Development agreement without transfer of possession does not trigger capital gains tax.

ORDER

Dr. Dipak P. Ripote, Accountant Member. – This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2012-13 on 31.10.2025, emanating from the Assessment Order u/s 144 of the Act dated NIL.

The Ld. AR filed a paper book containing 276 pages which contains English translation of the Development Agreement dated 12.07.2011. The Ld. AR submitted that there was no transfer during AY 2012-13, hence, no capital gain can be taxed for AY 2012-13. The Ld. AR invited our attention to the Development Agreement entered between the assessee, other coowners and Naman Homemakers Pvt. Ltd. which was at page Nos. 212276 of the paper book. The Ld. AR submitted that the assessee and other co-owners were owners of the impugned land. They entered into Development Agreement with Naman Homemakers Pvt. Ltd. on 12.07.2011. As per the said Development Agreement, the assessee was to receive 50% of the constructed area. The Ld. AR submitted that at the time of execution of the Development Agreement, no amount was paid to the land owners by the developers. As per the agreement land, owners were still the owners of the land even after execution of the Development Agreement on 12.07.2011. The Ld. AR submitted that therefore as per the Development Agreement, once the flats were constructed, the subsequent purchaser of the flat had to enter into agreement with developer and the land owner. The Ld. AR submitted that this explains that the assessee had retained her rights in the land. The Ld. AR submitted that therefore there was no transfer as mentioned in section 2(47) of the Act. The Ld. AR submitted that hence no capital gain is taxable for AY 2012-13. The Ld. AR relied on the following case laws :

The Ld. DR relied on the order of Assessing Officer (AO) and the Ld. CIT(A).

4. Findings and analysis:

We have heard both the parties and perused the record. We have studied the Development Agreement dated 12.07.2011 entered between Smt. Kondibai Kacharya Navadekar, Balaram Kacharya Navadekar as coowners of the land with Naman Homemakers Pvt. Ltd. as developers. As per the said Development Agreement, initially the assessee had entered into the Development Agreement with Vidhi Property Investment Pvt. Ltd. on 31.01.2008 for development of land at Plot No. 20, Sector 18, at Kharghar, Tal.-Panvel, Dist.-Raigad admeasuring 1299.69 Sq. Mtrs. However, due to some reasons, the said developer Vidhi Property Investment Pvt. Ltd. could not start the construction, therefore, subsequently the assessee entered into Development Agreement with Naman Homemakers Pvt. Ltd. for the development of impugned land. It is observed that the assessee had not received any amount from the developer Naman Homemakers Pvt. Ltd. during the year. As per the agreement, the assessee was to receive 50% of the constructed area. It is observed that the construction was not completed in the year under consideration.

4.1 In this case, the assessee is a senior citizen and had not filed return of income for AY 2012-13 as the assessee was not having any taxable income. The AO issued notice u/s 148 of the Act dated 27.03.2019 based on the information regarding Development Agreement entered with Naman Homemakers Pvt. Ltd. on 12.07.2011. There was no compliance during the assessment proceedings, therefore, the AO passed assessment order u/s 144 r.w.s. 147 of the Income Tax Act, 1961. It is important to mention here that there is no date mentioned in the assessment order either at the first page or at the last page of the assessment order. The AO held that as per section 2(47)(v) and 2(47)(vi) r.w.s. 45 of the Act it was a transfer and accordingly, the AO calculated Long Term Capital Gain at Rs.2,83,46,634/- as 50% share of the assessee. Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee also claimed deduction u/s 54F of the Act. The assessee filed elaborate submission before the Ld. CIT(A) and claimed that there was no transfer of the property, hence, no capital gain. However, without prejudice, the assessee claimed deduction u/s 54F of the Act. The Ld. CIT(A) upheld the assessment order and rejected the assessee’s claim for deduction u/s 54F of the Act. The assessee also submitted before the Ld. CIT(A) that the occupation certificate for the flats constructed as per Development Agreement was received on 01.10.2015.

4.2 Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before this Tribunal.

5. In this case, admittedly, the assessee along with Shri Balaram Kacharya Nawadekar entered into a Development Agreement with Naman Homemakers Pvt. Ltd. for the development of land situated at Plot No. 20, Sector 18, at Kharghar, Tal.-Panvel, Dist.-Raigad. We have perused the Development Agreement and noted that the assessee had not handed over the legal rights of the impugned land to the developer. As per Development Agreement, the assessee was to receive 50% share of constructed area. Admittedly, construction was completed in 2015. In this case the Assessee has not received any consideration at the time of entering in the Development Agreement, it is also not the case of the AO that the Assessee has received any consideration during AY 2012-13. Assessee was to receive 50% of the constructed area on completion of the construction. In this case we have to understand that there was NO Real Income to the Assessee during AY 2012-13. It is important to understand that Assessee and other co-owner had entered into similar kind of Development Agreement with Vidhi Properties in 31/01/2008, but the Developer Vidhi Properties could not start the work hence the Assessee & co-owner entered into Development Agreement with Naman Home Makers P Ltd on 12/07/2011. This explains that execution of such Development Agreements depends on various factors, hence there cannot be any Real income to the Land Owners unless they receive Constructed Area as per the Development Agreement.

6. In this case the AO has invoked Section 2(47)(v) and Section 2(47)(vi) of the Income Tax Act to arrive at a conclusion that there was transfer of the impugned Land.

Section 2(47)(v) and Section 2(47)(vi) are reproduced here under :

(i).

(ii) ………..

(iii) ……………….

(iv) ………………..

(v) any transaction involving the allowing of the possession of any immovable property 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, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

[Explanation 1].—For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.] Section 53A of the Transfer of Property Act is reproduced here under:

[53A. Part performance.– Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee 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 ²***, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:

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.]

6.1 Thus, the primary ingredient of Section 53A is that in part performance of the contract the Transferee has taken possession or is already in possession. In this case the Naman Home Makers Pvt Ltd has not taken possession of the impugned land as envisaged u/s 53A of the Transfer of Property Act. Rather Naman Home Makers P Ltd is not a Transferee but is a Developer. In this context we find support from the decision of Hon’ble Delhi High Court in the case of R.K. Apartments (P.) Ltd. v. Smt. Aruna Bahree [FAO (OS) No. 270/94, dated 14-9-1998] where in Hon’ble Delhi High Court on identical facts held as under :

Quote, “Possession of the suit land delivered to defendants 1 & 2 at the time of the execution of the agreements dated 1st/11^th March, 1985 was only by way of temporary measure for undertaking the construction work by them and the exclusive possession thereof in legal sense remained with the executants of the said agreements. Thus, defendants 1 & 2 prima facie are not entitled to protect their possession over the suit land under said Section 52-A of the Transfer of Property Act. ” Unquote.

7. On identical facts ITAT Bangalore in the case of Rajgopal Vijay Kumar v. ITO [IT Appeal No.1250 (Bang) of 2018, dated 3.12.2021], Assessment Year: 2014-15 has held as under :

Quote, ” 8. We have earlier noticed that the assessee, in the instant case, has given only permissive possession and not “legal possession” as contemplated within the meaning of sec. 53A of the Transfer of Property Act. Accordingly, following the co-ordinate bench decision referred supra, we hold that the provisions of sec. 53A of the Transfer of Property Act are not applicable to the impugned Joint Development Agreement.

9. In this view of the matter, the provisions of sec.2(47)(v) of the Act are also not applicable. Hence the tax authorities are not justified in invoking the above said provision and assessing capital gains in the hands of the assessee during the year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) and direct the A.O. to delete the capital gains assessed in the hands of the assessee during the year under consideration. ” Unquote.

8. Therefore, for all the reasons discussed above, we hold that there was no Transfer of impugned land as envisaged in Section 2(47)(v) of the Income Tax Act.

9. Similarly, the AO has not brought on record any evidence that the impugned land was transferred as envisaged in section 2(47)(vi) of the Income Tax Act. Hence, the said sub clause is not applicable to the present case.

10. We find support from the decision of the Hon’ble Bombay High Court in the case of in the case of CIT v. Eastern Ceramics Ltd.   (Bombay)/IT Appeal No. 68 OF 2010 vide order dated July 1, 2013 held as under :

Quote, “vi) We find that the CIT(A) as well as the Tribunal had held that during the assessment year 2000-01,no transfer of capital assets by sale of land at Goregaon had taken place. This was not only for the reason that the respondent-assessee was restrained from disposing the factory land in question but also as observed by the CIT(A) and the Tribunal that during subject assessment year, no construction activity took place and even commencement certificate was issued in a sub sequent assessment year. The amount received by the respondent-assessee was only an advance requiring fulfilment of certain obligations. The agreement itself provides that in case the respondent-assessee is not able to fulfil its obligation, then it was required to refund the amount to the developer. Thus, there was no transfer of land during the assessment year 2000-01. The revenue has not challenged the second part of the order of the Tribunal. Moreover, the Assessing Officer has interfered without any evidence that possession of factory land was given to respondent-assessee in the subject assessment year on the basis that construction activity had started. This is erroneous as the commencement certificate was only received from BMC on 7 November 2000 i.e. in the next assessment year. We find that two authorities viz: CIT(A) and Tribunal have rendered a finding offact that no transfer of land took place in the concerned assessment year is not shown to be perverse. In this view of the matter, we see no reason to entertain question (a).”Unquote.

11. Similarly, the ITAT Pune in the case of Balasaheb Popatrao Phadol v. ITO 212 ITD 280 (Pune – Trib.) held as under :

Quote, “9. We have heard Ld. Counsels from both the sides and perused the material available on record including both the development agreements and commencement certificate of the property subject to development and also gone through the judgement relied on by the assessee. In this regard, we find that the assessee has entered into a development agreement with M/s Shree Yashree Construction Pvt. Ltd. which was registered on 18.05.2011. A supplementary development agreement was again entered into between the assessee and M/s Shree Yashree Construction Pvt. Ltd. and was registered on 23.07.2012 i.e. during the subsequent assessment year 2013-14. We also find that the commencement certificate & the building permission of the subjected property was issued on 20.06.2012 by Nashik Municipal Corporation which is also in subsequent assessment year. We also find that in consideration of said development agreement the assessee has received 22 number of flats of value of Rs.2,23,26,000/- in the subsequent assessment year. These flats were handed over to the assessee in subsequent assessment year i.e. in assessment year 2013-14 and not during the period under consideration. We also find that these flats were sold by the assessee in assessment year 2013-14 and the respective capital gains was also shown in the income tax return of assessment year 2013-14. However, deduction u/s 54F was claimed by the assessee against the said capital gain arising on sale of flats in subsequent assessment year & there is no information on record that the department has rejected the deduction claimed by the assessee in subsequent assessment year. The sole grievance of the assessee in this appeal is that although the development agreement was first entered during the period under consideration i.e. assessment year 2012-13 but subsequently a supplementary development was again entered & also registered in the subsequent assessment year & even the consideration i.e. flats were also received in subsequent assessment year i.e. in assessment year 2013-14 and the Assessing Officer erred in calculating capital gains during the period under consideration whereas according to the assessee the said capital gain was arising in subsequent assessment year i.e. in assessment year 2013-14. In this regard, we also find that the building permission was also given in subsequent assessment year & not during the period under consideration. Considering the totality of the facts of the case and the evidences produced before us, & also in the light of the judgement passed by Hon’ble Bombay High Court in the case of Bharat Jayantilal Patel dated 10-02-2023 (supra), we are of the considered opinion that capital gains income does not arise to the assessee on transfer of development rights in its land to a developer, since assessee had merely granted licence to permit construction on land to such developer but not given any possession in land as contemplated under section 53A of T.P. Act, 1882, there was no transfer as per section 2(47)(v) giving rise to any capital gain in hands of assessee.” Unquote.

12. Thus, respectfully following the decision of Hon’ble Bombay High Court (supra) Hon’ble Delhi High Court and ITAT, Pune (supra), we hold that there was no transfer of capital asset during the relevant AY and hence no capital gain was taxable. Accordingly, grounds of appeal raised by the assessee are allowed.

13. Since we have held that there was no Transfer during the year, the question of deduction u/s 54F of the Act as claimed by the assessee becomes academic in nature and we do not intent to adjudicate the same.

14. In the result, the appeal of the assessee is partly allowed.