Court Overturns Capital Gains Tax Liability in Joint Development Agreement Case

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Case Name: Chiranji Lal Garg Vs Commissioner of Income Tax (High Court of Punjab and Harayana)

TA No.311 of 2015 (O&M)

Key Takeaways:

1. The court ruled that no possession was given to the transferee of the entire land in part performance of the JDA.

2. The possession delivered, if any, was as a licensee for property development, not as a transferee.

3. The court clarified that all essential ingredients of Section 53A of the Transfer of Property Act, 1882 must be fulfilled for Section 2(47)(v) of the Income Tax Act to apply.

4. The court held that the assessee is not liable for capital gains tax on land for which no consideration was received and which was cancelled due to court orders.

5. The case emphasizes the importance of proper registration and fulfillment of all legal requirements in property transfer agreements.

Issue:

The central legal question in this case was whether the assessee was liable to pay capital gains tax on the entire consideration receivable under the Joint Development Agreement (JDA) dated 25.2.2007, as determined by the Income Tax Appellate Tribunal.

Facts:

1. The assessee entered into a Joint Development Agreement (JDA) on

25.2.2007.

2. Sale deeds were executed on 2.3.2007 and 25.4.2007 for 3.08 acres and 4.62 acres respectively.

3. The Income Tax Appellate Tribunal held the assessee liable for capital gains tax on the entire consideration receivable under the JDA.

4. The assessee appealed this decision to the High Court.

5. The JDA was later cancelled, and no further amounts were received by the assessee.

6. Various orders were passed by the Supreme Court and High Court in Public Interest Litigations (PILs) affecting the performance of the JDA.

Arguments:

The assessee argued that:

1. There was no "transfer" of immovable property under section 2(47)(v) of the Income Tax Act read with section 53A of the Transfer of Property Act.

2. The requirement of registration of the JDA under section 53A of the Transfer of Property Act should be read into section 2(47)(v) of the Income Tax Act.

3. The possession given was not as contemplated under section 2(47)(v) of the Income Tax Act read with section 53A of the Transfer of Property Act.

4. The entire consideration receivable under the JDA should not be taxable as it amounts to taxation of hypothetical/notional income.

5. The claim for exemption under section 54F of the Income Tax Act should be considered.

The Revenue likely argued for upholding the Tribunal's decision, maintaining that the transaction constituted a transfer liable for capital gains tax.

Key Legal Precedents:

The court relied on its previous decision in C.S. Atwal vs. The Commissioner of Income Tax, Ludhiana and another (ITA No.200 of 2013), which dealt with similar issues.

Judgement:

The High Court allowed the appeal and ruled in favor of the assessee. Key points of the judgment include:

1. The parties had agreed for pro-rata transfer of land in the JDA.

2. No possession of the entire land was given to the transferee in part performance of the JDA.

3. Any possession delivered was as a licensee for property development, not as a transferee.

4. The JDA did not fall under Section 53A of the Transfer of Property Act, 1882, due to lack of registration, and consequently, Section 2(47)(v) of the Income Tax Act did not apply.

5. The assessee was not liable for capital gains tax on the remaining 13.5 acres of land for which no consideration was received and which stood cancelled.

6. The court disposed of the appeal in the same terms as in the C.S. Atwal case.

FAQs:

Q1: What is a Joint Development Agreement (JDA)?

A1: A JDA is an agreement between a landowner and a developer to develop a property, usually with shared benefits.

Q2: Why was the registration of the JDA important in this case?

A2: The lack of registration meant that the agreement did not fall under Section 53A of the Transfer of Property Act, which affected its tax implications.

Q3: What is the significance of "possession" in this case?

A3: The court distinguished between possession as a licensee for development and possession as a transferee, which affected the tax liability.

Q4: How does this judgment impact similar cases?

A4: It sets a precedent for interpreting JDAs and their tax implications, especially regarding the nature of possession and the importance of registration.

Q5: What should taxpayers learn from this case?

A5: Taxpayers should ensure proper registration of property agreements and be aware of the distinctions between different types of possession to understand their tax liabilities accurately.

CM No.18311 CII of 2015

1. There is a delay of 578 days in filing the appeal. Notice of the application was given to the respondents. After hearing learned counsel for the parties and for the reasons stated in the application, the delay in filing the appeal is condoned. CM stands disposed of.

ITA No.311 of 2015

2. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 12.9.2013, Annexure A.1 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short, “the Tribunal”) in ITA No.467(Asr)/2013 for the assessment year 2007-08, claiming following substantial questions of law:-

“i) Whether on the facts and in the circumstances of the case, the Tribunal erred in upholding the order of the Assessing Officer in bringing to tax the entire consideration receivable under the JDA dated 25.2.2007 as liable to tax under the head “Capital gains”?

ii) Whether the Tribunal erred on facts and in law in holding that there was “transfer” of immovable property under section 2 (47)(v) of the Act read with section 53A of the TPA?

Iii) Whether the Tribunal erred on facts and in law in holding that the requirement of registration of the JDA under section 53A of the TPA could not be read into section 2(47)(v) of the Act?

iv) Whether the Tribunal erred on facts and in law in holding that the requirement of registration of the JDA under section 53A of the TPA was not necessary once power of attorney was registered?

v) Whether the Tribunal erred in law in construing “possession”, as contemplated under section 2(47)(v) of the Act read with section 53A of the TPA, to have a wider connotation, to include concurrent possession and/or right to enter into possession?

vi) Whether the Tribunal erred on facts and in law in holding that “possession” as contemplated under section 2(47)(v) of the Act read with section 53A of the TPA was given by the society to the developers, who held concurrent possession over the immovable property?

Vii) Whether the Tribunal erred on facts and in law in holding that “possession” as contemplated under section 2(47)(v) of the Act read with section 53A of the TPA was given by the society to the developers since the developers had not only the authority/right to enter into the immovable property but also to deal with the same for various purposes?

viii) Whether the Tribunal erred on facts and in law in holding that there was “transfer” under section 2(47)(v) of the Act read with section 53A of the TPA even though “unconditional willingness” on the part of the developers was absent?

ix) Whether the Tribunal erred on facts and in law in holding that in view of applicability of clause 26 dealing with “Force Majeure”, it could not be said that “unconditional willingness” on the part of the developers was absent?

x) Whether the Tribunal exceeded its jurisdiction by sitting in judgment on issues concerning civil dispute between parties to the JDA and in inter alia holding that (a) there was no default on the part of the developers in complying with the terms of the JDA; (b) there was no default on the part of the developers in making payment; (c) the developers were making sincere efforts to obtain all approvals/permissions; and (d) cancellation of the JDA and/or revocation of power of attorney by the society was not proper and would not stand the test of law?

xi) Whether the Tribunal erred on facts and in law in holding that there was transfer within the meaning of section 2(47) of the Act despite the fact that the JDA was terminated/cancelled by the society?

xii) Whether the Tribunal erred on facts and in law in holding that there was “transfer” even under clause (vi) of section 2(47) of the Act?

xiii) Whether the Tribunal erred on facts and in law in not holding that there was no “transfer” under clause (ii) of section 2(47) of the Act?

xiv) Whether the Tribunal erred on facts and in law in holding that the entire consideration receivable under the JDA was taxable without appreciating that the same tantamount to taxation of hypothetical/notional oncome which is not permissible in law?

xv) Whether the Tribunal erred on facts and in law in upholding the taxation of value of the flat as part of the consideration receivable under the JDA?

xvi) Without prejudice, whether the Tribunal erred on facts and in law in upholding the determination of value of the flat at the rate of 4500/- per square feet?

Xvii) Without prejudice, whether the Tribunal erred on facts and in law in not adjudicating the claim of exemption under section 54F, simply because sections 54 and 54EC were inadvertently mentioned in the grounds of appeal and not section 54F of the Act?

Xviii) Without prejudice whether the Tribunal erred on facts and in law in holding that exemption under section 54F of the Act was not available on the value of the flat receivable under the JDA?

Xix) Whether on the facts and in the circumstances of the case the findings arrived at by the Tribunal are perverse, inasmuch as no reasonable person correctly informed of the provisions of law would come to such a conclusion?

xx) Whether demand of respondents to demand alleged income tax liability even though as per the ruling of this Hon'ble Court rendered in ITA No.200 of 2013, no tax is liable to be paid?

xxi) Whether the demand is justified once question of law that there is no capital gains has been decided in favour of the assessee?”

3. The facts being identical as in ITA No.200 of 2013 (C.S.Atwal vs. The Commissioner of Income Tax, Ludhiana and another), need not be noticed herein again. It was not disputed by learned counsel for the parties that the issues involved in this appeal have already been decided by this Court in C.S.Atwal's case (supra) vide order dated 22.7.2015, wherein it was concluded as under:-

“1) Perusal of the JDA dated 25.2.2007 read with sale deeds dated 2.3.007 and 25.4.2007 in respect of 3.08 acres and 4.62 acres respectively would reveal that the parties had agreed for pro-rata transfer of land.

2) No possession had been given by the transferor to the transferee of the entire land in part performance of JDA dated 25.2.2007 so as to fall within the domain of Section 53A of 1882 Act.

3) The possession delivered, if at all, was as a licencee for the development of the property and not in the capacity of a transferee.

4) Further Section 53A of 1882 Act, by incorporation, stood embodied in section 2(47)(v) of the Act and all the essential ingredients of Section 53A of 1882 Act were required to be fulfilled. In the absence of registration of JDA dated 25.2.2007 having been executed after 24.9.2001, the agreement does not fall under Section 53A of 1882 Act and consequently Section 2(47)(v) of the Act does not apply.

5) It was submitted by learned counsel for the assessee- appellant that whatever amount was received from the developer, capital gains tax has already been paid on that and sale deeds have also been executed. In view of cancellation of JDA dated 25.2.2007, no further amount has been received and no action thereon has been taken. It was urged that as and when any amount is received, capital gains tax shall be discharged thereon in accordance with law. In view of the aforesaid stand, while disposing of the appeals, we observe that the assessee appellants shall remain bound by their said stand.

6) The issue of exigibility to capital gains tax having been decided in favour of the assessee, the question of exemption under Section 54F of the Act would not survive any longer and has been rendered academic.

7) The Tribunal and the authorities below were not right in holding the assessee-appellant to be liable to capital gains tax in respect of remaining land measuring 13.5 acres for which no consideration had been received and which stood cancelled and incapable of performance at present due to various orders passed by the Supreme Court and the High Court in PILs. Therefore, the appeals are allowed.

4. In view of the above, the appeal is disposed of in the same terms as in C.S.Atwal's case (supra).

(Ajay Kumar Mittal)

Judge

November 02, 2015 (Ramendra Jain)

gs’ Judge