Introduction

1. The recent decisions of various courts including the apex court seem to be making a departure from the ratio laid down in the case of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 129 Taxman 497/260 ITR 491 (Bom.) and Jasbir Singh Sarkaria, In re [2007] 164 Taxman 108/294 ITR 196 (AAR - New Delhi). Both these decisions interpreted the provisions of section 2(47) of the Act defining the term "transfer" and held that the moment Development Agreement is signed between the land owner and the Developer, incidence of capital gain under section 45 arises in the hands of land owner. Of late the judiciary has held that merely because a Development Agreement was executed and a power of attorney issued to the Developer, the transaction would not partake the character of "transfer" so as to visit the land owner with a capital gains tax. We refer to the decision of C.S Atwal v. CIT [2015] 59 taxmann.com 359/234 Taxman 69/378 ITR 244 (P&H) affirmed/approved by the apex court in the case of CIT v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202/398 ITR 531 (SC) and the decision of the Mumbai High Court in the case of CIT v. Dr. Arvind S. Phake [2018] 164 DTR 77. We analyse the paradigm shift in courts approach while discussing on the recent judicial trend and try to find a reasonable distinction between the two sets of cases to arrive at some harmonious interpretation.

Historical Background

2. Section 2(47) of the Act defines the term "transfer" of capital asset for the purpose of charging capital gains tax under section 45. With effect from 01.04.1988 the Finance Act, 1987 introduced sub-clause (v) and (vi). Clause (v) (subject matter of discussion here)is a legislation by incorporation vide which the transfer in part performance of contract as provided in section 53A of the Transfer of Property Act was made applicable to transfers of capital asset for capital gains tax purposes. Prior to this the apex court in the case of Alapati Venkataramaiah v. CIT [1963] 57 ITR 185 had held that transfer means effective conveyance of the capital asset. It held that mere delivery of possession of immovable property or entries of receipt of consideration in the books of account is not sufficient to treat the asset as transferred. The introduction of sub-clause (v) with effect from 1.4.1998 has undone the said decision of the apex court and brought into tax ambit even deemed transfer which is otherwise not transfer under the general law.

In an earliest decision the said sub-clause (v) came in for interpretation by the Mumbai High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra). In the said case the assessee-land owner had entered into a registered development agreement of his land in 1994. The said agreement contained a clause stating that after the permissions are obtained the land owner shall issue irrevocable license to developer to enter the land and develop the same. The said irrevocable license was granted through a registered power of attorney in 1999. In the meantime the developer paid substantial consideration to the land owner till 1996.

On the above facts the revenue contended that the year of transfer of land was AY 1996-97 when substantial consideration stood paid. The assessee contended that year of transfer was AY 1999-2000 when the possession was transferred through irrevocable power of attorney. The High Court dismissed the contentions of the assessee as well as revenue and held that the year of transfer would be the year in which the contract was entered into. More pertinently the Mumbai High Court held as under:

…. ….Before us, it was argued on behalf of the assessee that the date on which possession is parted with by the transferor is the date which should be taken into account for determining the relevant accounting year in which the liability accrues. It was argued on behalf of the assessee that in this case, irrevocable licence was given in terms of the contract only during the financial year ending March 31, 1999, and, therefore, there was no transfer during the financial year ending March 31, 1996. On the other hand, it was argued on behalf of the Revenue that one has to go by the date on which the developer substantially performed the contract. It was argued on behalf of the Department that since substantial payments were made during the financial year ending March 31, 1996, and since majority of permissions were obtained during that year, the liability to pay capital gains tax accrued during the assessment year 1996-97.

In fact, the limited power of attorney may not be actually given, but once under clause 8 of the agreement a limited power of attorney is intended to be given to the developer to deal with the property, then we are of the view that the date of the contract, viz., August 18, 1994, would be the relevant date to decide the date of transfer under Section 2(47)(v) and, in which event, the question of substantial performance of the contract thereafter does not arise.

We do not find merit in the argument of the assessee that the court should go only by the date of actual possession and that in this particular case, the court should go by the date on which irrevocable licence was given. If the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability.

The said decision held the field for long and was followed in large number of cases. The proposition laid down in said case was further elaborated upon by the Authority for Advance Ruling in the case of Jasbir Singh Sarkaria (supra) which laid down that where the land owner has given irrevocable POA and possession of the land in pursuance of the Developer it would be treated as transfer of land by the owner to Developer for the purposes of section 2(47)(v) of the Act. In the said case the AAR laid down three propositions:

The essential point of difference between the two cases discussed above was that in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra), the court took the first date of execution of the Development Agreement as the date of transfer and not the date of execution of irrevocable license to enter. In the case of Jasbir Singh Sarkaria (supra) the AAR took the subsequent date of execution of irrevocable power of attorney as the date of transfer. Both forums decided the respective cases after analysing and interpreting the terms and conditions and the clauses contained in the documents executed between the parties but ultimately holding that point when substantial control of land is divested in favour of developer it would be taken as date of transfer for calculating the capital gain tax liability.

A large number of cases were decided by various tribunals and courts following the above referred to rulings and propositions. This resulted in the tax in the hands of the land owner even prior to they having receiving the consideration for such transfer of land. Therefore, there was a constant effort made by the assessee to distinguish between the facts of their case with that of Chaturbhuj Dwarkadas Kapadia of Bombay (supra) to wriggle out of such front end capital gain tax. Though there were occasional decisions which ruled otherwise, like Pota Nageshwar Rao [2014] 106 DTR 96 (AP), yet the hangover of the Mumbai High Court's decision in Chaturbhuj Dwarkadas Kapadia of Bombay case (supra) loomed large on the judicial forums and they, by and large treated the date of execution of the Development Agreement as the date of transfer.

Turning Point

3. The big distinction came in the case of C.S Atwal (supra) decided by the Punjab & Harayana High Court. The issue of capital gain arose in the hands of Punjabi building Co-operative housing society and its members who had entered into a collaboration agreement with Tata Housing (THDC). As per the terms of the agreement THDC was to develop the land owned by the society and its members. In consideration thereto, THDC was to make payment in four instalments which were linked to various stages like obtaining permission for development, etc. The THDC was also to provide constructed area to the members of the society. Some part of the land was transferred in the name of THDC through sale deed against the payment of first two instalments but other two instalments were not received by the members because the permission for development was not received by THDC. Accordingly, THDC decided to shelve the development of the said land and only transferred the portion of land to the extent consideration was paid by it.

The question was whether by virtue of execution of collaboration agreement the members had transferred the entire land to THDC in part performance of contract so as to invite capital gain tax?. The assessee-members contended that since the project could not be developed there would not be capital gain tax. Though they offered tax on the portion of land which was actually transferred through sale deed to THDC, yet the revenue did not agree with the contention of the members and relying upon the decision of Mumbai High Court in Chaturbhuj Dwarkadas Kapadia's case (supra) treated the collaboration agreement and the subsequent power of attorney as "transfer" under clause (v) of section 2(47) and, accordingly, levied capital gain tax. The revenue's order was upheld by the ITAT relying upon the said decision of the Chaturbhuj Dwarkadas Kapadia's of Bombay case (supra) of the Mumbai High Court. The ITAT held that:

The assessee carried the matter to the Punjab &Harayana High Court. The court delved deep into the provisions of clause (v) of section 2(47) of the Act. In an elaborate order it discussed the provisions of section 53A of the Transfer of Property Act and, accordingly, read the commentary on part performance of contract. It held that section 53A of the Transfer of Property Act has been incorporated into the clause (v) of section 2(47) of the Income Tax Act and, hence, S.53A will apply as it stands on the date when it is being applied under Income Tax Act. It relied upon the CBDT Circular No.495 dated 23.9.1987 (168 ITR (St.) 87 at page 92) to hold that sub-clause (v) has been introduced to capture those transactions which are in effect sale transactions and confer rights and privileges of ownership on the buyer without executing formal conveyance deed. Thus, by a deeming fiction the term "transfer" has been extended to embrace handing over of possession in part performance of contract as provided in section 53A of the Transfer of Property Act.

An analysis of section 53A of the Transfer of Property Act provides for the following conditions:

After a detailed analysis P&H Court observed that, though "ownership" is a legal concept, yet the taking of "possession" is a factual concept. Even symbolic possession is sufficient. The court further held that the collaboration agreement is unregistered and, hence, section 53A of the Transfer of Property cannot be applied to such unregistered document. The court interpreted the clauses of the registered irrevocable power of attorney to hold that the powers given thereunder to THDC were merely a license to enter the said land for the limited purpose of carrying out development and such clauses could not be treated as transfer of "possession".

With the decision of the P&H High Court, the pendulum has swung on the other extreme. In Chaturbhuj Dwarkadas Kapadia's of Bombay case (supra) the Mumbai High court ignored the date of execution of power of attorney and handing over of possession. It even ignored the earlier date of receipt of consideration and went still earlier to the date of execution of agreement. So, it took the earliest point of transaction as the date of transfer. The court held that there is a difference between the contract on one hand and the performance of the other. Hence, section 53A of the Transfer of property cannot be read to mean actual physical transfer of possession.

Now with the decision of the Punjab & Harayana High Court in C.S. Atwal's case (supra) the court has held that even actual physical handing over of the land (the furthest point of transfer) would not necessarily result in "transfer" as contemplated under section 2(47)(v). The court has held that the terms of power of attorney, though allow license to enter into the land it cannot be treated as transfer of possession as it is for the limited purpose of development. Where such development was not carried out due to non-fulfilment of obligation by Developer, clause (v) of section 2(47) will not be attracted. Hence, whereas the Mumbai High Court opined that even a symbolic possession is a "transfer" for purpose of Income Tax Act, the P&H High Court has held that even actual possession may not be a transfer.

The above decision of the P&H High Court has been affirmed by the apex court in the case of Balbir Singh Saini (supra). The apex court has not gone into the question of determining the clauses of Power of attorney. It has upheld that the transfer of possession cannot be determined on the basis of unregistered agreement. Incidentally the court has neither made reference to the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra) nor to the case of Jasbir Singh Sarkaria (supra), and, hence, avoided the question of interpreting the registered irrevocable power of attorney.

Complication Confounded

4. Recently the Mumbai High Court had the occasion to revisit the controversy. In the case of Dr. Arvind S. Phake (supra) the High Court found that the Development Agreement contained a clause that the possession of the land will be handed over to the Developer after receipt of entire consideration. It negated the argument of Revenue that date of execution of Development Agreement should be considered as date of transfer. Instead it relied upon a clause of development agreement which said that it is only after receipt of entire consideration the developer will be entitled to commence the construction. It further said that the physical possession of the property was passed on to the Developer after receipt of entire consideration. Hence, the date of transfer was taken as handing over of possession.

This decision, even though relied upon the Chaturbhuj Dwarkadas Kapadia of Bombay case (supra), yet it makes a significant departure therefrom. It takes actual date of handing over possession of said land after payment of consideration instead of date of execution of document which indicates passing of complete control in property. While doing so the court has not considered the observation of the same Court in Chaturbhuj Dwarkadas Kapadia of Bombay case (supra) that substantial performance of the agreement by payment of consideration or handing over date of possession are not material parameters for determination of date of transfer. The Court has also ignored the specific observation of the same court that there is a difference between execution of the contract and performance of the said agreement and, hence, the date of agreement is the date of transfer.

Thus, on one hand the court has upheld the basic proposition that point of transfer of possession has to be taken for determining transfer of capital asset such determination of date of transfer of possession has been left at the door of the Revenue in each case. From the above discussion one thing is clear that determination of the date of transfer would purely depend upon the facts of each case; the clauses contained in the development agreement and the irrevocable power of attorney. We have definitely not seen the end of this controversy yet.

Propositions

5. General rules that can be culled out from the conspectus of case laws as discussed above are:

Conclusion

6. The Mumbai High Court had issued guidelines for applicability of clause (v) of section 2(47) only with the intention that the revenue is not given the discretion of determining date of transfer. With the apex court laying down the proposition that's to the other end of spectrum the field is wide open with the authorities to determine the date of transfer on the basis of documents executed.

On the the other hand, the legislature tried to remedy the situation by introducing the provisions of section 45(5A) of the Act with effect from 01.04.2018. As per the said provision the capital gain is taxable in the year in which the completion certificate of the project is received. The said provision is hardly an impetus for the land owners, since it is restrictive in nature applicable only to individuals and HUFs. Moreover, it comes with added tax liability as consideration in hands of land owner and is to be taken at ready reckoner value of the completed units on the date of receipt of completion certificate. Further, this provision is inapplicable if the land owner sells his share of units before receiving certificate of completion.

Thus, the date of transfer under development agreement remains in the womb of mystery, With no clear guidelines coming from CBDT the courts will continue to have the privilege to determine the date of transfer in such cases