Court Rules Capital Gains Tax Applicable When Land Possession Transferred, Not Title

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Case Name:

Commissioner of Income Tax vs. Ziauddin Ahmad (High Court of Allahabad)

Income Tax Appeal No. 467 of 2010

Date: 18th December 2014

Key Takeaways:

1. Capital gains tax is triggered when possession of property is transferred, even if legal title remains with the original owner.

2. The date of the development agreement is considered the date of transfer for capital gains purposes, not the date of title transfer.

3. Transferring substantial control and rights over property, even without transferring title, can constitute a "transfer" for tax purposes.

Issue:

Whether capital gains tax was applicable in the assessment year 2006-07 (when legal title was transferred) or earlier when possession and most rights were transferred to the developer?

Facts:

- The assessee owned two plots of land in Kanpur (Plot No. 14/138 and 14/143).

- On June 24, 1999, the assessee entered into development agreements with M/s. Shilpi Builders Limited for these plots.

- The agreement for Plot No. 14/138 involved transferring 60% of the land to the builder in exchange for construction on the remaining 40%.

- A power of attorney was executed on the same day (June 24, 1999) giving the builder extensive powers to deal with the property.

- The builder launched a scheme for booking flats on April 20, 2002, indicating they had possession before this date.

- The legal title was transferred on April 30, 2005.

Arguments:

Revenue's Arguments:

1. The transfer took place on April 30, 2005, when the completion agreement was signed and possession was officially handed over.

2. The capital gains should be taxed in the assessment year 2006-07, corresponding to the financial year 2005-06 when the completion agreement was signed.

3. The consideration for the transfer (cost of construction) was received in 2005 when the project was completed.

Assessee's Arguments:

1. The transfer occurred in 1999 when the original agreement was executed and possession was handed over to the developer.

2. The power of attorney executed in 1999 transferred all rights except legal title to the developer.

3. The 2005 agreement was merely a confirmation of the earlier transfer, not the actual date of transfer.

Key Legal Precedents:

1. Jasbir Singh Sarkaria, In re [2007] 294 ITR 196 (AAR):

Possession need not be exclusive for it to constitute a transfer under Section 2(47)(v) (of Income Tax Act, 1961).

2. Chaturbhuj Dwarkadas Kapadia vs. CIT (260) ITR 491 (Bom):

Capital gains are taxable in the year when such transactions are entered into, even if the transfer is not complete under general law.

3. Sanjeev Lal vs. CIT and Another [2014] 365 ITR 389 (SC):

The date of the agreement to sell should be taken as the date of transfer of the original asset.

Judgement:

1. The court held that the transfer of land took place on June 24, 1999, when the development agreement was executed and possession was handed over to the developer.

2. The capital gains should be computed based on the 1999 transfer, not the 2005 title transfer.

3. The court upheld the order of the Income Tax Appellate Tribunal, which had ruled in favor of the assessee.

FAQs:

Q1: What constitutes a "transfer" for capital gains tax purposes?

A1: A transfer can occur when possession is given, or when the transferee is given substantial control over the property, even if legal title is not transferred.

Q2: Does the transferor need to give up all rights for it to be considered a transfer?

A2: No, the court held that transferring all rights except legal title can still constitute a transfer for tax purposes.

Q3: Why is the date of transfer important for capital gains tax?

A3: The date of transfer determines in which financial year the capital gains are taxable.

Q4: Can a later agreement (like the 2005 completion agreement in this case) change the date of transfer for tax purposes?

A4: Not necessarily. The court looked at when the actual transfer of possession and control occurred, rather than the date of the final agreement.

Q5: How does this judgment affect property developers and landowners?

A5: It emphasizes the importance of considering tax implications at the time of entering into development agreements, not just when the final title transfer occurs.

Both the cross appeals have been filed against the order dated 5 March 2010 passed by the Income Tax Appellate Tribunal, Lucknow in I.T.A. No. 499/LUC/2094 for the assessment year 2006-07.

On 22.01.2013, a coordinate Bench has admitted the appeal filed by the Department-appellant (ITA 467 of 2010) on the following substantial questions of law :

“(a) Whether the ITAT was correct in law in

canceling the assessment framed u/s 143(3) (of Income Tax Act, 1961)/147

on account of validity of notice u/s 143(2) (of Income Tax Act, 1961) in

absence of any return, ignoring the fact that the

assessee himself had offered in writing for

treating one of its earlier returns to be in

response to notice u/s 148 (of Income Tax Act, 1961),

1961?

(b) Whether the ITAT was correct in law in

holding that no capital gain accrued or arose to

the assessee in A.Y. 2006-07 as the transfer did

not take place on 30.04.2005 without properly

appreciating the facts narrated by the A.O. which

wee clearly born out from records?”

The brief facts of the case are that the assessee is an

individual and running Excel Hospital Limited. On 13.09.2007, a

survey, under Section 133(A) (of Income Tax Act, 1961) was carried out at the business

premises of the assessee. The assessee was examined under

Section 131 (of Income Tax Act, 1961) as per notice dated 22.09.2007 and his

submissions were recorded on 03.08.2007. The assessee was

served with a notice under Section 148 (of Income Tax Act, 1961) on 20.03.2008. In

response, the assessee has furnished the necessary documents.

On 11.7.2008, the A.O. has intimated the assessee about the

reasons recorded for initiating the proceedings under Section 148 (of Income Tax Act, 1961)

of the Act. Finally, on 22.12.2008, the assessment was completed

under Section 143(3) (of Income Tax Act, 1961)/147 of the Act where the capital gain was

levied.

The assessee has assailed the assessment order pertaining to

the capital gain in an appeal before the CIT(A), which was

dismissed. Being aggrieved, the assessee filed an appeal before the

Tribunal, who has granted the relief by observing that capital gain

is not chargeable for the assessment year under consideration.

Being not satisfied, the Department has filed the appeal. The

assessee has also filed the cross appeal to assail the validity of the

proceedings under Section 147 (of Income Tax Act, 1961).

With this background Shri Shambhu Chopra, the learned

counsel for the revenue-appellant relied on the order of the A.O. He

submits that assessee was the owner of the Plot Nos. 14/138 and

14/143 Chunniganj, Kanpur measuring 3569 sq. yards and 277 sq.

yards. The assessee had entered into an agreement with M/s.

Shilpi Builders Limited for the development/construction of a

Nursing Home/residential complex and commercial complex

without forfeiting his title rights. The land of his brother was also

included in the development of entire project called Ratan Esquire

and Excel Nursing Hospital. The agreement was entered in the year

1999, while supplementary agreement was also entered in the year

2002 with the brother. He further submits that since, on the basis

of the said agreements, the conditions of chargeability of capital

gains tax were found to be attracted on the basis of completion

agreement dated 30.04.2005, so the capital gain was charged

during the assessment year under consideration. He further

submits that the proceedings under Section 147 (of Income Tax Act, 1961) was rightly

initiated for the assessment year 2006-07, as completion

agreement is dated 30.04.2005 and falling within the assessment

year 2006-07.

The learned counsel for the Department has read over the

following passage from the assessment order :

“The assesse had entered into an agreement on

24.06.1999 with M/s. Shilpi builders for

development of his land. Subsequently, after

obtaining the sanctioned map from KDA, the

parties entered into supplementary agreement

dated 29.04.2002 and possession of the land was

also handed over to M/s. Shilpi Builders on

01.05.2002 for development of residential cum

commercial complex. The perusal of agreement

dated 24.06.1999 and 29.04.2002 makes it quite

clear that the rights of ownership of the land was

with the assessee only and both these

agreements were subject to the completion of

project. The project was completed and an

agreement of completion of project was signed

by the two parties on 30.04.2005, when the

respective shares were handed over and taken

over by M/s. Shilpi Builders and the assessee.

The argument of the assess that he hand

transferred land on 24.06.1999 is not tenable in

any way because even the assessee himself did

not paid any tax on transfer of land in A.Y. 2000-

01 relevant to this period. Thus, the intention of

the assessee is very clear that the assesse did

not desires to pay any capital gain tax. In this

case, the assessee has given a license to the

developer i.e. M/s. Shilpi Builders for

development of a residential cum commercial

complex on its land within a period of three years

from the date of possession or from the date of

obtaining sanctioned map from KDA whichever is

later. The assessee did not surrender any of his

right of ownership to the developer till

completion of the project. The assesse has filed

copy of three agreements dated 24.06.1999

[agreement], 29.04.2002 [supplementary

agreement] and 30.04.2005 [completion

agreement]. The perusal of the above three

agreements makes it abundantly clear that the

rights of ownership in respect of the share of

developers were transferable to the developer

only on completion of the project as discussed

above in the gist of agreements given above.

Learned counsel for the Department also read over the Para-1 of page-4 of the completion agreement dated 30.04.2005, which is as under :

“AND WHEREAS since the Building is completed and in order to make a proper

utilization of shares in the Building Complex has been reallocated and accordingly the possession of the portion fallen into the share of First Party has been delivered to him in the same manner the area fallen into the share of the Second Party is with the Second Party, hence this COMPLETION AGREEMENT.”

Learned counsel for the Department submits that from the above, it is very clear that the possession was handed over and taken over by the First and Second Party respectively on 30.04.2005 i.e. the date of completion agreement.

According to the learned counsel, the chargeability of capital gain tax require three basic ingredients :

1. Ownership of capital asset. Here the assesse is in owenership of plot no. 14/138 and 14/143 Chunniganj, Kanpur.

2. Transfer of capital asset. The assessee sold/transferred part of his land to M/s. Shilpi Builders as per its completion agreement dated 30.04.2005 as discussed above.

3. Receipt of consideration. The assesse also received consideration in the form of constructed area on 30.04.2005 as per the completion agreement discussed above.

Thus, the condition of chargeability of capital gain tax are being competed on 30.04.2005 in the F.Y. 2005-06 relevant to A.Y. 2006-07. Thus, the proceedings initiated u/s 148 (of Income Tax Act, 1961) are valid and capital gain is chargeable in the case of assessee during the A.Y. 2006-07.

It is also a submission of the learned counsel that the basis

to charge the Tax in Assessment Year 2006-07 is that the

consideration for transfer of capital is the cost of construction, as

specified by principal agreement executed on 24.06.1999, has been

received in the year of completion of construction as evidenced by

completion agreement is 30.04.2005. As per law, the capital gain

on transfer of land is chargeable at point of time of completion on

the development on 30.04.2005, which is taxable and is falling

within the assessment year 2006-07.

Learned counsel for the Department has also relied on the

provision of Section 2(47)(v) (of Income Tax Act, 1961) which is

reproduced as under :

“Any transaction involving the the allowing of the

possession of any immovable property to be taken

or retained in part performance of contract of the

nature referred to in section 53A (of Income Tax Act, 1961) of the Transfer

of Property Act, 1882 (4 of 1882).

Learned counsel has also read out Section 53A (of Income Tax Act, 1961) of transfer of

property Act, 1882 which is as under :-

“Where any person contract to transfer for

consideration any immovable property by writing

signed by him or on his behalf from which the

terms necessary to constitute the transfer can be

ascertained with reasonable certainty.

And the transferee as, in part performance of the

contract, taken possession of the property or any

part thereof, or the transferee, being already in

possession, continues in possession in part

performance of the contract and has done some

act in furtherance of the contract.

And the transferee has performed or is willing to

perform his part of the contract, Then

notwithstanding that where there is an instrument

of transfer, that the transfer has not been

completed in the manner prescribed therefore by

the law for the time being in force, the transferor

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 of which the transferee

has taken or continued in possession, other than

a right expressly provided by the terms of the

contract.”

Shri Shambhu Chopra, learned counsel further submits that

these two provisions relate to transfer of immovable property

without execution and registration of conveyance deed. On conjoint

reading of above 2 provisions 2(47)(v) of IT Act and 53A of TP Act

(transfer or Property Act), it transpires that for an act of transfer

resulting in the capital gain under the deeming provision of Section

2(47) (v), the transaction leading to the transfer of capital asset

shall:-

(i) allow the transfer of possession of the capital asset to the transferee

(ii) of if the transferee is already in the possession of capital asset, it must be retained by him in part performance of contract of transfer.

In the instant case, the transaction is principal agreement,

which was executed on 24.06.1999 followed by power of attorney

simultaneously executed on same date which together constitute

the principal documents of transfer. The terms of these documents

allowed the builder to take the possession of capital asset by

conferring upon builder the substantial control over the land to be

developed including the transferred land. The builder had

undertaken the various activities which tantamount to deemed

transfer within purview of sec 2(47)(v) (of Income Tax Act, 1961).

Though physical delivery of the land to the builder was

declared by supplementary deed executed on 29.04.02, however,

as explained, hereinabove, the same had been actually delivered to

the builder much before it immediately after sanction of building

plan on 24.10.01. It is copiously evidenced by the activities under

taken by the builder for the excavation of site of land, booking of

flats on opening ceremony performed on 21.04.02 on which date

construction commenced. But the complete ownership was

transferred only on 30.04.2005, which falls during the Assessment

Year 2006-07 and capital gain was rightly charged during the

assessment year under consideration.

To support his arguments, the learned counsel for the

appellant has relied upon the ratio laid down in the case of Jasbir

Singh Sarkaria, In re [2007] 294 ITR 196 (AAR), where it was

observed that :

“...Possession” contemplated by clause(v) of

section 2(47) (of Income Tax Act, 1961) need not necessarily be sole and

exclusive possession. So long as the transferee is,

by virtue of the possession given, enabled to

exercise general control over the property so as to

make use of it for the intended purpose, the mere

fact that the owner has also the right to enter the

property to oversee the development work or to

ensure performance of the terms of the agreement

does not introduce incompatibility. The concurrent

purpose of the owner who can exercise possessory

rights to a limited extent and for a limited purpose

and that of the buyer/developer who has a general

control and custody of the land can very well be

reconciled. Clause(v) will have its full play even in

such a situation. There is no warrant to postpone

the operation of clause(v) and the resultant accrual

of capital gains to a point of time when the

concurrent possession will become exclusive

possession of the developer/transferee after he

pays full consideration. Possession given to the

developer need not ripen into exclusive possession

on payment of the instalments in entirety for the

purpose of determining the date of transfer. It is

enough if the transferee has, by virtue of that

transaction, a right to enter upon and exercise acts

of possession effectively pursuant to the covenants

in the contract. That amounts to legal possession.”

Similarly, he relied upon the ratio laid down in the case of

Chaturbhuj Dwarkadas Kapadia vs. CIT (260) ITR 491

(Bom), where it was observed that :

“....Section 2(47)(v) (of Income Tax Act, 1961) read with section 45 (of Income Tax Act, 1961) indicates

that capital gains was taxable in the year in which

such transactions were entered into even if the

transfer of immovable property is not effective or

complete under the general law...”

Lastly, he justified the order passed by the CIT(A).

On the other hand, Sri S.K. Garg assisted by Shri A. Bansal,

learned counsel for the assessee has produced the copy of the

agreement, where it was shown that the total area was transferred

in the year 1999. The learned counsel submits that the possession

of the property was given in the year 1999 as per the agreement.

To this effect, the CIT(A) has asked the remand report from the

Assessment Officer. The Assessment Officer has filed contradictory

remand report where the admissiblility of additional evidence

adduced under Income Tax Rule 46A (of Income Tax Rules, 1962) was discussed. Section

156(A). The A.O. has not contradicted the written submission

adduced by the assessee despite opportunity given by him by the

CIT(A). Nevertheless the CIT(A) upheld the addition, but the

Tribunal has examined the material on record and rightly deleted

the addition. According to learned counsel, no capital gain on

transfer of land by the assessee to M/s. Shilpi Builders is applicable

during the assessment year under consideration, for the reason

that the land in question got transferred from the assessee to M/s.

Shilpi Builders on execution of original agreement on 24.6.1999 or

on 24.10.2001, when the building plan was sanctioned by the

Kanpur Development Authority.

It is also a submission of the learned counsel for the assessee

that original agreement was executed on 24.6.1999. Memorandum

of understanding between the assessee and M/s. Shilpi Builders

Limited was also executed on 24.6.1999. Power of Attorney was

executed by the assessee in favour of Shri Atma Ram Khatri on

24.6.1999 itself and supplementary agreement between the

assessee and M/s. Shilpi Builders Limited drafted on 29.4.2002, but

executed on 1.8.2002 and claiming the same as executed only for

confirming the handing over of the land to M/s. Shilpi Builders Ltd.

prior to drafting of the supplementary agreement and pleaded that

so far as transfer of land from the assesse to the builder is

concerned, the assesse having handed over the physical possession

of land as well as having executed a power of attorney in favour of

builder and having received substantial amount in consequence of

the original agreement, the assessee had transferred almost all the

rights in the land, except title, to the transferee and therefore,

capital gain had not accrued or earned during period relevant to

assessment year 2006-07.

He also read out the clause 2 of the agreement, which is as

under :

“......the words used in this clause are “has

delivered” and not “is being delivered” or “is

delivered” which confirms the assessee's claim that

this agreement was only to confirm the acts having

been done in the past and not acts doe in the

present. He, therefore, submitted that possession

of land covered by plot No. 14/138 and part of land

covered by plot No. 14/143 had been transferred to

the builder on 24.6.1999....”

To support his arguments, he relied upon the ratio in the case

of Sanjeev Lal vs. CIT and Another [2014] 365 ITR 389(SC),

where it was observed that :

“Date of agreement to sell to be taken as date of

transfer of original asset”

He further relied upon the ratio in the case of Sunil

Siddharthbhai vs. CIT [1985] 156 ITR 155 (SC), where it was

observed that :

“....In its general sense, the expression “transfer of

property” connotes, the passing of rights in

property from one person to another. In one case,

there may be a passing of the entire bundle of

rights from the transferor to the transferee. In

another case, the transfer may consist of one of the

estates only out of all the estates comprising the

totality of rights in the property. In a third case,

there may be a reduction of the exclusive interest

in the totality of rights of the original owner into a

joint or shared interest with other persons. An

exclusive interest in property is a larger interest

that a share in that property. To the extent to

which the exclusive interest is reduced to a shared

interest, it would seem that there is a transfer of

interest....”

Lastly, he justified the impugned order passed by the

Tribunal.

We have heard both the parties at length and perused the

material available on record. From the record, it appears that

there was a succession on death of assessee's father Late

Khaliluddin Ahmad thereafter by partition with his brother became

the owner of following two immovable properties 14/138 and

14/143 Chunniganj, Kanpur, having land area 3569 sq. yard and

277 sq. yard respectively. Both the lands are adjoining and situated

within prime location of city. Two separate development

agreements were executed with builder for the development of the

above land and to gain the maximize its economic return. Assessee

entered into development agreements with builder originally with

M/s. Shilpi Builder Limited which subsequently, before completion

of development project, converted into Ratan Housing Development

Ltd. Two separate development agreements had been executed

with builder on same date i.e. on 24.06.1999 for each of above

lands in question. The development agreements for the land

provided the transfer of land to builder. As per the agreements, the

Plot No. 14/138 involved the transfer of 60% land to the builder.

On remaining 40% shares of land to be retained for the

construction of Nursing Home and three residential flats had to be

made by builder at his cost. Thus, there was the transfer of land to

the builder in lieu of cost of construction as per specification of the

agreement for Plot No. 14/138. Thus, there was transfer of the

capital assets. This transfer had taken place at the time of

execution of the development agreement on 24.06.1999, whereby

the builder had been vested with extensive powers by execution of

power of attorney executed on same day i.e. on 24.06.1999 to deal

with property for the purpose of development as stipulated by

principal development agreement. So far as Plot No. 14/143 is

concerned, it did not provide any transfer of land, but this plot was

in the name of the brother of the assessee.

This aspect is supported by the fact that the builder had

launched its scheme of booking of flats by advertising in various

well know newspaper on 20.04.2002 from 1.4.2002. This evidence

has also remained uncontroverted by the Revenue before us and

therefore, explanation of assessee being plausible, we are of the

opinion that had the possession not been given prior to a

reasonable period, then the date of launching of the scheme, the

builder could not have been in a position to launch the scheme on

21.4.2002 and here we are further of the opinion that demolition of

old building and acquiring of the land for construction being not a

childish job, was to take sufficient time and therefore, the

assessee's plea is that the possession of the land was handed over

latest by 23.11.2001 is liable to be accepted.

From the record, it also appears that the land was transferred

in all manner except title to the builder by the assessee. The word

“transfer” has been defined in Section 2(47) (of Income Tax Act, 1961).

The clause (v) and (vi) were introduced in Section 2(47) (of Income Tax Act, 1961) of the

Income Tax Act, 1961, with effect from April 1, 1988. They

provided that “transfer” includes (i) any transaction which allows

possession to be taken/retained in part performance of a contract

of the nature referred to in section 53A (of Income Tax Act, 1961) of the Transfer of Property

Act, 1882.

The Tribunal in its impugned order has observed that as per

terms and conditions of the agreement date 24.06.1999 the

transfer was effective from that very day and not in the year of

2005 as wrongly observed by the A.O. We are of the view that the

capital gain is applicable in the year when the possession was

handed over by the assessee. In the present case, the assessee's

all other rights, except title, stood transferred and therefore, the

capital gain was to be computed on the basis of transfer and in the

year of the transfer. It is evident in the present case that the

partial possession was given in the year 1999. The title was

transferred on 30.04.2005, so no capital gain could have been

accrued on 30.04.2005 for the assessment year 2006-07, as

wrongly claimed by the revenue.

In view of the above, we are of the view that the transfer of

the land under reference did not take place on 30.04.2005 as

claimed by the A.O. or arose during the assessment year 2006-07.

Hence, we find no reason to interfere with the order passed by the

Tribunal, the same is hereby sustained alongwith the reasons

mentioned therein.

Thus, the answer to the substantial question of law (No. 2)

is in favour of the assessee and against the revenue. When we

have decided the matter strictly on merit, then the technical issue

has become academic. Therefore, no answer is required to be

answered to the first substantial question of law. For the same

reason, the cross appeal filed by the assessee has only an

academic value and has become infructuous.

In the result, both the appeals filed by the revenue as well as

assessee are hereby dismissed.

Order Date :- 18.12.2014

(Dr. Satish Chandra, J.) (Tarun Agarwala, J.)