Income Tax Appellate Tribunal - Mumbai
Deputy Commissioner Of Income-Tax vs Asian Distributors Ltd. on 11 January, 2000
ORDER
D. Manmohan, J.M.
1. This appeal is filed by the Revenue and it pertains to asst. yr. 1988-89. The first issue in this appeal is with regard to the taxability of the amount of Rs. 1,80,00,000 receivable by the assessee by virtue of a development agreement entered into on 29th August, 1987. The facts of the case revolve in a narrow compass.
2. The assessee is an incorporated company. It owned a land at Thane. During the previous year ended on 31st March, 1988, the assessee-company entered into a development agreement with M/s Runwal Investments (P) Ltd. Bombay and in terms of the said agreement, a total sum of Rs. 1.80 crores was payable to the company in instalments against which a sum of Rs. 1.30 crores was received by the assessee before 31st March, 1988 and the balance of Rs. 50 lakhs (last instalment) is to be received in the month of May, 1988. The instalments received from the developer was shown under the head "sundry creditors".
3. However, the AO was of the view that by virtue of the development agreement the assessee transferred the land at Thane to M/s Runwal Investments (P) Ltd. and therefore, the total consideration receivable from the developer is liable to be taxed under s. 45 of the Act i.e., under the head 'Capital gains'. The reasons given by AO in this regard are as under :
(a) Prior to 1st April, 1988 only legal ownership was recognised under the Indian laws and it was immaterial whether one had given possession of the property to someone and there was absolutely no chance of getting it back. Whereas, consequent to the decision of the Supreme Court in Nizam's case s. 2(47) of the IT Act, was amended and w.e.f. 1st April, 1988 the legislature recognised the concept of beneficial ownership of the nature referred to in s. 53A of the Transfer of Property Act, 1882 (T.P. Act).
(b) In the present case, the assessee transferred the possession of land to M/s Runwal Investments (P) Ltd., the company engaged in the business of land development, construction and sale of flats/shops. M/s Runwal Investments (P) Ltd. agreed to pay Rs. 1.8 crores to the assessee as consideration for this transfer of possession. In return for the consideration, the assessee got sole and exclusive right to develop the said land and the land was placed entirely at the discretion of the developers in the matter of the development of the said property and as regards terms and conditions. The assessee is not entitled to receive any part of the consideration money which may be collected or received by the developers from the prospective purchasers of the flats.
(c) Going by the terms of the agreement dt. 29th July, 1987, and the supplementary agreement dt. 24th September, 1987, the transfer of possession by the assessee to M/s Runwal Investment (P) Ltd. was clearly in the nature of regular transfer of ownership and amounted to sale of the said property.
4. The assessee contended before the AO that by virtue of the argument, the assessee did not transfer complete rights in the property and, therefore, there is no transfer. The following points were raised by the assessee :
(a) The agreement with the developers is only for the development of the property which is only a different method of engaging a specialist in the developmental task.
(b) The developer was to obtain all the permissions and fulfil the requirement under various law. Thus, there was no question of "enjoying" the property.
(c) Payments to assessee were to be made as per schedule and in case of default the agreement was liable to be terminated.
(d) Only licence was granted to the developer to enter upon the property.
(e) What was transferred was easement right, and not the possession of the said property.
(f) The transfer was to be effected not to the developer but to co-operative society of the tenements which were to be constructed on the impugned land.
(g) CBDT in its Circular No. 495 dt. 22nd September, 1987 provides that all the agreements cannot be treated as transfer within the meaning of s. 2(47)(v) of the Act.
5. The contention of the assessee was not accepted by the AO. He observed that a transfer can take place even without transfer of absolute legal right vested in the owner in the wake of amended section i.e. s. 2(47)(v) of the Act. After extracting the provisions of s. 53A of the T.P. Act and s. 2(47)(v) of the IT Act, the AO summarised that the following points would decide whether there was a 'transfer' within the meaning of the Act or not :
(a) There should be a contract of transfer of any immovable property for consideration.
(b) The agreement should be in writing.
(c) The terms necessary to constitute the transfer can be ascertained with reasonable certainty.
(d) There should be transfer of possession of the property or any part thereof in part-performance of the contract.
(e) Transferee has performed or willing to perform his part of the contract.
6. AO observed that all the aforementioned conditions are fulfilled in the instant case because there is a valid contract to transfer the immovable property for consideration and the agreement is in writing. The terms are specific and unambiguous and the purchaser has taken the possession of the property in part-performance of the contract. He also observed that both the parties were willing to honour the contract. He thus concluded that all the conditions contained in s. 53A of the T.P. Act are fulfilled and hence the transaction is covered by the provisions of s. 2(47)(v) of the IT Act. He, therefore, proceeded to tax the aggregate consideration as per the developer's agreement under the head 'Capital gains'.
7. Aggrieved, the assessee appealed to the CIT(A) and reiterated the contentions made before the AO. It was contended that the last instalment was payable in May, 1988 which falls in the next accounting year and until the last instalment is paid, the conditions stipulated in the agreement cannot be said to have been fulfilled and, therefore, the developer has no right whatsoever in the said property. It was further submitted that the developer was only given a licence to develop the land i.e. to construct the flats, but the land was to be transferred by the assessee-company directly to the co-operative house society and, therefore, till such time conveyance deeds are prepared in favour of the flat owners/co-operative housing society, no transfer can be said to have taken place.
8. The CIT(A) observed that as per the agreement with the builder/developer, the assessee received some instalments but only after payment of last instalment the possession was given for development work. He further observed that till the last instalment is paid, there is every possibility that transferee may not perform the contract. The right which was given to the builder was only for the purpose of developing the land which cannot be called a sale of land because the land, according to the company, continued in its hands and was handed over to the Co-operative Society subsequently, after the completion of the building. He, therefore, concluded that the agreement entered into by the assessee with M/s Runwal Investments (P) Ltd. is only for the purpose of developing the land and cannot be called an agreement for sale of land, because the agreement speaks of only development of the land and not transferring the land to the builder. On perusal of cls. (3), (5) and (6) of the agreement, the CIT(A) was of the opinion that till the last instalment is not paid, the contract is not complete and therefore, the question of taxing the aggregate consideration in this year will not arise. The learned CIT(A) laid emphasis on the wordings in cl. (3) of the agreement to highlight that in the event of non-payment of last instalment, the owner of the land i.e. the assessee company has right to forfeit the payment already made by M/s Runwal Investments (P) Ltd. and terminate the contract. He thus concluded that the amount is not taxable in the current year but can be taxed in the subsequent year. It may be observed here that the assessee has not disputed the taxability of the above sum in the next assessment year and has not filed any cross-objections against the observations of the CIT(A). In fact, the assessee voluntarily offered to tax the said sum in the subsequent assessment year.
9. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us contending, inter alia, that the builder has given possession of the land without which he cannot develop the land and construct the flats. As per s. 2(47)(v) of the IT Act r/w s. 53A of the T.P. Act, transfer of possession of land would amount to part-performance of the contract and by virtue of the extended meaning given to the term 'transfer', the assessee is liable to be taxed under the head 'capital gains'. The Departmental Representative took us through the detailed order passed by the AO in support of his plea that transfer of legal title is not necessary in order to constitute 'transfer' and in the instant case, all the conditions stipulated in s. 2(47)(v) r/w s. 53A of the T.P. Act are fulfilled. The developer is willing to abide by the terms of the contract and the assessee never showed any intention to cancel the contract and, therefore, on the receipt of instalment amounts and after handing over the possession to the developer, the transfer can be said to have taken place and thus the sum of Rs. 1.80 crores is liable to be taxed in the year under consideration.
10. On the other hand, the learned counsel appearing on behalf of the assessee submitted that the assessee company merely gave licence to the developer to go ahead with the activities of construction of flats and obtaining clearance from various Government departments but such a licence cannot be equated to transfer of property within the meaning of s. 2(47)(v) of the IT Act/s. 53A of the T.P. Act. Explaining his case further, the learned counsel adverted our attention to cls. (3), (5) and (6) of the agreement, dt. 29th July, 1987, and the supplementary agreement, dt. 24th September, 1987.
11. Clause (3) of supplementary agreement states that the last instalment of Rs. 50 lakhs is payable by the developer on or before 31st May, 1988. It further states that the rights of development shall be acquired by and vest in the developer only upon his fully paying the amount as aforesaid. Clause (5) in the supplementary agreement states that the developers and their representatives and workers are granted the licence to enter upon the property to commence and complete constructions as contemplated by the agreement but without affecting the owner's right, title and interest in the said property. It further reads as under :
"The licence that may be granted by the owners shall be deemed to be a licence given to the developers under the provisions of the Indian Easements Act, 1882 and nothing contained in this agreement shall be construed to be an agreement to sell the said property nor is it intended by the parties hereto that the possession of the said property, whether actual or constructive, be transferred to the developers on or after the execution of this agreement, the intention being that the possession of the said property and all the rights, title and interest in the said property shall be transferred to the developers only upon the developers fulfilling all the obligations under this agreement and upon the execution of the conveyance as hereinafter provided."
12. Vide clause (6) of the supplementary agreement, it is agreed that the developer is allowed to carry out the development work on and from the grant of licence and the developers in turn have the right to enter into agreements for sale of flats constructed on the said property but in the event of failure on the part of the developers to complete the transaction with the owners, for any reason whatsoever, such purchasers shall have no claim, of whatsoever nature, against the owners, as a result thereof. The case of the learned counsel is that nowhere transferring the possession is contemplated by the agreement, the developer is only granted a licence so that he can enter in the said premises and peacefully carry out the construction activity as otherwise the developer would be considered as trespasser. He also adverted our attention to pp. 15 to 18 of the paper-book No. 2 to submit that the assessee-company has full rights to terminate the agreement in the event of default on the part of the developer in making payment of the last instalment within the stipulated time and till the flats are given possession to the flat owners, upon the execution of the conveyance deed, the owners shall have complete control over the property. The case of the learned counsel is that the grant of licence is as per s. 52 of the Indian Easments Act, 1882, which reads as under :
"52. "Licence" defined. - Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence."
13. In other words, the plea of the assessee is that the developer is given permission to construct the flats and this permission would be effective only when the developer is allowed to enter the plot legally. For this purpose, he was granted licence so that developer will not become a trespasser in the assessee's land during the course of carrying on the developmental activities. The learned counsel also invited our attention to s. 53A of the T.P. Act to point out the difference in the language of s. 2(47)(v) of the Act vis-a-vis s. 53A of the TP Act. Sec. 2(47)(v) and Explanation thereto reads as under;
"Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part-performance of the contract of the nature referred to in s. 53A of the T.P. Act, 1882."
(vi). .....
Explanation. - For the purposes of sub-cls. (v) and (vi), "immovable property" shall have the same meaning as in cl. (d) of s. 269UA.
12.Sec. 269UA(d) and its Explanation which are also relevant in this context are extracted herein for the sake of convenience :
"(d) "immovable property" means -
(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.
Explanation. - For the purposes of this sub-clause, 'land, building' part of a building, machinery, plant, furniture, fittings and other things' include any right therein;"
14. Comparing the language of the provisions under the IT Act and s. 53A of the T.P. Act, the learned counsel contended that in order to treat a particular transaction as amounting to transfer under the IT Act, the transferee, in part performance of the contract, should take possession of the property whereas under s. 53A of the T.P. Act, the language used is "......" taken possession of the property or any part thereof' which abundantly shows that the transfer of possession should not be in part in order to constitute a 'transfer' under the IT Act. Elaborating his submissions further, the learned counsel explains that s. 2(47)(v) deals with complete possession of property and not mere licence or a part possession for carrying on the developmental activities and, therefore, such alleged possession did not fall within the meaning of 'transfer' under the IT Act. He further submitted that one of the conditions laid down in s. 53A of the T.P. Act is that the transferee should either perform or willing to perform his part of the contract and the willingness of the transferee to perform his part of the contract can be proved only in a Court of Law, by producing evidence on record, before invoking s. 53A of the T.P. Act. Explaining this argument further, the learned counsel adverted our attention to p. 35 of the paper-book No. 1 to highlight that the last instalment is due in May, 1988 whereas the transferee paid the last instalment in four equal instalments beginning from 1st August, 1988 and thus after 1st May, 1988, the assessee had a right to terminate the contract because the transferee has not paid the instalment and in such cases it is to be positively proved by the Revenue that the case falls under s. 53A of the T.A. Act and the transferee is willing to perform his part of the contract, whereas no such material was furnished by the Revenue.
15. Reverting to s. 2(47)(v) of the IT Act, the learned counsel pointed out that section speaks of allowing of the possession in part-performance of the contract which implies that the transferee should be allowed the right of the possession of the property in matters such as sale of the property etc. and the words did not mean mere physical possession for carrying out developmental activities. The learned counsel asserts that the transferee has no right to obtain the possession as per the contract because the ownership vests in the assessee till it is transferred to the intending buyers of the flats. Pointing out to the words "the transferee or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property on which the transferee has taken or continued in possession" in s. 53A of the T.P. Act, the learned counsel submits that in the instant case, the assessee is not debarred from enforcing against the developer any right in respect of the property and this is supported by the cl. (6) of the supplementary agreement. The relevant portion of cl. (6) reads as under :
"........ if by reason of any failure on the part of the developers to complete the transaction with the owners, for any reason whatsoever, such purchaser shall have no claim, of whatsoever nature, against the owners as a result thereof."
16. Relevant portion of cl. (3) reads as under :
".......... it being the intent that notwithstanding anything contained in these presents or otherwise howsoever, the rights of development shall be acquired by and vest in the developers only upon his fully paying the said amount as aforesaid. The directors of the developers shall give personal guarantee to the owners for payment of the aforesaid amount and interest as aforesaid. Such guarantee shall be in the form approved by the advocates of the owners. The developers shall not give possession of any tenement in the building to any of the buyers of such tenements till the amount due under this agreement to the owners is paid in full."
17. Relevant portion of cl. (8)(d) reads as under :
"........ Notwithstanding the fact that the said Power of Attorney dt. 30th July, 1987, given by the owners is made irrevocable it is hereby mutually agreed and declared that in case the developers make any default in making payment of any of the instalments due under the development agreement, dt. 29th July, 1987, or this agreement is terminated, then the owners will be at liberty to revoke the said power by giving 30 days notice to the Developers and if within the said time the default is not remedied. (As agreed upon by supplementary agreement dt. 24th Sept, 1987)."
18. The learned counsel also relied upon the decision of the Hon'ble Gujarat High Court in the case of Shantivan Corporation vs. Sub-Registrar & Ors. (1990) 189 ITR 583 (Guj) in support of his plea that the transferee has no right of possession before the last instalment is paid and thus there is no transfer in the instant case. In support of his plea that s. 2(47)(v) of the IT Act envisages only transfer of complete legal possession and not part-possession and the transfer of complete legal possession is possible only in the case of a sale or any such contract, he also relied on the following decisions, 1992 AIR 346 Allahabad; and Ajai Kumar Sah Jagate vs. ITO (1995) 55 ITD 348 (Del).
19. We have carefully considered the rival submissions and perused the record as well as the case law cited before us. The case of the AO precisely is that by virtue of the amendment to s. 2(47)(v) of the IT Act, there is a "transfer" of immovable property in the year under consideration. In order to appreciate as to whether the facts suggest "transfer" of immovable property in the year under consideration, it is necessary to bear in mind the facts and circumstances of the instant case and the specific clauses in the agreement, dt. 29th July, 1987 as amended by the supplementary agreements, dt. 24th September, 1987. Admittedly, the last instalment falls due in the month of May, 1988. For the assessment year under consideration, the previous year ends on 31st March, 1988. The clauses in the agreement, which are extracted hereinabove, amply show that the possession of the property is agreed to be given to the developers only upon payment of the last instalment and till such time, the assessee has a right to revoke the contract in certain eventualities. The language used in the contract also, to our mind, indicates that it is not a case of transferring the possession of the property to the developers to enjoy absolute rights over the said property, but it is a case of mere licence to him to enter upon and carry on the developmental activities in the said property. In the light of the specific clause in the agreement, as regards the transfer of possession of the property, it is for the Revenue to prove that the assessee gave possession of the property to the developers before the end of the previous year relevant to asst. yr. 1988-89 and such transfer of possession, if any, debars the assessee from enforcing against the transferee or persons claiming under him any right in respect of the property. Thus, neither in terms of s. 2(47)(v) of the IT Act, nor in terms of s. 53A of the T.P. Act, the impugned transaction can be classified as "transfer" of capital asset or would be considered as allowing of the possession of any immovable property in part-performance of a contract of the nature referred to in s. 53A of the T.P. Act. As rightly pointed out by the learned counsel for the assessee, the transaction can at best be classified as an agreement granting licence to the developers within the meaning of s. 52 of the Easement Act, 1882. It may also be noted that the Revenue has not brought any material to show that as on 31st March, 1988 i.e. the last day of the previous year, the developer was willing to perform the contract on his part. On the contrary, the factum of delayed payment of the last instalment would indicate that the assessee had the privilege to terminate the contract as per terms of agreement and the other party cannot have any protection under law to seek specific performance of the contract or to take shelter under s. 53A of the T.P. Act. Thus, the conditions stipulated in s. 53A of the T.P. Act are also not satisfied. Thus, on a careful perusal of the agreements and upon a plain interpretation of the concerned provisions, we are of the view that the impugned agreements did not give rise to any transfer, in the previous year relevant to asst. yr. 1988-89, of the assessee's land at Thane and, therefore, the consideration receivable by the assessee by virtue of the impugned agreements is not taxable under the head 'capital gains' in this year. We, therefore, uphold the order of the CIT(A) and dismiss the appeal filed by the Department.
20. This leaves us with ground No. 2 which reads as under :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in setting aside the issue of disallowance of interest receivable amounting to Rs. 43,630 from Trans Asian Carpets Ltd. sister concern though the AO has given a clear finding that in the assessment order for not accepting assessee's method of accounting of interest from this sister concern."
21. We have heard both the parties. We find that the issue is merely set aside by the CIT(A) to give a proper finding on the subject. The contention of the assessee before the CIT(A) was that the interest accrued to the company but it was not shown in its receipts because the company has been following cash system and such system has been consistently followed and accepted by the Department. The CIT(A) observed that the AO has not discussed at all on this aspect. He, therefore, directed the AO to consider this aspect. We do not find any infirmity in the order of the CIT(A). We, therefore, uphold the order of the CIT(A) and dismiss the appeal filed by the Department.