DCIT, CENTRAL CIRCLE-2(4), HYDERABAD, HYDERABAD vs. NAGAM DINAKAR REDDY, HYDERABAD, SECUNDERABAD

O R D E R PER BENCH : These appeals are filed by the Revenue for the AY.2013- 14, aggrieved by the order(s) of the Commissioner of Income Tax (Appeals)–12, Hyderabad, in appeal Nos.0024, 0032, 0026 & 0025/2015-16, dated 28-12-2016. Since the facts and issues involved in all these appeals are common and identical, except for the amounts mentioned therein, all these appeals were heard together and are being disposed off by way of this :- 2 -: 529, 530 & 531/Hyd/2017 common order. For the sake of convenience, appeal in ITA No. 531/Hyd/2017 is discussed in detail, hereunder.

1. 1. The development is for construction of project as per approval to be granted by the competent statutory authorities, as per the specifications as agreed under the development agreement.

2. The owners would be entitled to 32.30% out of total saleable area in the project towards their share and Developer is entitled to 67.70% out of the total saleable area in the project towards its share.

3. As per the terms the Developer has agreed to pay an amount of Rs.7 crores as interest free refundable security deposit to the owners. Out of this Developer had already deposited an amount of Rs.4 crores starting from January 2012. The balance amount of Rs.3 crores was supposed to be paid on the date of obtaining construction approval but before the commencement of construction.

4. As per clause IV (pg.12 Dev. Agreement) dealing with APPROVALS the developer was supposed to get the Schedule property converted from 'Agricultural' to 'Non-agricultural' use within 4 month starting from the date of Development Agreement i.e.07.04.2012 (one or before 07.08.2012).

5. Thereafter, the develop shall apply for the sanctioning of a plan for common construction over the schedule property as per applicable rules and regulations and shall obtain approvals within a period of 9 months starting from the date of Development Agreement i.e.07.04.2012 (on or before 07.01.2013).

6. If the above events do not happen for whatever reasons, the Owners shall refund the security deposit within one month from the date of receiving a written intimation from the developer. There are other terms and conditions with respect to overall built-up- area, specifications, sharing of constructed areas, inspection of progress of construction, completion of project, termination, borrowings, assignment of agreement etc. to be fulfilled by the either side to the development agreement provided the initial obligations of conversion and plan approvals are achieved in the time frames mentioned above. In the present case during the Assessment Year 2013-14 the developer is unable to obtain approval which was supposed to have been secured long back in the month of August 2012 for construction over the schedule property as required under the State Laws. The :- 4 -: 529, 530 & 531/Hyd/2017 possession of the land is to be given only after obtaining of approvals by the developer and hence possession is no: handed over till date. Having regard to the admitted facts narrated above, it is apparent that we have not earned any income by way of Capital Gains in respect of Development Agreement. The Developer had completely failed in securing required permissions/ approvals statutorily required for commencement of the Development Agreement. You would agree with us that the first step for commencement of Development Agreement is to secured permission for conversion of nature of land use which is done in the present case. To attract income by way of capital gains there should be a transfer. For valid transfer there should be giving possession of property and receipt of consideration. Even as per Sec.53A of TP. Act, there should be handing over of possession and payment of consideration. In my case there is neither receipt of consideration, nor giving of possession resulting in a transfer. What is received is only refundable deposit and not even advance. Therefore, we firmly believe that there is no income which could be admitted in respect of the Development Agreement. In view of the above, we submit that, there is no income chargeable to tax as a result of Development Agreement with M/s.Ramky Estates & Farms Limited in the Assessment Year 2013-14”. 4.1. However, Ld.AO treated the amount of Rs.6,69,92,266/- as Long-Term Capital Gains in the hands of the assessee by observing as under: 4.1. page 4. “The above submissions of the assessee's authorized representative have been carefully considered and the same are not acceptable. In the present case, neither the assessee has taken any legal action against the Developer nor the Agreement has been terminated on the grounds of non-performance. The Agreement is in force during the previous year relevant to the assessment year 2013- 14 and the Developer has also not expressed his unwillingness. There is no progress in the development as stated by the assessee cannot be a ground to negate the provisions of Section 53A of Transfer of Property Act vis-a-vis Section 2(47)(v) of Income Tax Act. The terms of Development Agreement dearly show that the assessee has given possession of the land and thjs clearly shows that the Agreement is operational and resulted in transfer and 1S considered as being valid enough to fasten the Capital Gains liability on the assessee. In this connection, the Hon'ble High Court of Andhra Pradesh while giving judgement in the case of PotlaNageswara Rao Vs "DCIT, Central Circle-A, Hyderabad [ITTA.No.245 of 2014 dated 9- 4-2014] held that the language of Section 53A of Transfer of Property

:- 5 -: 529, 530 & 531/Hyd/2017 Act which has been engrafted in the definition of Section-2(47) of Income Tax Act, does not contemplate any payment of consideration and that payment of coniseration on the date of agreement of sale is not required, it may be deferred for future date. Accordingly, the Hon'ble High Court held that the element of factual possession and agreement are contemplated as transfer within the meaning of Section 2(47) of Income Tax Act and further held that when the transfer is complete, automatically, consideration mentioned in the agreement of sale has to be taken into consideration for the purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. Since the element of factual possession and agreement exist in the present case, the transaction results in transfer within the meaning of Section 2(47) of Income Tax Act read with Section 53A of Transfer of Property Act. Hence, the Capital Gains of Rs.6,69, 92,266/-, worked out as per the working sheet enclosed, is brought to tax”.

:- 7 -: 529, 530 & 531/Hyd/2017 was also seems to have been over ruled by the AO, based the application of ratio of High Court order in case of Potla Nagesara Rao(supra). 6.3.2 The further contention of the assessee was that the facts of case law relied upon by the AO for fastening the capital gains in the year or agreement, as in the case of Potla Nageswara Rao (supra), ar.: distinguishable on two or three of the following issues/facts, as submitted during the course of appellate proceedings:

1. 1. In the case of Potla Nageswara Rao, the consideration ascertainable and the developer was wiling to perform the contract during the year, as such date of receipt of consideration was considered irrelevant, where as in tile present case, no such consideration was ascertainable, and the developer was not in a position to execute the contract, during the year of Agreement.

2. The agreement signed, possession given and approvals by Municipal Authorities had taken place during the same year in the case of Potla Nageswar Rao, where as in the case of the assessee no approval was obtained during the year and such approval was only obtained during subsequent years. 6.3.3. Further, the AO presumed that once the possession has been handed over to the developer by virtue of Development Agreement and the developer undertakes the construction and enters in to agreements for sale of constructed area with prospective buyers, the transfer is complete, as per the provisions of sec.53A of TP Act vis-a- vis sec.2(47) of I.T.Act. However, such presumption found to be only theoretical with one of the main condition for transfer of property as per TP Act i.e., willingness to perform on the part of contractor/developer as transferee is missing during the year of agreement. Further, catena of judicial decisions are of the opinion that handing over of the possession of property is only one of the condition u/s.53A of TP Act, but is not the sole and isolated condition, when one of the other conditions such as the lack of willingness on part of the developer or lack of approval/sanction by local authorities, were also held to be failing the meaning of 'transfer' u/s.2(47) of I.T.Act vis-a-vis the Sec.53A of TP Act, 1882. 6.3.4 The other observation of the AO, on the issue that the Development Agreement was entered but stated to be not executed by the developer during the year, was that the agreement was in force during the year and the assessee has not taken any action to terminate the agreement, based on which the capital gains are fastened to the year of JDA. In this context, it may be relevant to refer to the fact, that the contract/development period runs for 54 months as in case of the assessee and if such action is to be taken, it can only happen after the expiry of period of contract and sometimes after

:- 8 -: 529, 530 & 531/Hyd/2017 the expiry of the grace period well, and even in case of taking legal action against the developer, in such instances, it may confine to the specific act of claiming damages, alone but may not entitle the assessee to get the promised constructed are or the equivalent consideration. 6.3.5 Further, as could be made out from the facts of the case, the Developer neither started construction nor was granted with required permissions from the Municipal Authorities, during the year under reference. The specific clauses of Agreement indicate the facts of the case little more clearly. "The Developer shall construct and complete the Project in accordance with and in conformity with the sanctions, approvals, etc and the responsibility therefore shall be that of the Developer alone", (Clause IV(f) o JDA)." It is also observed that the actual possession of land was not handed over in the case as such the provisions of Section 53A of TP Act/2(47) of I.T.Act were not attracted, with possession in this case was only considered as license granted to builder to enter the land and construct and whereas the possession being an essential component of section 53A of TP Act and without possession Section 53A fails, as held in case of N.Karuna vs Appropriate Authority 118 Taxman 401 (AP) and Mrs.Sadia Shaik vs CIT (Bombay) and in this case the construction had not started during the year, with municipal sanction obtained by the developer/transferee during the subsequent year only as such the transfer as defined in sec.2(47) of I.T.Act, held to be not taking place during the year under reference. 6.3.6 Further, the Hon'ble ITAT, Hyderabad. had occasions to adjudicate on the same issue, where the reference was made to the decision of Hon'ble High Court of AP in case of Potla Nageswara Rao but considered the issue in favour of the landowners, interpreting the facts of cases concerned and are similar to the facts of the case under reference, on similar issue. In the case of Sudha Giri Vs ITO (ITA No.1578/Hyd/2014) vide it's order dtd.31-07-2015, the Hon'ble ITAT, 'A' Bench, Hyderabad, while further relying on the decisions of (a) M/s.Binjusaria properties Pvt Ltd vs ACIT, Central Circle-4, Hyderabad, in dtd.04-04-2014. (b) ACIT vs. Sri R.Srinivasa Rao and others in ITA No.1786/Hyd/2012 dtd.28-08-2014. (c) Ms.K.Radhika Vs. DCIT in ITA No.208/Hyd/2011, had held as under; “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 :- 9 -: 529, 530 & 531/Hyd/2017 perform, the intention of the parties, terms of the conditions which are required to be examined case by case." (Para 20 (part) of the order). 6.3.7 It may also be relevant to refer to the decision of ITAT in the case of ITO vs Sham Kumar (ITA No.1604/Hyd/2.014) dtd.20-03- 2015, which was also referring to the decision of High Court of AP in Potla Nageswar Rao Vs DCIT, though distinction was not made as to the facts of the said cases, while allowing the appeal of tile said assessee: on facts. The relevant part of the order run as under: "Taking into the totality of the facts into consideration we are of the opinion that the provisions of deemed transfer u/s.2(47)(v) cannot be invoked on the facts of the present case and for the A.Y. in dispute before us. The assessee has not received any consideration except for refundable deposit of Rs.3.00 crores and there is no evidence brought on record by the Revenue to show that actually some construction has taken place at the impugned property in the previous year relevant to the A.Y. under consideration and the right to receive the sale consideration has actually accrued to the assessee. The assessee is not eligible to capital gains on the entire sale consideration without the accrual of the consideration to the assessee. We are also fortified by the decision of the Coordinate Bench in the case of Bhavya Construction Ltd & Others (ITA No. 1788/Hyd/2012). The ratio of the decision is that unless there is willingness on the part of the Developer to perform his part of the Contract, there cannot be a transfer of capital assets as envisaged u/s.2(47)(v) r.w.s. 53A of the Transfer of the Property Act. The ratio laid- down as above squarely applies to the facts to the present case as the Department has failed to controvert the findings of the ld CIT(A) by bringing material on record to show that the developer has taken steps toward developmental activities. Hence, the capital gains cannot be brought to tax in the year under appeal.” 6.3.7.1 It may also be relevant to mention here that without computation the charging section may fail as held in case of CIT Vs. BC Srinivasa Setty 128 ITR 294 (SC) and in this case, the consideration held to be not determined without there being any permissions from the Authorities concerned and execution of Agreement during the year under reference. 6.3.8. Thus, going by the facts of the case, where the conditions stipulated as per the provisions of sec.53A of TP Act, were not fully fulfilled as in this case, with no municipal sanction obtained during the year and no work resumed during the year of agreement, it could not be presumed that capital gains had arisen during the year of Development Agreement. Further, in the case of Sri N.Dinakar Reddy, of the same family/group, for A.Y.200-10, on similar facts, It was :- 10 -: 529, 530 & 531/Hyd/2017 observed that the capital gains were offered for the year of approvals obtained from Municipal Authorities, as against the year of Agreement (A.y.2006-07), and such computation was accepted by the AO, in Assessment. It is also a fact, that on similar lines, the assessee under reference has offered the capital gains related to the TDA dated 11/04/2012, on the basis of approvals by Municipal Authorities in the years corresponding to A.Y.2014-15 and 2015-16 and ROI were being filed. In fact, the assessee made alternative plea for giving credit for such amounts as offered in AY 2014-15 and 2015~16,in case of computation of capital gains for the year under reference, based on signing of Agreement alone. However, it is observed that the AO had gone by the ratio of the decision of Hon'ble High Court of AP in the case of potla Nageswara Rao, to hold that once the possession is given the transfer is complete and capital gains accrued, regardless of receipt of consideration. The AO did not get in to the details of fulfillment of conditions stipulated u/s.53A of TP Act, in the case of the assessee, as averred by Hon'ble High Court of Potla Nageswara Rao (supra), where in a specific observation regarding the governing facts/clauses of agreement was made, which run as under: "We are of the view that each and every individual case stands on its own footing". 6.3.9 As to the further facts of the case, there was no resumption of contract, with no sanction obtained by the developer, till the end of the year. Further, the transaction of Development Agreement had shown to have resulted in computation of capital gains in the years of Municipal Approvals as happened on assessee's own case in earlier years, as indicated. Hence, on facts, the 'transfer' of property by virtue of the JDA was stated to be not complete during the year under reference, being the year of Agreement, to give rise to the capital gains. Hence, on facts of the case, no capital gains are held to have been arisen during the year under reference, by taking these important factors, into consideration. The fact of the case is that there was no activity on part of the developer to execute the JDA, during the year with no steps were taken for development, as such no consideration held to have been received, with no municipal sanction approved during the year, but only obtained in the subsequent year, Hence, it is reasonable to hold that the computation of capital gains of Rs.6,69,92,266/-, based on the signing of Development Agreement, in the year 2012-13 related to A.Y.2013-14, held to be not justified. However, the AO is free to proceed to assess the capital gains in the years of approval by the Municipal Authorities as had taken place in the case of the assessee for A.Y.2009-10, on the basis of JDA dtd.11- 12-2006. On similar lines, the relevant years in this regard, to the Development Agreement dtd.07-04-2012, happen to be A.Y-2014-15 :- 11 -: 529, 530 & 531/Hyd/2017 and 2015-16. Accordingly, the grounds related to this issue are treated as Partly Allowed”.

Order pronounced in the open court on the 22nd December, 2021