Case nº A.A.R. No. 724 of 2006, (Assessment Year: 2007-2008;2008-2009) of Authority for Advance Rulings, August 30, 2007 (case In Re: Jasbir Singh Sarkaria Vs)
| President | P.V. Reddi, J. (Chairman) and A. Sinha, Member |
| Resolution Date | August 30, 2007 |
Judgment:
P.V. Reddy, J. (Chairman)
FACTS
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Broadly, the question that has to be answered in this case turns on the year of chargeability of the income attributable to capital gains. The applicant, who is a citizen of USA, is the co-owner of agricultural land of an extent of 27.7 acres. The other co-owners are his brother and sister. The applicant is entitled to 4/9th share therein. The applicant and other co-owners having decided to develop the land by constructing a residential complex there on through a 'developer' entered into a 'Collaboration agreement' on 8-6-2005 with M/s. Santur Developers Pvt. Ltd., New Delhi. On behalf of the applicant, the agreement was signed by his brother and Power of Attorney holder Mr. Karanbir Singh Sarkaria. According to the terms of the agreement, the developer should obtain the 'Letter of Intent' from the concerned Government department and obtain other permissions and sanctions for developing the land at its own risk and cost. The developer will have 84 per cent share of the entire built up area and the proportionate land area whereas the owners' share will be 16 per cent. The mode of apportionment of the built up area is indicated in clause 21 of the agreement. The consideration for the agreement is the portion of the built up area to be handed over to the owner free of cost. Owners are entitled to visit the site in order to review the progress of the project. It is clarified in clause 18 that the ownership would remain exclusively with the owners till it vests with both the parties as per their respective shares on the completion of the project. The other clauses and the steps contemplated in the agreement are the following:
(i) Payment of earnest money of Rs. 1 crore at the time of entering into agreement.
(ii) Execution of Special Power of Attorney in favour of developer to enable it to deal with the statutory authorities etc. for obtaining necessary approvals/sanctions.
(iii) Obtaining 'Letter of Intent' not later than 8-3-2006. In case of failure to do so, the agreement shall stand terminated. ('letter of Intent' is the license granted by the Director of Town Planning to develop the land for the proposed purpose subject to payment of prescribed charges and compliance with other conditions).
(iv) On fulfillment of the requirements laid down in the 'Letter of Intent', owners will have to execute irrevocable general Power of Attorney in favour of the developer, inter alia, authorizing it to book and sell dwelling units out of developer's share and collect the money for the same. However, the sale deeds can only be executed after the owners receive their share of the constructed area. [Vide clause 15]
(v) After filing application for change of land use (licence), the developer shall take steps to earmark the built up area of the owners in accordance with the tentative building plan and both the parties are entitled to lease out or sell the area falling to their respective shares as per the agreed allocation and to receive payments. [ vide clause 26]
(vi) The owners, on completion of the construction of their built up area, shall grant power in favour of the developer to enable it to transfer rights, title and interest to the extent of its share in favour of buyers of the units.
(vii) Subject to the fulfillment of the obligations enjoined upon the developer, the owners shall not interfere with the execution of the development and construction work.
Three months later, an agreement styled as 'Supplementary Agreement' was entered into on 15-9-2005 between the applicant and other co-owners on the one hand and M/s. Santur Developers Pvt. Ltd. (Santur Developers Pvt. Ltd. is hereafter retired to as "developer" or "transferee" for the sake of brevity) on the other. In essence, it is an agreement to sell the 16 per cent share of the owners in the built up area to the developer or its nominee for a consideration of Rs. 42 crore.
1.1 The salient features of the 2nd Agreement are:
Apart from Rs. 2 crores which the owners have received under the collaboration agreement, the balance sum of Rs. 40 crores is payable by the developer to the owners in six instalments starting from 8-3-2006. The time for payment of instalment money may be extended subject to payment of interest/liquidated damages as per clauses 8 and 9. The last instalment of Rs. 10 crores was payable on or before 8th June, 2007 subject to maximum extension of three months. Thus, the entire consideration should be paid within 27 months from the date of Collaboration agreement. Under clause 10 it is provided that if the payment is not made within the maximum period of extension, the owners shall be at liberty to terminate the collaboration agreement by giving 30 days' notice and thereupon it is incumbent on the developer to forthwith cease the development activity on the land and remove itself and its agents therefrom. On receipt of all payments within the prescribed or extended time, the owners shall have to transfer all the rights, title and interest in and over the owners' developed share along with proportionate land and basement underneath by executing requisite documents. The owners shall also grant powers to the developers enabling them to transfer rights and possession and to execute sale deeds etc. in respect of the developer's 84 per cent share together with proportionate land and basement underneath. The GPA executed earlier in favour of the developer will become inoperative after the title gets transferred to the developer. In the last clause it is stated that all other terms and conditions of Collaboration Agreement not inconsistent with the provisions of the supplementary Agreement will continue to be binding on both parties.
1.2 The Supplementary Agreement has substantially altered the legal relationship and rights and obligations of the parties. The transaction is not the usual development agreement under which the developer constructs on the owner's land and hands over a part of the built up area to the owner as consideration. It is an assorted type of arrangement under which the developer builds on the land of the owners and ultimately, in consideration of payment of stipulated price to the owners, the developer requires the owner to part with his title in favour of the developer or his nominees. Instead, the developer could have straightway purchased the land out-right by paying consideration to the owners and utilized the land in whatever manner he pleased. But, that was not done for the apparent reason that the developer either wanted to avoid or reduce the stamp and registration expenses, or to get over the possible difficulties in obtaining the licence/permission.
The questions and contentions
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Broadly the question is about the year of chargeability of income attributable to capital gains. Integrally connected to it is the identification of the previous year in which the deemed transfer within the meaning of sub-clause (v) of section 2(47) of the Income-tax Act had taken place.
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Whereas it is the contention of applicant that the transfer can be said to have taken place only when the entire consideration of Rs. 42 crores has been received by the owners in terms of the supplementary agreement, it is the contention of the Commissioner of Income-tax that the capital gains arise during the year in which any of the following activities take place, i.e.:
(a) Obtaining permission for change of land use by the developers
(b) Construction/development of land
(c) Receipt of payments by the applicant from 8-6-2006 onwards as per the supplementary agreement.
It is also contended that the last payment made by the developer or completion of the building has no bearing on the issue. As an alternative, it is submitted by the Commissioner that capital gains accrue in the year in which different instalments of amounts have been received by the assessee. In the course of arguments, the departmental representative contended that the transfer under section 2(47)(v) takes place in the instant case on the date of execution of agreement itself because under clause 27, it cannot be cancelled by any party. Thus, the Revenue's stand is not consistent and clear. Probably, the Department wants to play safe in the wake of subtle legal issue that has arisen.
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Following revised questions were formulated by the applicant:
(i) Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2006-07 and accordingly subject to tax in the assessment year 2007-08 on grant of CLU (Change of Land Use) as detailed in the letter dated 8-3-2006 (Annexure P-3)?
(ii) Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) during the financial year 2007-08 and accordingly subject to tax in the assessment year 2008-09 on completion of construction and on receipt of final payment of instalment when the share of the Developer is eligible for transfer as agreed vide Collaboration Agreement dated 8-6-2005?
(iii) Whether on the facts and in the circumstances of the case, the capital gains accrue/arise to the applicant (assessee) partly during the assessment year 2006-07, assessment year 2007-08 and the assessment year 2008-09 respectively, on receipt of consideration amount in proportion to its payment by the Developer, who is allowed to carry out the development activity after grant of CLU and other required permissions?
[The 4th question - opening with the words "any other question..." is too general and omnibus and need not be referred to]
Relevant provisions of I.T. Act Section 45
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In order to decide the issue, the relevant provisions of the Income-tax Act, 1961 (for short 'the Act') should be noticed. Section 45 of the Act is the charging section in regard to capital gains. It lays down that any profit or gains arising from the transfer of a capital asset effected in the previous...
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