as 8 grounds on the issue of reopening u/s. 148 of the Income Tax Act [Act] and also bringing to tax the capital gains on the reason that transfer has occurred during the year.

2. Briefly stated, assessee was owner of 4,986 Sq. Yds., of land at Road No. 14, Banjara Hills, Hyderabad. Assessee entered into a development agreement dt. 11-02-2004 with M/s. Kavuri Hills Developers Pvt. Ltd for construction of a residential complex on this land under which assessee was entitled to 50% of the constructed area.

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Assessee filed return of income for the impugned assessment year. Assessing Officer (AO) noticing that the agreement was entered into on 11-02-2014 but physical possession of the property was handed over on 07-12-2004, invoking the provisions u/s. 147, issued a notice u/s. 148. Assessee contended that no capital gain accrued during the year, as assessee was not having complete possession of the property. It was submitted that the assessee was not liable to pay capital gains on the transaction arising out of the development agreement since the transaction did not fall within the scope of transfer u/s 2(47), that no rights were given to the developer' under the development agreement dated 11-02-2004 till the municipal permission was granted, that in any event, the developer did not adhere to the terms of the agreement, that neither the details of the built up area falling to the share of the assessee was identified and determined under the development agreement dated 11-02-2004 nor was any consideration received by the assessee, that delivery of the existing structures to the developer was to be made after municipal sanction which was obtained on 30-06-2006 and that the developer had not been given any exclusive rights of execution of agreements of sale which had been retained by the assessee. Municipal approvals for the building plans were granted on 03-06-2006 and a registered development agreement was entered on 03-11-2007. It was contended if at all capital gain arises, that should be in AY. 2008-09 not in AY. 2005-06. It was contended that Assessee admitted capital gains in AYs. 2010-11 to 2012-13. The Assessing Officer relied on the terms and conditions of the development agreement dated 03-11-2007 and concluded that the developer had been given exclusive right to develop the property, that the assessee had handed over possession of the property to commence, carry on and complete development work, that the provisions of sec.2(47)(v) of the Income Tax Act r.w.s. 53A of the Transfer of Property Act were applicable to the transaction in question I.T.A. No. 1578/Hyd/2014 :- 3 -: Smt. Sudha Giri

and that the capital gains arising on transfer of the assessee's share of land to the developer was liable to tax in the AY 2005-06. The Assessing Officer held that the assessee had vacated and delivered the property to the developer on 07-12-2004 as per para 4 (page 6) of the development agreement dated 03-11-2007. The Assessing Officer also held that the power of attorney granted to the developer conveyed a bundle of possessor rights to the developer simultaneously and on the other hand, the developer's gesture of development work was evidence of its willingness to perform his part of the contract. The Assessing Officer concluded that transfer in terms of Section 2(47)(v) had taken place during the AY 2005-06 and brought the capital gains to tax. AO thus holding that assessee has handed over possession of the property on 07- 12-2004 brought the capital gains on the basis of the deemed sale consideration calculated on construction cost of Rs. 3,070/-, arrived at the sale consideration at Rs. 9,33,09,580/- deducting the cost of land foregone and the old building. The acquisition cost was arrived at Rs. 7,79,160/- and cost of building at one Lakh. The net capital gains were determined at Rs. 9,25,30,420/-.

3. Before the Ld.CIT(A) it was contended that there was no transfer of property as per Section 2(47) under Clause-5 and Clause-3(b) of the development agreement dt. 11-02-2004. It was further submitted that the property was subject to urban land ceiling and there is no proper demarcation / identification of assessee's share of the constructed area. It was further submitted that the municipal approval was obtained on 30-06-2006. Hence, possession of the property would be deemed to have been handed over to the developer only after obtaining the permission from GHMC i.e., after 30-06-2006 (AY. 2007-08). It was also submitted that the developer had not undertaken any construction activity during the AY. 2005-06 in part-performance of the development I.T.A. No. 1578/Hyd/2014 :- 4 -: Smt. Sudha Giri

agreement nor had any consideration being paid. It was contended that only actual performance of the transfer is obligation which would give rise to a situation envisaged in Section 53A of the TP Act. Assessee relied on the following decisions:

i. Sri K. Gopal Raj Vs. DCIT (ITA No. 140/Hyd/2012); and ii. Binjusaria Properties P. Ltd., Vs. ACIT (ITA No.157/Hyd/2011)

It was further submitted before the CIT(A) that in development agreement dt. 11-02-2004 (referred as first agreement), there was no handing over of possession to the developer but only permission to demolish the existing building thereon. Referring to the development agreement dt. 03-11-2007 (second agreement), it was submitted that possession if any, can only be considered after the second agreement but not before. It was contended that as per Clause-5 of the first agreement, assessee agreed to deliver the property to the developer after the MCH approvals.

4. Ld.CIT(A) however, did not agree with assessee's contentions. Even though the first agreement refers to delivery after MCH approvals the second agreement particularly Clause-6 specifically states that the payment of tax related to the property with handing over of property and Clause-5 records that all outstanding dues upto 07-12-2004 has been paid by assessee and possession was handed over on 07-12-2004. Therefore, it was held that possession was handed over on 07-12-2004 i.e., in AY. 2005-06. With reference to the argument that no consideration has been paid, Ld.CIT(A) relied on the jurisdictional High Court decision in the case of Potla Nageswara Rao Vs. DCIT in ITTA No. 245/14 dt. 09-04-2014 [365 ITR 249 (AP)]. With reference to the contention that developer had not undertaken any construction activity I.T.A. No. 1578/Hyd/2014 :- 5 -: Smt. Sudha Giri

in part performance of the agreement, Ld.CIT(A) relied on the decision of the ITAT in the case of Cheedi Srinivas in ITA No. 1651 & 1652/2012 dt. 31-07-2014 held that though the municipal approval had been granted in the subsequent year, the developer had applied for GHMC approval and other ancillary activities in the assessment year. Because there is no construction work during the year, it could not be said that there was absence of willingness on the part of the developer in commencing development activities. Relying on page 4 of the second agreement, it was considered as under:

"6.6 Page 4 of the Second Agreement states as follows:

"Whereas both the parties after negotiations arrived at certain terms and conditions in pursuance of which the developer has extended full co- operation to get the surplus land of 1041.63 sq. meters out of the land mentioned in Schedule-J exempted under Urban Land Ceiling Act by the government vide G.O.Ms. No. 103, dtd.17.01.2005 and to get 'NOC' from the government vide Proc. No. 11/1276/2004, dtd.14.07.2005, the cost & expenses of which shall be borne by the 'The Owner', in preparation of building plans in consultation with 'The Owner', from reputed architects and in getting building permission from the competent authority, all part of developmental cost of the project and shall be borne by the 'Developer'. "

6.7 The averment in the second agreement shows that contrary to the assessee's claim, the developer did undertake activities for the development of the property and specifically for the exclusion of part of the land from the purview of the UCLA during the FY 2004-05 which culminated in the issue of GO Ms No. 103 dated 17.1.2005. Indeed, the clause as quoted above, acknowledges the 'full cooperation' of the developer, contrary to the claim, made during the appellate proceedings, of the unwillingness of the developer to perform his part of the contract".

5. Ultimately, Ld.CIT(A) concluded against assessee by holding as under in para 6.9, 6.10 and 6.11:

"6.9 It is possible that there were time-overruns during the construction of the project. This can hardly be construed as evidence of the unwillingness of the developer to perform as per the agreement. Clause 8 of the First Agreement and Clause 7 of the Second Agreement I.T.A. No. 1578/Hyd/2014 :- 6 -: Smt. Sudha Giri

provide that in case of delay on the part of the developer to complete the project within the specified period, the assessee had the right to entrust the completion of the project to any other builder. Thus, the Agreements themselves envisaged time-delays since it is not an unusual problem in this line of business and cannot be interpreted as an unwillingness on the part of the developer to perform as per the contract. Indeed, the fact that the assessee chose not to exercise her right under the Agreements to entrust the work to another builder is significant and indicative of her confidence in the developer to complete the project.

6.10 The AR has also submitted that the assessee had offered the capital gains to tax in the AYs 2010-11, 2011-12 and 2012-13. These are apparently the years when the assessee sold the constructed area received by her from the developer. In case of a development agreement, as undertaken by the assessee, the capital gains typically arises from two transactions: firstly, on transfer of land to the developer in lieu of the constructed area and secondly, on sale of the constructed area (along with undivided share in the land). The capital gains disclosed by the assessee in the AYs 2010-11, 2011-12 and 2012-13 pertain to the second transaction, i.e sale of the constructed area (along with undivided share in the land). The assessee has failed to admit the capital gains from the first transaction of transfer of land to the developer. This has rightly been brought to tax by the Assessing Officer in the order appealed against.

6.11 The assessment of capital gains on transfer of land to the developer in accordance with sec.2(47) is, therefore, upheld".

6. Contesting the above, assessee is aggrieved and raised the following grounds:

"1. The order of the Ld. CIT(A)-IV, Hyderabad is erroneous both on facts and in law in dismissing the appeal filed by the assessee.

2. The Ld. CIT(A) ought to have appreciated the fact that the AO erred in reopening the assessment by issue of notice us 148 without there being any new material on record.

3. The Ld. CIT(A) ought to have appreciated the fact that the A.O erred in not passing the speaking order for the assessment year 2005-06 u/s. 147 of the Act.

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4. The Ld. CIT(A) ought to have appreciated the fact that the AO erred in reopening the assessment beyond 4 years which is void ab initio.

5. The Ld. CIT(A) erred in upholding the view of the AO regarding the year of transfer of property.

6. The Ld. CIT(A) ought to have appreciated the fact that the case of the assessee does not fall under the definition of 'Transfer' as defined in section 2(47) of the Act.

7. Without prejudice to the above, we would like to submit that the AO erred in taking the valuation of the super structure as given by the builder without considering the information submitted by the assessee.

8. The Ld. CIT(A) ought to have allowed claim of assessee made u/s. 54 of the Act.

9. The assessee may add, alter or modify or substitute any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal".

7. Before us, Ld. Counsel did not press the grounds from 2 to 4, as the same did not arise out of the order of the CIT(A), in fact assessee did not challenge the reopening of assessment before the Ld.CIT(A). No arguments were placed before us with reference to above additional grounds. Therefore, we deem them as not pressed and are treated as 'withdrawn'.

8. Ground Nos. 5 & 6 are with reference to year of taxability of capital gains based on the definition of transfer as defined in Section 2(47) and Ground No. 7 is without prejudice to the above grounds, it was the contention that AO erred in taking the valuation of the super structure at market value, as against the information given by the builder. Further, Ground No.8 pertains to deduction u/s. 54 of the Act, in case the capital gains are leviable in the year under consideration. .

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9. Ld. Counsel reiterated the same submissions made before the CIT(A) that capital gains cannot be taxed in the impugned year. He referred to the first agreement, the second agreement and the submissions made before the CIT(A) and drew our attention to specific clauses of the agreements to submit that the possession was handed over to the developer only after urban land ceiling clearance certificate and further sanction of municipal permissions which came in later assessment year. He also pointed out that AO relied on first agreement which does not pertain to the impugned assessment year but AY. 2004-

05. Therefore, looking at either way, capital gains cannot be taxed in the impugned assessment year.

10. Ld. DR however, defended the action of AO and CIT(A) to submit that assessee having given possession in the year under consideration capital gains is correctly levied in the impugned assessment year.

11. We have considered the rival contentions and perused the paper book placed on record and the orders. There is no dispute with reference to the fact that the first agreement was dt. 11-02-2014 in which assessee was entitled to 50% of the constructed area. In case, the possession was given as per the contention of Revenue consequent to this agreement, certainly the capital gains was leviable in AY. 2004-05 itself, as the agreement entered has been fulfilled by giving possession if not immediately but after some time. Therefore, following the principles of jurisdictional High Court in the case of Potla Nageswara Rao Vs. DCIT [365 ITR 249 (AP)], which Ld.CIT(A) relied upon, the capital gains is certainly attracted on entering into development agreement, even if consideration was not received. In that way, assessee's contention that capital gains cannot be brought to tax in this assessment year( AY 2005-

06) is valid.

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12. However, the matter does not end there. The only reason for the Revenue to bring the capital gains to tax in the impugned year is on the decision/observation that physical possession of property was handed over by assessee to the developer on 07-12-2004, for which the development agreement dt. 03-11-07 was relied upon by the AO and CIT(A). As extracted by the Ld.CIT(A) in para 6.1, the clauses of the development agreement are very clear. What the assessee has handed over is not the scheduled property, as the property is subject to urban land ceiling clearance which admittedly came in a later year. Assessee also stated in clause 3B that after the Municipal Corporation of Hyderabad sanctions the plans and before the developer start construction, the details of the built up area falling to the share of the owner and the developer shall be identified and reduced into writing and marked in a working plan duly singed by them, which shall be deemed as part of this instrument. Thus, terms are very clear that assessee's share is to be identified only after Municipal Corporation of Hyderabad sanctions the plans. Not only that, clause-5 which mainly was relied upon by the Revenue is as under:

"05. The owner shall deliver the existing structures on the Schedule-I property to the developer for demolition, after the removal of all identified re-usable materials by the owner at the developer's cost and after the sanction of plans by the Municipal Corporation of Hyderabad".

13. This above clause indicate that the owner shall deliver the existing structure on the schedule-I property to the developer for demolition, after the removal of all identified reasonable materials by the owner and after the sanction of plans by the Municipal Corporation of Hyderabad. This clause also very clear that till municipal sanctions were received, developer cannot do anything even the demolition of building i.e., existing building on the de-marked area can be done only after the plans I.T.A. No. 1578/Hyd/2014 :- 10 -: Smt. Sudha Giri

were approved by the Municipal Corporation, Hyderabad. Thus, the owner protected its interest and did not handover the property to the developer as contended by Revenue. The owner is not having complete ownership on the entire land, as exemption from ULC is yet to be received and how much of the land will be parted with for ULC was not known. In view of this, the contention of the Revenue that possession was handed over on 07-12-2004 does not stand the test of actual possession required under the provisions of Transfer of Property Act. Therefore, on the basis of the first agreement, it cannot be deduced that owner has handed over the property to the developer. Even though the owner admitted to grant specific GPA to the developer to enable it to secure sanctions from other authorities, they are all part of the development agreement, but there is no specific undertaking that the property was handed over to the developer as part performance under the Transfer of Property Act. Therefore, reliance on these clauses of first agreement by the Revenue does not help its case. Therefore, the Revenue also relied on the second development agreement dt. 03-11- 2007, wherein it was noted in clause-4 that 'as of 07-12-2004, the owner vacated and delivered the existing structures on the schedule-I property to the developer for demolition. The developer after which applied to Municipal Corporation, Hyderabad for building premises and is in receipt of conditional sanction from Municipal Corporation, Hyderabad dt. 30-06-2006. Developer has commenced the construction work on 02-10-2006 in pursuance of the meeting of the criteria mentioned therein for issuance of final sanction. Thus, even if one would to take the second agreement into consideration, this does not empower Revenue to bring to tax the capital gains based on the date i.e., 07-12- 2004. Looking at either way, the capital gains cannot be brought to tax in the impugned assessment year. If one goes by the terms of first agreement, the capital gains should have been in the AY. 2004-05 as the I.T.A. No. 1578/Hyd/2014 :- 11 -: Smt. Sudha Giri

development agreement was entered on that date, which was partly complied with immediately (to a limited extent of handing over the existing building but not the land in possession). If one were to go by the second agreement, the second agreement comes into effect in AY. 2008-09 and not in AY. 2005-06. In either way, just because some of the terms indicate that building for demolition was handed over on 07- 12-2004, the capital gains cannot be brought into tax in the year under consideration. Therefore, both AO and CIT(A) are not correct in contending that year of possession or the deemed possession is the year of capital gains, ignoring the year of agreements entered by assessee and the terms of agreement. If this logic of Revenue is accepted, then a situation may arise that parties try to incorporate a clause that possession was handed over much earlier to defeat the levy of capital gains. It also does not answer sale to existing tenant who is in possession of property from a longer period. Therefore taking possession alone in to consideration for levy of capital gains ignoring the date of agreement and terms of agreement is not according to law.

14. As can be seen from para 6.10 of the CIT(A)'s order, assessee seems to have offered capital gains in AYs. 2010-11 to 2012-13 when the constructed area was handed over to her. These require examination by the AO in the respective years and computation of capital gains in those years but capital gains cannot be brought into tax in the impugned assessment year as neither agreement fall in the year nor the terms of first agreement endorses that assessee has handed over possession as contended on 07-12-2004. In view of this, we have no hesitation in setting aside the order of the AO and CIT(A) in allowing assessee's grounds.

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15. Assessee relied on the co-ordinate bench decision of ITAT, Hyderabad 'B' Bench in the case of M/s. Fibars Infratech Pvt. Ltd., Vs. ITO in ITA No. 477/Hyd/2013 dated 03-01-2014 in that, the co-ordiante bench has analysed the willingness to perform and whether deemed transfer u/s. 2(47)(v) can be invoked. Vide para 51, the ITAT considered as under:

"51. It is important to bear in mind that Section 2(47)(v) refers to possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of Section 53A were satisfied. In other words, the proposition laid down of Section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under Section 53A are satisfied, and when the assessee enters into a contract which is a Development Agreement, in the garb of agreement of sale, it is the date of this Development Agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all Development Agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v)".

16. After analyzing the facts of the case and also the legal position, the bench has come to conclusion that there is no transfer within the provisions of Section 2(47)(v) in that case.

17. In the case of M/s. Binjusaria Properties Pvt. Ltd., Vs. ACIT Central Circle-4, Hyderabad, in ITA No. 157/Hyd/2011 for AY. 2006-07 dt. 04-04-2014, co-ordinate bench has analysed a similar situation of bringing to tax on the basis of development agreement and found that the party has not fulfilled the conditions of the development agreement and no development has taken place even after so many years. Therefore, on the facts of the case it was held that there is no deemed transfer so as to levy capital gains tax.

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18. Similarly, in the case of ACIT Vs. Sri R. Srinivasa Rao and others in ITA No. 1786/Hyd/2012 dt. 28-08-2014 held as under:

"13. On going through the aforesaid decisions of the coordinate bench, the ratio which emerges is unless there is willingness on the part of the developer to perform his part of the contract, there cannot be a 'transfer' of capital asset as envisaged u/s 2(47)(v) read with section 53A of the TP Act. The ratio laid down as above squarely applies to the facts of the present case as the department has failed to controvert the finding of the learned CIT(A) by bringing material on record to show that the developer has taken any steps towards development activity. Further, we may observe, though the AO referring to the development agreement has inferred that possession of the property was handed over to the developer, however, on going through the pleadings and prayer of the plaintiffs in the plaint filed in Civil Court, a copy of which is at page 51 of assessee's paper book, it appears assessee along with others are still having physical possession over the property. Be that as it may, after careful consideration of facts and materials on record, we are of the view, CIT(A)'s order being well founded and well reasoned needs to be upheld. Another crucial aspect which needs to be commented upon is the CIT(A) has also held that the transaction will not attract capital gain as the asset transferred being an agricultural land is not a capital asset as defined u/s 2(14) of the Act. This finding of the learned CIT(A) remains unchallenged and uncontroverted by the Department. For this reason also, short term capital gain computed by the AO cannot be sustained. In view of the aforesaid, we do not find any reason to interfere with the order of the CIT(A)".

19. In the case of Ms. K. Radhika Vs. DCIT in ITA No. 208/Hyd/2011 the co-ordinate bench has held as under:

"48. We are in considered agreement with the view so expressed in this commentary on the provisions of the Transfer of Property Act. It is thus clear that 'willingness to perform' for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of I.T.A. No. 1578/Hyd/2014 :- 14 -: Smt. Sudha Giri

Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have 'performed or is willing to perform' its obligations under the agreement".

20. As can be seen from the above decisions, no rule can be made out that in all cases of development agreements, there is a deemed transfer unless certain parameters like developer's willingness to perform, the intention of the parties, terms of the conditions which are required to be examined case by case. In this present case, as stated earlier, there are two agreements and in the first agreement, there is no specification that property would be handed over to the developer, except for demolition of the existing building that too after getting municipal permissions. If it is to be construed that development agreement has been fulfilled, then the capital gains would arise in AY. 2004-05 and not in AY 2005-06. If one goes by the second agreement, where assessee's share has been crystalised and further assessee was in a position to handover the land subsequent to clearance from ULC authorities and also permission from Municipal Corporation, the capital gains can be considered in the year relevant for AY. 2008-09. Looking at either way, the capital gains cannot be brought to tax in AY. 2005-06. For these reasons, we are not in a position to uphold the orders of the authorities in bringing to tax in AY. 2005-06.

21. AO is free to consider the capital gains in the relevant assessment year or to examine the year(s) in which assessee offered the capital gains. As far as this assessment year is concerned, assessee's contentions are accepted and accordingly, grounds are considered allowed to that extent.

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22. Since we have held that no capital gains can be brought to tax in this year, the alternate contentions raised on deduction u/s. 54/54F by assessee does not require any adjudication and those grounds are treated as academic in nature.

23. In the result, appeal is considered allowed.

Order pronounced in the open Court on 31st July, 2015

Sd/- Sd/-

(SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 31st July, 2015

TNMM

Copy to :

1. Smt. Sudha Giri, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

2. Income Tax Officer, Ward-6(3), Hyderabad.

3. CIT(Appeals)-IV, Hyderabad.

4. CIT-III, Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.