SHRI. KOLA VENKAT RAMA NAIDU,BANGALORE vs. THE COMMISSIONER OF INCOME TAX (APPEALS) - 6, BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by the assessee is directed against order of the CIT(A) dated 21.11.2019. The assessee has raised following grounds of appeal:- The impugned order dated 16.11.2019 passed by the (2) Assistant Commissioner of Income Tax, Appeal - 6 under section 250 of the Income Tax Act 1961 for assessment year 2010-11 is highly illegal, improper and unjust and also in the gross violation of the principles of natural justice.

(3) The learned respondent seriously erred in not noticing the fact that in view of the pendency of the various legal litigation on the properties, the appellant had not got a complete legal rights over the property which were the subject

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matter of Joint Development Agreement with M/s. Sri Ram Properties Limited resulting in-complete inaction much less any commercial activity on the said property warranting assumption of income in the manner assessed in the impugned order.

(4) The Learned Respondent equally overlooked all the glaring facts and submissions made by the appellant before the survey authorities and therefore the impugned orders are liable to be quashed on this ground alone.

(5) The learned respondent further grossly erred in assuming income during the impugned period although the appellant had never accrued any income in view of complete inaction on the project.

(6) The learned respondent further grossly erred in assuming the selling price absolutely without any basis and had arrived at an imaginary figure without any basis and therefore the impugned orders is liable to be set aside on this ground also.

(7) The learned respondent also seriously erred in not considering the various statutory documents like granting of Khata on the property, releasing the original Joint Development Agreement by the Registering Authority, continuation of the litigation over the properties which are the subject matter of Joint Development Agreement which disabled the appellant as well as the transferee from not carrying out any activity on the property so as to remotely presumed any income assessable during the impugned period.

(8) On the facts and circumstances of the case , the re- assessment order passed by the learned A.O is illegal and opposed to law and liable to be quashed as the A.O has recorded completely false & wrong facts on reasons recorded for re-opening of the assessment in spite of repeated request by the Appellant.

(9) The Respondent erred in holding that there was "transfer" within the meaning of section 2(47)(v) of the Income Tax Act, 1961 is clearly un- sustainable in law.

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(10) Without prejudice to any of the aforesaid grounds, it is noted that consideration accruing cannot be evaluated as the subject matter is not in existence and therefore cannot be ascertained as on the date of JDA as it would amount to calculation of discounted figures on an unknown value for a non-existed asset and in capable of being determined. Therefore, it is submitted that the computation provisions cannot be involved and therefore charge to capital gain fails.

(11) The learned A.O, has grossly erred in considering the sale value of capital assets (consideration) on imaginary basis without any material in hand and also he has incorrectly considered the cost of acquisition.

(12) The Appellant has incurred various expenses for the project which had undertaken routinely and had reflected all the expenses in the regular books of accounts maintained by the Appellant under the head Developmental Expenses and in fact all the payments were made through account payee cheques only. Despite the same the Respondent had illegally assumed that the Appellant had not produced complete documentary proof for the development expenses incurred by him during the relevant assessment year.

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contention of the assessee is that the permissive possession of land was given to the developer only in October, 2013. The A.O. treated the transfer in terms of section 2(47)(v) of the Act and computed the short term capital gain arising out of JDA. Further, during the survey, the assessee was asked to produce details of bills/vouchers and documentary proof for the developmental expenditure charged to the P&L account and consequently statement u/s 133A of the Act from the assessee with the declaration of 25% of the development expenses as additional income of Rs.1,37,60,592/- was obtained as additional income. Consequent to survey, the assessment was reopened by issuing a notice u/s 148 of the Act on 17.3.2015 by recording a reason as follows:-

"The assessee Sri.K.V Naidu (PAN: ABMPN6059K) has filed his return of income for the AY 2010-11 on 13.10.2010 declaring total income of Rs 54,36,810/-.

A survey u/s 133A was conducted in the business premises of the assessee on 02.03.2015 by this circle. During the course of survey, it was found that the assessee had entered into JDA on 07.05.2009 with M/s Shriram Properties Limited, Chennai for the construction of residential flats on the lands owned by the assessee by transferring the lands measuring 2 acres and 5 guntas at Sy.No.68, situated at Singapura, Jalahalli East, Bengaluru. It is seen from the records that the assessee has not offered any income capital gains arising out to the transfer of the above lands to M/s. Shriram Properties Limited, Chennai, in the return of income filed by him for AY 2010-11. Therefore, I have reason to believe that the income chargeable to tax has escaped assessment for the A.Y 2010-11."

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Total - Rs.7,10,69,602/-

7.1 The Assessee has filed his income tax return for the A.Y 2010- 11 on 13-10-2010 declaring income of Rs.54,36,810/-. A survey u/s 133A was conducted on 02.03.2015 at the business premises of the Assessee. During the survey, the Assessee was asked to explain the present situation on the matters on the Joint Development agreement entered on 07-05-2009 with M/S Shriram Properties Limited, for construction of residential flats on the land owned by the Assessee measuring 2 Acres and 5 guntas situated at Singapura Village, Jalahalli East, Yelhanka Hobli, Bengaluru. According to A.O the possession of the land was given to the Builder/developer on

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signing the JDA, in spite of the contention of the Assessee that the permissive possession of land was given to the Developer only in October 2013. Accordingly, he completed assessment so as to keep the matter alive. Thereby, he has wrongly computed the alleged STCG arising out of JDA.

7.2 The Ld. A.R. submitted that the Assessee has entered into JDA on 07-05-2009 with M/S Shriram Properties Limited for developing residential flats in land measuring 10 Acres 27 guntas situated at Singapura Village, Jalahalli East, Yelhanka Hobli, Bangalore. As per clause No. 1.2 of JDA, the Assessee has granted license to the Developer to enter into the vacant property and to construct a residential complex as per the plan to be sanctioned by competent authority for the composite development of the property. It is also mentioned therein JDA that such permission given under said agreement cannot be construed as delivery of possession under section 53A of Transfer of Property Act.

7.3 According to Ld. A.R., the judgement of Hon’ble Bombay High Court’s in the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT (260 ITR 491), consider this issue and it was observed as under:-

"Under Section2(47)(v), any transaction involving allowing of 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 would come within the ambit of Section 2(47)(v). That, in order to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under section 2(47)(v)."

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7.4 Their Lordships, having made the above observations, took note of the fact that section 2(47)(v) was introduced in the Act w.e.f. A.Y 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, section 2(47)(v) came to be introduced in the Act.

7.5 He submitted that there was no dispute on whether or not the conditions of section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon’ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows:

"If on a bare reading of a contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under section 2(47)(v)"

7.5 He submitted that 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 by their Lordships can at best be inferred as that when conditions under section 53A are satisfied, and when the assessee enters into a

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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).

7.6 According to Ld. A.R., in order to invoke the ’principles’ laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under section 53A of the Transfer of Property Act are satisfied.

7.7 He submitted that a plain reading of the section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in s. 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon’ble Bombay High when their Lordships observed as follows:

"That, in order to attract s. 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract.".

Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla—The Transfer of Property Act" (9th Edn.: Published by Butterworths India), at p. 448, observes that:

"The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is

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conditioned upon the transferee’s willingness to perform his part of the contract in terms covenanted thereunder.

Willingness to perform the roles ascribed to a party in a contract is primarily a mental disposition. However, such willingness in the context of s. 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient.

In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed......"

7.8 According to Ld. A.R., the ‘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 his obligations. Unless the party has performed or is willing to perform his 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 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’ his obligations under the agreement.

7.9 He submitted that facts of this case would show that the transferee had neither performed nor was he willing to perform his obligation under the agreement. The agreement based on which capital gains are sought to be taxed in the present assessment year is agreement dated 07-05-2009 but this agreement was not adhered to by the transferee. There are various litigations were pending before

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City Civil Court at Bangalore in O.S. No. 3391/1997 & OS No.1682/2011 and they are finally settle in subsequent assessment years. So, the transferee did not make the payments as stipulated in the said agreement. Despite best efforts by the Assessee, the payments from the transferee could not be obtained. In fact, as a result of this lapse by the transferee, the possession as well as ownership of the impugned property was with Assessee and it was rightly shown as asset in the balance sheet of the Assessee as on 31- 03-2010 and thereafter. All these factors unambiguously establish that not only the transferee never performed his obligations under the agreement but the transferee was, not even willing to perform his obligations in the A.Y under consideration. When transferee, by his conduct and by his deeds, demonstrates that he is unwilling to perform his obligations under the agreement, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform his obligations in the A.Y 2010-11 in which the capital gains are sought to be taxed by the Revenue. The condition laid down under s.53A of the Transfer of Property Act was not satisfied. Once the transferee was not ‘willing to perform’, as stipulated by and within meanings assigned to this expression under section 53A of the Transfer of Property Act, his contractual obligations in this previous year, it is only a corollary to this finding that the development agreement dated 07-05-2009, based on which the impugned taxability of capital gain is imposed by the AO cannot be said to be a "contract of the nature referred to in section 53A of the Transfer of Property Act" and, accordingly, provisions of section 2(47)(v) cannot be invoked on the facts of this case. In the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT’s case (supra) undoubtedly lays down a

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proposition which, more often not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the Assessee inasmuch as “‘willingness to perform’ has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of section 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of A.O’s case is thus base less.

7.10 As stated in the assessment order, it only explains the reasons of re-opening the assessment is that the entering of JDA on 7.5.2009 and there is no offering of income of the capital gain on this count. The clause no. 1.2 of JDA itself states that no possession of the property has been given through the said JDA. The JDA is only for granting license to enter plot and start developmental activities" as narrated in clause 1.2 of JDA and that "as a result of this, the provisions of section 2 (47)(v) have no application. In this context, it is submitted that, the AO himself aware of the fact that the possession of the property was not given vide JDA and, having noted that valid consideration was not received by the assessee and no possession of the property was given by the assessee to the Developer in the relevant assessment year, concludes that this agreement was not given effect to. There was no material before the AO to infer that the transferee had performed, or was willing to perform his obligations under the agreement, and yet he concludes that the conditions of section 53A are satisfied. On the contrary, there was material on record to suggest that the transferee has not, and is not willing to, perform his obligations under the agreement dated 07.05.2009, as was discernable from the details of payments received vis-a-vis the payment obligations under the agreement in question. The AO has apparently proceeded to reopen the assessment on the basis that mere grant of license, coupled with entering of

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development agreement, was not enough to invoke deemed transfer under section 2(47)(v) of the Act. That is clearly an erroneous assumption, and an action based on such a fallacious assumption cannot be sustained in law. The provisions of deemed transfer under section 2(47)(v) could not have been invoked on the facts of the present case. In the present case, the situation is that the Assessee has received only a ‘meager amount’ at Rs. 5,00,000/- out of total refundable deposit, the transferee is avoiding adhering to the construction schedule on one ground or the other, and there is no surety that the sales consideration will actually be realized by the Assessee, and yet the Assessee is expected to pay capital gains on the entire estimated sales consideration. When payment on time is essence of the contract, and the payments are not made in time, it cannot be said that such a contract confers any rights on the transferee to seek redressal under section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of section 2(47)(v) will apply to the assessee’s case.

7.11 Ld. D.R. submitted that the assessee entered into JDA on 7.5.2009 with M/s. Sriram Properties Ltd. for construction of residential flats on the land owned by the assessee and the assessee has given the construction possession to the developer on this date and received substantial advance, as such, the provisions of section 2(47)(v) of the Act is directly applicable and accordingly, the Ld. CIT(A) treated that there was a transfer in this case and accordingly he directed the AO to compute the long term capital gain arising out of the JDA and for this purpose he relied on the judgement in the case of Chaturbuji Dwarakadas Kapadia Vs. CIT reported in 260 ITR 491 and also in the case of T.K. Dayalu 202 Taxmann 500 (Karn).

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Page 13 of 33 Further, he also relied on the judgement in the case of CIT Vs. Balbir Singh Maini reported in 398 ITR 531 (SC). He also relied on the order of Tribunal Cochin bench in the case of Smt. Hema Mohanlal for assessment year 2009-10 in ITA No.367/Coch/2017 dated 27.12.2018, wherein held as under:-

“ 7. We have carefully perused the JDA entered between the assessee and the developer. As per the JDA (in page 3 para 4), the construction should have completed and the share of build up area marked for the assessee ought to have been handed over within 36 months of obtaining necessary sanction. The developer could not complete the construction as per the JDA due to their internal problems and working capital issues and 20,000 sq. ft. of buildup area was handed over to the assessee only on 12.04.2016 after a gap of seven years. The closure agreement dated 12th April, 2016 evidencing the handing over is enclosed from page 16 of the paper book. As per page 3 para 5 of the JDA, it is stated that “the sale deeds the developer executes with the prospective buyers or other investors, shall be without prejudice to the complete ownership of land to the land owner until the owner’s part of the built-up area is finished and handed over”. Hence the builder did not have the right to sell the land without the signature / thumb impression of the assessee / the owner. Further, as per 1st para page No.4 of the JDA, it is stated that “if the developer fails to complete the project within 36 months from the date of signing the agreement, the Land Owner will have the right to mortgage or alienate the land as absolute owner and use the money for completing the project and developer shall have no right to object or obstruct the process of construction in the aforesaid property”. Therefore, the assessee has given the possession of the property for limited purpose of construction as per the JDA and the assessee continue to retain the ownership of the property. In other words, the assessee has the right to take back or reclaim property at any time, if the 20,000 sq.ft. built-up area is not handed over to the assessee in time.

7.1 As per the provisions of section 53A of the Transfer of Property Act, transaction would constitute “transfer” for the purpose of capital gain only if all following conditions are satisfied:- (i) There should be a contract in writing. (ii) The transferee has paid consideration. (iii) The transferee is willing to perform his part of the contract. (iv) The transferee should have taken possession of the property.

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Page 14 of 33 7.2 In this case, other than entering into the Agreement, no other condition stipulated u/s 53A as stated above is complied with. The following conditions are not fulfilled:-

(i) No consideration in cash or kind is passed on at the time of signing the agreement or afterwards. Hence there is no accrual of consideration.

(ii) The conditions stipulated in the agreement was not complied with by the transferee, i.e. the construction and transferring 20,000 sq.ft. of built-up as per JDA was within 36 months from the date of JDA instead the same was handed over only after seven years i.e. on 12.04.2016.

(iii) The agreement is a joint venture agreement and only conditional possession is handed over and as per the agreement the land owner continued to be the owner and has right to take back the land with building constructed, on non fulfillment of the contract terms. Conditional possession granted for development of plot does not amount to taking possession of the property under section 53A of the Transfer of Property Act. “Willingness to perform” the conditions stipulated has been specifically recognized as one of the essential ingredients to cover a transaction within the scope of section 53A of the Transfer of Property Act.

7.3 The provisions of deemed transfer u/s 2(47)(v) cannot be invoked in the assessee’s case since she did not receive any consideration and also no construction actually took place during the Asst. Year 2009-2010. The permission from Trivandrum Corporation to construct the building was issued only during the next financial year on 08.06.2009. Copy of permission to construct the building is enclosed at page 19 of the paper book filed by the assessee.

7.4 The Power of Attorney was given to the developer only to represent the land owner and to sign on behalf of the land owner as per the instruction given by her since she is handicapped and living abroad at the time of execution of power of attorney. Nowhere in the power of attorney, handing over of the complete possession of the property to M/s.Artech Realtors (P) Ltd. was mentioned. Copy of the Power of Attorney is enclosed at page 21 of the paper book. As per the Power of Attorney and the JDA, flat can be transferred to a buyer only with the signature of the land owner and no power is given to the developer for selling the land. The developer had waited for 7 years (i.e. up to 12th April, 2016) for handing over the built-up area to the land owner to get the first sale deed registered with the signature of the land owner assessee. Before the date of handing over on 12th April, 2016 no land right was transferred to the flat owners. (Copy of the first sale deed is enclosed from page 25 of the paper book). It is made clear in the JDA that “the land owner hereby agrees to give the right to sell the undivided share of interest in the aforesaid property to the developer in lieu of construction and handing over of 20,000 sq.ft. of super built-up area of service apartments”.

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Page 15 of 33 7.5 In the case of C.S.Atwal v. CIT (2015) TaxCorp (DT) 61500 the Hon’ble Punjab and Haryana High Court held that “Entering into a joint development agreement with an irrevocable power of attorney in favour of the developer does not result in a “transfer” for purpose of capital gains. For the purpose of taxability the income has to really accrue to the assessee”. In this case the right to receive the sale consideration is not accrued at the time of signing of agreement on 8th February, 2009. Without the accrual of consideration, the assessee is not expected to pay capital gain on the agreed sale consideration. Even the sale consideration is not mentioned in the agreement and no amount was handed over at the time of signing the agreement or afterwards. It was held in the case of C.S.Atwal v CIT (supra) that “willingness to perform their part of the contract was absent on the part of the developers or it could not be performed by them which was one of the conditions precedent for applying Section 53A”.

7.6 In the case of ITO v. Sham Kumar 2015 TaxPub (DT) (Hyderabad ITAT – ITA No.40270) which is identical to the facts of the present case. It was held by the Hyderabad Bench of the ITAT as follows:-

“The assessee has not received any consideration except refundable deposit of RS.3 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 relevant to the assessment year under consideration and the right to receive the sales consideration has not actually accrued to the assessee.” Further it is held that “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 provisions of section 53A of the Transfer of 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 the case, the transaction in question cannot fall within the scope of deemed transfer under section 2(47)(v) of the Act.”

7.7 When time is essence of the contract, and the time schedule is 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any right on the vendor / landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. The provisions of section 2(47)(v) will not apply in such a situation. It was held in the case of Sri ABVS Prakash, Hyderabad v. The ACIT, Central Circle-1, Hyderabad (2014) 8 Tax Corp (A.T.) 35688 that “The provisions of deemed transfer under section 2(47)(v) could not have been invoked. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor / landlord to seek redressal under section 53A of the Transfer of Property Act. The agreement

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cannot be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot be said that the provisions of section 2(47)(v) will apply in the situation. Thus, the capital gains could not have been taxed”.

7.8 In the instant case, the assessee has offered a capital gain amount of Rs.1,17,00,000 in Asst.Year 2017-2018 in respect of this transaction and has also paid the full tax. Copy of the statement of the total income along with ITR V for Asst.Year 2017-2018 enclosed as Annexure 14 in the paper book filed by the assessee.

7.9 Further, as per the newly inserted sub-section (5A) to section 45 to the Income Tax Act, 1961, by the Finance Act, 2017, capital gains in case of a joint development agreement arises only in the previous year in which the certificate of completion for the whole or the part of the project is issued by the competent authority. The stand of the assessee that just by signing the joint development agreement capital gains will not be attracted is now accepted by way of this newly inserted sub-section (5A) to section 45 of the Income-tax Act.

7.10 Most importantly, we notice that JDA was not a registered document. The general Power of Attorney executed by the assessee in favour of her husband is the only registered document. Even construction agreement dated 21.06.2009 is not registered. The Hon’ble Apex Court in the case of CIT v. Balbir Singh Maini (supra), has held that after amendment of Registration Act, 1908 in the year 2001, unless the document containing the contract to transfer any immovable property is registered, it shall not have any effect in law. The relevant finding of the Hon’ble Supreme Court reads as follows:-

“20. The effect of the aforesaid amendment is that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of section 53A. In short, there is no agreement in the eyes of law which can be enforced under section 53A of the Transfer of Property Act. This being the case, we are of the view that the High Court was right in stating that in order to qualify as a "transfer" of a capital asset under section 2(47)(v) of the Act, there must be a "contract" which can be enforced in law under section 53A of the Transfer of Property Act. A reading of section 17(1A) and section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in section 53A. The Income-tax Appellate Tribunal was not correct in referring to the expression "of the nature referred to in section 53A" in section 2(47)(v) in order to arrive at the opposite conclusion. This expression was used by the Legislature ever since sub-section (v) was inserted by the Finance Act of 1987, with effect from April 1, 1988. All that is meant by this expression is to refer to

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the ingredients of applicability of section 53A to the contracts mentioned therein. It is only where the contract contains all the six features mentioned in Shrimant Shamrao Suryavanshi (supra), that the section applies, and this is what is meant by the expression "of the nature referred to in section 53A". This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression "of the nature referred to in section 53A" would somehow refer only to the nature of contract mentioned in section 53A, which would then in turn not require registration. As has been stated above, there is no contract in the eye of law in force under section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no "transfer" can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken ; whether only a licence was granted to develop the property ; and whether the developers were or were not ready and willing to carry out their part of the bargain. Since we are of the view that sub-clause (v) of section 2(47) of the Act is not attracted to the facts of this case, we need not go into any other factual question.”

7.11 In view of aforesaid reasoning and judicial pronouncements cited supra, we hold that the CIT(A) is justified in deleting the addition of Long Term Capital Gain during the relevant assessment year.”

Findings on taxability of capital gains by invoking provisions of section 2(47)(v) of the Act:-

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“PERMISSION TO DEVELOP: 1.1) The First Party on this day delivered permissive possession of the Schedule B Property to the Second Party for the purpose of Development and Construction of residential complex. 1.2) The First Party hereby grants license to the Second Party or its nominees to enter into the vacant Schedule B Property and to construct a residential complex as per the plan to be sanctioned by BDA/BMP or any other competent authority for the composite development of Schedule Property. The Second Party shall enter upon Schedule B Property for commencing the work and shall continue to exercise the said right throughout the duration of the project and its completion. It is specifically understood between the Parties that the permissive possession of Schedule B Property given to the Second Party is not being given or intended to be given by the First Party in part performance of this agreement and this is not a sale agreement in any form or manner. Both the Parties confirm that the First Party shall retain legal possession of the Schedule B Property, subject to other terms and conditions of this agreement. The Development contemplated by this agreement is not in the nature of a partnership as contemplated either by the Indian Partnership Act 1932 or by the Income Tax Act, 1961. Such permission to enter Schedule B Property shall however be not construed as delivery of possession under section 53A of Transfer of Property Act.”

8.1 Thus, the assessee granted license to the developer to enter into the vacant property to construct residential complex as per the plan to be sanctioned by the competent authority for the composite development of the property. It was also mentioned in that clause that such permission given under the said agreement cannot be considered as delivery of possession under the Income Tax Act, 1961.

8.2 Hon’ble Bombay High Court’s in the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT (260 ITR 491), consider this issue and it is necessary to first appreciate what this judgment lays down, and perhaps even more important that, what it does not lay down.

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8.3 Their Lordships of Hon’ble Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. This provision, which covers one of the modes of deemed ‘transfer’, lays down that the scope of expression ‘transfer’ includes "any transaction involving the allowing of, the possession of any immovable property (as defined) to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act”. Elaborating upon the scope of section 2(47)(v), their Lordships observed as follows:

"Under Section2(47)(v), any transaction involving allowing of 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 would come within the ambit of Section 2(47)(v). That, in order to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under section 2(47)(v)."

8.4 Their Lordships, having made the above observations, took note of the fact that section 2(47)(v) was introduced in the Act w.e.f. A.Y 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, section 2(47)(v) came to be introduced in the Act.

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8.5 There was no dispute on whether or not the conditions of section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon’ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows:

"If on a bare reading of a contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under section 2(47)(v)"

8.6 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 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).

8.7 In order to invoke the ’principles’ laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference:

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Page 21 of 33 "Sec. 53A : Part performance—Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, 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 the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed thereof 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 the right specifically provided by the terms of the contract;

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."

8.8 A plain reading of the section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in s. 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon’ble Bombay High when their Lordships observed as follows:

"That, in order to attract s. 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract.".

Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla—The Transfer of Property Act" (9th Edn.: Published by Butterworths India), at p. 448, observes that:

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"The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee’s willingness to perform his part of the contract in terms covenanted thereunder.

Willingness to perform the roles ascribed to a party in a contract is primarily a mental disposition. However, such willingness in the context of s. 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient.

In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed......"

8.9 We are in agreement with the views so expressed by the Hon’ble Bombay High Court. 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 his obligations. Unless the party has performed or is willing to perform his 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 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’ his obligations under the agreement.

8.10 He submitted that facts of this case would show that the transferee had neither performed nor was he willing to perform his obligation under the agreement. The agreement based on which

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capital gains are sought to be taxed in the present assessment year is agreement dated 07.05.2009 but this agreement was not adhered to by the transferee. There are various litigations were pending before City Civil Court at Bangalore in O.S. No. 3391/1997 & OS No.1682/2011 and they are finally settle in subsequent assessment years. So, the transferee did not make the payments as stipulated in the said agreement. Despite best efforts by the Assessee, the payments from the transferee could not be obtained. In fact, as a result of this lapse by the transferee, the possession as well as ownership of the impugned property was with Assessee and it was rightly shown as asset in the balance sheet of the Assessee as on 31- 03-2010 and thereafter. All these factors unambiguously establish that not only the transferee never performed his obligations under the agreement but the transferee was, not even willing to perform his obligations in the A.Y under consideration. When transferee, by his conduct and by his deeds, demonstrates that he is unwilling to perform his obligations under the agreement, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform his obligations in the A.Y 2010-11 in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under s.53A of the Transfer of Property Act was not satisfied. Once we come to the conclusion that the transferee was not ‘willing to perform’, as stipulated by and within meanings assigned to this expression under section 53A of the Transfer of Property Act, his contractual obligations in this previous year, it is only a corollary to this finding that the development agreement dated 07-05-2009, based on which the impugned taxability of capital gain is imposed by the AO cannot be said to be a "contract of the nature

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referred to in section 53A of the Transfer of Property Act" and, accordingly, provisions of section 2(47)(v) cannot be invoked on the facts of this case. In the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT’s case (supra) undoubtedly lays down a proposition which, more often not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the Assessee inasmuch as “‘willingness to perform’ has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of section 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of A.O’s case is thus devoid of legally sustainable basis.”

8.11 The clause no. 1.2 of JDA itself states that no possession of the property has been given through the said JDA. The JDA is only for granting license to enter plot and start developmental activities" and that "as a result of this, the provisions of section 2 (47)(v) have no application. This action falls within the purview of section 53A of the Transfer of Property Act and such part performance has been defined as ‘transfer’ as defined under section 2(47) of the IT Act". When, we analyze these observations made in the reasons for reopening of assessment, there are factual inconsistencies and glaring errors. In this context, it is submitted that, the AO himself aware of the fact that the reopening is bad in law as the possession of the property was not given vide JDA and, having noted that valid consideration was not received by the assessee and only permissive possession of the property was given by the assessee to the Developer in the relevant assessment year, concludes that this agreement was not given effect to. There was no material before the AO to infer that the transferee had performed, or was willing to perform his obligations under the agreement, and yet he concludes that the conditions of section 53A are satisfied. On the

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contrary, there was material on record to suggest that the transferee has not, and is not willing to, perform his obligations under the agreement dated 07-05.2009, as was discernable from the details of payments received vis-a-vis the payment obligations under the agreement in question. The AO has apparently proceeded to reopen the assessment on the basis that mere grant of license, coupled with entering of development agreement, was enough to invoke deemed transfer under section 2(47)(v) of the Act. That is clearly an erroneous assumption, and an action based on such a fallacious assumption cannot be sustained in law. The provisions of deemed transfer under section 2(47)(v) could not have been invoked on the facts of the present case. In the present case, the situation is that the Assessee has received only a ‘meager amount’ at Rs.5,00,000/- vide clause No.11.1 of JDA dated 7.5.2009 as refundable deposit, the transferee is avoiding adhering to the construction schedule on one ground or the other, and there is no surety that the sales consideration will actually be realized by the Assessee, and yet the Assessee is expected to pay capital gains on the entire estimated sales consideration. When payment on time is essence of the contract, and the payments are not made in time, it cannot be said that such a contract confers any rights on the transferee to seek redressal under section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of section 2(47)(v) will apply in the situation before us. Being so, the capital gain on entering into JDA in question, could not have been taxed in the assessment year 2010-11.

8.12 Further, there is no progress in development agreement in assessment year under consideration. The permission for construction was not obtained in the assessment under

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consideration. Various permission from concerned authorities were obtained as below:

8.13 The above permissions were utmost important for the implementation of the JDA. Without above sanction, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. In fact, the building plan was not got approved by the builder in the assessment year under consideration. Unless permission is granted, a developer cannot undertake construction. As a result of this, the construction was not taken place in the assessment year under consideration. There is a breach and break down of development agreement in the assessment year consideration. Nothing is brought on record by A.O to show that there was any development activity in the assessment year under consideration and no cost of construction was incurred

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in this assessment year. Hence, it is to be inferred that no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer.

8.14 The admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the assessment year under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 07-05-2009 but this agreement was not adhered to by the transferee. As such, the assessee has received only a meager amount as refundable security deposit which cannot be construed as receipt of part of sale consideration. Admittedly, there is no progress in the development agreement in the assessment year under consideration. The Khata of the property transferred in the name of the Assessee in on 28.5.2013, and the plan sanction of the building plan is utmost important for the implementation of the agreement entered between the parties. Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, the khata of the property has to be transferred in the name of the assessee, plan is to be approved by the competent authority. In fact, the building plan was not got approved by the builder in the assessment year under consideration since he do not have legal ownership, since the khata has not been transferred. Until permission is granted, a developer cannot undertake construction. As a result of this lapse by the transferee, the construction was not taken place in the assessment year under consideration. There is a breach and break down of development agreement in the assessment year under consideration and it is not possible to say whether the developer prepared to carry out those parts of the agreement to their

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logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agreement. The developer has not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredient that make a person eligible and entitled to make the construction. The act and conduct of the developer in this assessment year shows that it had violated essential terms of the agreement which tend to subvert the relationship established by the development agreement. Being so, it was clear that in the year under consideration, there was no transfer of not only the flats as superstructure but also the proportionate land by the assessee under the joint development agreement. The time is the essence of the contract and as per JDA, the said property is to be developed and hand over the possession of the owners’ allocation to the owners’ and or their nominees within 56 months from the date of JDA as per reading in clause 6.1 of JDA. It has to be seen from clause 2.1 of the JDA that the developer shall prepare necessary plan for construction of residential buildings and to submit to the authorities concerned and to submit them to BDA or other government authorities within one month so as to secure approved plan for construction. The clause no. 6.1 of the JDA shows that the developer has to commence the construction of buildings within 60 days from the date of securing sanction of plans and license. The developer has to complete the construction within 48 months from the commencement of construction with a grace period of 6 months. But the fact remains that the transferee was not only failed to perform its obligations under the agreement, but also unwilling to perform its obligations in the assessment year under consideration. Even otherwise, the assessing authorities has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction

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work at any time during the assessment year under consideration or any development has taken place in the project in the relevant period. He went on to proceed on the sole issue with regard to handing over the possession of the property to the developer though it was not handed over though JDA. Even otherwise, the handing over of the possession of the property is only one of the condition u/s 53A of the Transfer of Property Act but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was 'willing to perform' its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee's obligations which can give rise to the situation envisaged in Section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the A.O. It is to be noted that the condition laid down under section 53A of the Transfer of Property Act was not satisfied in this assessment year. Once it is concluded that the transferee was not 'willing to perform', as stipulated by and within meanings assigned to this expression under Section 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present assessment year, it is only a corollary to this finding that the development agreement based on which the impugned taxability of capital gain is imposed by the AO cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case Chaturbhuj Dwarkadas Kapadia v. CIT's case (supra) undoubtedly lays down a proposition which, more often than not, favours the A.O, but, on the facts of this case, the said judgment

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supports the case of the assessee inasmuch as 'willingness to perform' has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. A.O does not get any assistance from this judicial precedent. The very foundation of AO's case is thus devoid of legally sustainable basis.

8.15 That is clearly an erroneous assumption, and the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has not received any part of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the assessee/landlord to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, the capital gains could not have been taxed in the in this assessment year under consideration.

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8.16 Further, Hon’ble Supreme Court in Civil Appeal No. 15619 OF 2017 (Arising out of SLP (CIVIL) NO.35248 OF 2015) in the case of Commissioner of Income Tax Vs. Balbir Singh Maini, wherein it was held as follows:-

“27. In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.” “28. In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act. “

“29. We are, therefore, of the view that the High Court was correct in its conclusion, but for the reasons stated by us hereinabove. The appeals are dismissed with no order as to costs”

8.17 In view of the above, impugned Development agreement comes out of the scope of the ambit of section 53A of the Transfer of Property Act. Therefore, section 53A of the Transfer of Property Act, has no manner has application to impugned development agreement. Accordingly, section 2 (47)(v) of the IT Act is also not applicable as it has no effect of transfer nor enabling of any enjoyment by either of the parties on the date of execution of development agreement as the owner continue to own the land and the developer has no enjoyment whatsoever as it is only on the execution of a project in accordance with the terms of development agreement.

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8.18 As seen from the above, in the assessment under consideration, it cannot be said that there was a transfer in terms of section 2(47)(v) of the Act as nothing has been progressed with regard to the construction project from the end of the developer in this A.Y. Further, the possession in the present case is only permissive possession given by the assessee to the developer and not the possession in part performance of agreement of sale. There is no document by which the revenue can come to the conclusion that there was delivery of possession. The mere fact that development of the property cannot be done without possession cannot be the basis to come to the conclusion that possession was delivered in the part performance of the agreement for sale in the manner laid down in section 53A of the T.P. Act. Being so, the judgement relied by the Ld. D.R. in the case of T.K. Dayalu cited (supra) cannot be applied to the facts of the present case as the constructive possession of property as per section 53A of the T.P. Act has not been given. Accordingly, we hold that there is no transfer in the assessment year under consideration in the A.Y. 2010-11. However, we make it clear that the capital gain arise out of this JDA dated 07.05.2009 to be taxed in the assessment year when the assessee actually got received his share of constructed area of flats from the developer, if it is not offered to him so far. This ground of assessee is partly allowed.

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Page 33 of 33 11. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 5th Aug, 2022

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 5th Aug, 2022. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.