Direct Tax Refresher Course 2016 - Recent Judgements on JDA and Capital Gains

Direct Tax Refresher Course 2016 JOINT DEVELOPMENT AGREEMENT – BUILT UP AREA/REVENUE SHARING-RECENT JUDGEMENTS -CAPITAL GAINS CA. VIPIN K. GUJARATHI June 11, 2016

Presentation Flow CA. Vipin K. Gujarathi

INTRODUCTION-NEED FOR JDA CA. Vipin K. Gujarathi

JDA, JV, DA (1 of 5) • Joint Ventures (JV) , Joint Development Agreement (JDA) or Development Agreement (DA) have not been defined under any of the enactments and they are used interchangeably. • JDA can be for sharing of constructed Built Up Area or Sharing of Revenue (Sale Proceeds) or both • JDA can be for asset held as “Capital Asset” as well as held as “Stock-in-Trade” • However, in practice they are understood as follows: CA. Vipin K. Gujarathi

JDA, JV, DA (2 of 5) CA. Vipin K. Gujarathi

RELEVANT SECTIONS OF I. T. ACT. Section 2(14) defines “Capital Asset” means property of any kind held by the assessee but does not include stock in trade Section 2(47)(v) Transfer in relation to capital asset includes allowing of possession of any immovable property vis-à-vis section 53A of TOPA Section 2(47)(vi) Transfer –Capital Assets -becoming member of society, company etc & enabling enjoyment of immovable property CA. Vipin K. Gujarathi

RELEVANT SECTIONS OF I. T. ACT Section 45(1) Profits or gains arising on transfer of capital asset shall be deemed to be income of previous year in which transfer took place. Section 45(2) Profits or gains arising on conversion of capital asset into stock in trade is chargeable to tax as the income of the previous year in which conversion took place but payable when such stock in trade is sold or otherwise transferred. CA. Vipin K. Gujarathi

RELEVANT SECTIONS OF I. T. ACT Section 48 Mode of Computation of Capital Gain- “Consideration received or accrued” as a result of transfer of capital asset CA. Vipin K. Gujarathi

CHATURBHUJ D KAPADIA- BOMBAY HC • Controversy triggered whether transfer of property under the development agreement/arrangement conferring the privileges of ownership is effected even without transfer of title & will fall under section 2(47)(v) of the I. T. Act by Bombay HC judgment in Chaturbhuj D Kapadia. 260 ITR 491 • The Bombay HC considered the provisions section 2(47)(v) of I. T. Act which refers to allowing of the possession of the nature referred to in section 53A of the TOPA • Bombay HC held that if the contract, read as whole, indicates passing of or transferring of complete control over the property in favour of developer, then the date of contract would be relevant to decide the year of chargeability CA. Vipin K. Gujarathi

CHATURBHUJ D KAPADIA- BOMBAY HC Decision of Chaturbhuj Dwarkadas Kapadia followed by various courts and tribunals Jasbir Singh Sarkaria294 ITR 196 (AAR) T. K Dayalu 60 DTR 403 (Karnataka) Potla Nageswar Rao 365 ITR 349 (AP) The decision of C D Kapadia was applied by the I. T. Department in various cases to bring to tax capital gain or business profit on the date of entering into JD or DA agreement CA. Vipin K. Gujarathi

PROVISIONS OF TRANSFER OF PROPERTY ACT • The main issue in Joint Development/Development Agreement is point of time of transfer of property which attracts tax liability. • Therefore, it is necessary to understand the relevant provisions of I T Act as well as TOPA & Registration Act • Section 53A of TOPA – “Part Performance of contract” • Section 54 of TOPA which defines “Sale” • Registration Act Section 17(1)(b) amended by 2001 Act CA. Vipin K. Gujarathi

SECTION 53A OF TOPA • Bombay HC considered the provisions of section 2(47)(v) r. w. s. 53A of the TOPA in case of Chaturbhuj D Kapadia. It held 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 or on behalf of him • It should pertain to the transfer of immovable property; • The transferee should have taken possession of property in furtherance of contract; • Lastly, transferee has performed or should be willing to perform his part of the contract". CA. Vipin K. Gujarathi

SECTION 54 OF TOPA • Section 54 of the TOPA defines “Sale” as • "Sale" is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. • Sale how made: Such transfer, in the case of tangible immovable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument. • It is important to note that if the transaction does not fall under Section. 2(47)(v) & (vi) then for transfer, reference has to be made to “Sale”. CA. Vipin K. Gujarathi

POSSESSION OF THE PROPERTY • What is the meaning of the expression “Possession” contemplated by section 53A of the TOPA? • Whether “possession of the transferee” as postulated under Section 53A of TOPA is it that it must have been delivered in furtherance to the contract ? • Whether physical delivery of document to title constitutes possession? • Can the possession be concurrent of the transferor as well as of the transferee and would it be enough if the transferee has, by virtue of the transaction, a right to enter upon and exercise acts of possession effectively pursuant to the covenants in the contract ? CA. Vipin K. Gujarathi

POSSESSION OF THE PROPERTY • "The possession contemplated by 2(47)(v) need not necessarily be sole and exclusive possession. So long as the transferee is, by virtue of the possession given, enabled to exercise general control over the property and to make use of it for the intended purpose, the mere fact that the owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of "Agreement" does not introduce any incompatibility." • Jasbir Singh Sarkaria 294 ITR 196 (AAR) CA. Vipin K. Gujarathi

POSSESSION OF THE PROPERTY • Hon. P & H HC in the case of C. S. Atwal 378 ITR 244 held that the decision of Jasbir Singh Sarkaria was correct in the contextual reference & facts. But in respect of possession the court held as follows: • The concept of possession to be defined is an enormous task to be precisely elaborated. “Possession” is a word of open texture. It is an abstract notion. It implies a right to enjoy which is attached to the right to property. It is not purely a legal concept but is a matter of fact. • The issue of ownership depends on rule of law whereas possession is a question dependent upon fact without reference to law. CA. Vipin K. Gujarathi

POSSESSION OF THE PROPERTY • To put it differently, ownership is strictly a legal concept and possession is both a legal and a non-legal or pre-legal concept. • The test for determining whether any person is in possession of anything is to see whether it is under his general control. He should be actually holding, using and enjoying it, without interference on the part of others. • Whether a License to enter premises can be considered to be possession? CA. Vipin K. Gujarathi

POSSESSION OF THE PROPERTY • The expression “License” has been defined in section 52 of the Indian Easement Act, 1882. “Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.” • Therefore, possession if delivered, as a license for development of property it cannot be equated with possession. CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM • Section 2(47) refers to a transaction involving allowing of possession of any immovable property to be taken or retained in the part performance of a contract of the nature referred to in section 53A of the TOPA. • Section 53A of the TOPA contains several conditions. One of the important conditions is that the transferee should have performed or willing to perform his part of the contract. • A plain reading of Section 53A of the TOPA shows that in order for a contract to be termed "of the nature referred to in Section 53A of the TOPA" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM • It is 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 transferee to perform its obligations. • Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which those are to be performed, it cannot be said that the provisions of Section 53A of the TOPA will come into play on the facts of that case. CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM 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). Therefore, one should consider whether the transferee, on the facts of the present case, can be said to have ‘performed or is willing to perform’ its obligations under the agreement. CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM • How to ascertain that the transferee has not performed or is not willing to perform his part of the contract? • The transferee has not commenced the work • Transferee denies to make payment as agreed • Now various Tribunals have applied different parameters to decide this issue. • In the following judgements tribunals have held that the transferee is not willing to perform his part of the contract CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM • General Glass Co. Ltd. Vs DCIT 108 TTJ 854 (Mumbai) • Where payment of balance consideration within stipulated time is essence of the agreement of sale and such payments are not made in time by the transferee, such a contract does not confer any right on the transferee as envisaged under Section 53A of the TOPA and provisions of Section 2(47)(v) cannot be applied in such a situation • S. Ranjith Reddy 35 Taxmann.com 415 (Hyderabad) • ITAT Hyderabad has held that where nothing happened during the relevant previous year except execution of the agreement or no progress or construction had taken place it could not be held that the developers had performed its obligation as envisaged by Section 53A of TOPA. CA. Vipin K. Gujarathi

WILLINGNESS TO PERFORM • Fibars Infratech Pvt. Ltd. 162 TTJ 228 (Hyderabad) • ITAT Hyderabad has held that since no consideration passed to the assessee and no construction activity had commenced and no Development Plan was approved which is the utmost important condition or step for implementation of project it cannot be said that transferee was willing to perform and conditions of Section 53A of TOPA were complied with. • Arvind S Phadke ITA No 236/PN/2013 • Pursuant to development agreement, handing over of possession of land was conditional, subject to full payment of consideration; As complete consideration was not paid as on agreement date, holds 'possession date' as 'transfer date' of land; Rejects Revenue's contention that developer took possession in part performance of contract u/s. 53A of TOPA thereby reckoning 'development agreement date' as 'transfer date';

WILLINGNESS TO PERFORM • Finian Estate Developers Pvt. Ltd. 2361 & 1953 (Delhi) 2011 • Delhi ITAT has held that income accrues only upon obtaining necessary approval from local authorities by the developer. • Coromandal Cables Pvt. Ltd. ITA No 1779 ITAT Chennai • Binjusaria Properties Pvt. Ltd. 164 TTJ 417 (Hyd) • K Radhika 149 TTJ 746 (Hyd) • P & H High Court in the case of C S Atwal 378 ITR 244 (P & H) has held the similar view. CA. Vipin K. Gujarathi

AMENDMENT -53A OF TOPA • Section 53A of the TOPA, 1882 is amended with effect from 24th September 2001. The words “the contract, though required to be registered, have not been registered or” has been deleted. • It means that in order to bring in force provisions of Section 53A of the TOPA to protect the possession by the transferee, the agreement/contract entered on or after 24th September 2001 must be registered. CA. Vipin K. Gujarathi

AMENDMENT TO REGISTRATION ACT 1908 • Consequential amendment have been made to Registration Act w. e. f. 24th September 2001. • Registration & Other Related Laws (Amendment) Act, 2001. Section 17(1A) has been introduced making it mandatory to register the agreement on or after 24th Sept, 2001 for it to become legally enforceable. • Amendment to section 49 of the Registration Act –Effect of non-registration of documents required to be registered CA. Vipin K. Gujarathi

AMENDMENT -53A OF TOPA • If JDA is not registered whether the transaction will come within the ambit of section 2(47)(v) of the I. T. Act • P & H HC in the case of C. S. Atwal has held that Section 53A by incorporation, stood embodied in Section 2(47) of the I. T. Act and thus all essential ingredients of Section 53A were required to be fulfilled. JDA to be covered under TOPA is required to be a registered instrument for enforcing civil law rights. Judgment date 22nd July, 2015. CA. Vipin K. Gujarathi

AMENDMENT- 53A OF TOPA • Fardeen Khan Vs ACIT ITA No 1588/Mum/2013 has held similar view. Judgment date 25th February, 2015 • Sureshchandra Agarwal Vs ITO 13 Taxmann 115 (Mum) Judgment date 14th September, 2009. • ITAT Mumbai has held the contrary view that the amendment to Section 53A of the TOPA which did not require registration has been omitted but the said amendment will not alter the situation for holding the transaction to be a transfer u/s 2(47)(v) if all other ingredients have been satisfied. CA. Vipin K. Gujarathi

SHARING OF AREA-CAPITAL ASSET • The parties agree to share built up area in respect of the land held as capital asset, whether the value adopted for stamp valuation or the cost of construction of built up area of owner’s share is to be considered for taxing capital gain? • Section 50C by fiction considers Stamp Duty value as full value consideration in case it is less than consideration received or accruing as a result of transfer of capital asset. Therefore, section 50C value is not full value consideration per se. • Section 48 (Computation mechanism) refers to consideration received or accruing as a result of transfer of capital asset as the full value consideration i.e. consideration receivable in exchange or in lieu of the property. CA. Vipin K. Gujarathi

SHARING OF AREA-CAPITAL ASSET • Sri N. S. Nagaraj Vs ITO ITA No 376/Bang/2011 • The Bangalore bench has held that Section 48 nowhere talks of fair market value. It talks of full consideration. Full consideration in this case is the cost of construction incurred by the builder on the assessee's share of constructed area, because the assessee would receive constructed area in lieu of the land share. Whatever is the expenditure incurred for constructing that area is a consideration in kind to the assessee. • Medravati Agro Farms /Goman India Agro Farms Pvt Ltd 943/Hyd/2014 also held the same view. CA. Vipin K. Gujarathi

SHARING OF AREA-CAPITAL ASSET • Section 50C value exceeding the cost of construction of built up area • On JDA, the stamp duty is levied on the built up area allotted the land owner. The cost of construction is fixed under Ready Reckoner. At present the cost of construction under Bombay Stamp Duty Act is Rs. 22,000/- per square meters. At times the actual cost of construction is less than 22,000/- per square meters under such circumstances whether the full value consideration will be w. r. t. Ready Reckoner or cost of construction. • Provisions of Section 50C will prevail and the consideration will be as per Stamp value. CA. Vipin K. Gujarathi

REVENUE SHARING ARRANGEMENT • In this kind of agreement or arrangements the Land Owner and Developer agree to share “Distributable Revenue” in specified percentage • The Land Owner and the Developer join together in a tripartite agreement with ultimate purchaser of apartment wherein the Land Owner agrees to convey his undivided right, title & interest in land to & in favour of the prospective purchaser of the apartments and the Developer agrees to convey the specified built up area being constructed on the land in favour of ultimate purchaser. CA. Vipin K. Gujarathi

REVENUE SHARING ARRANGEMENT • A GPA is executed by the Land Owner in favour of the Developer giving him powers to do all acts, deeds and things in pursuance of Revenue Sharing Agreement /Arrangement. • Normally agreements with purchasers are executed jointly by the Land Owner & the Developer stating therein their respective obligations. • The agreement is worded in such a manner to indicate that the revenue share accruing to the Land Owner is in essence for the transfer of the undivided share of right, title and interest in land and revenue share of the developer is for transfer of specified built up area. CA. Vipin K. Gujarathi

REVENUE SHARING ARRANGEMENT • The legal ownership, domain & control of land remains vested with the Land Owner and no portion of it is transferred to the developers • There is no area allocation between owner and developer • A joint account, “Escrow Account” is opened and the Bank is appropriately instructed to transfer amount in pre-determined ratio to account of each of the party. CA. Vipin K. Gujarathi

REVENUE SHARING- CAPITAL ASSET • In case of JDA in respect of capital asset the parties agree to share revenue, whether stamp duty value as per section 50C or estimated value falling to the share of landowner to be considered for capital gain? • Assuming that the transfer has taken place, then as per Section 48, Capital Gains Tax is computed with reference to full value of consideration received or accruing as a result of transfer of capital asset. CA. Vipin K. Gujarathi

REVENUE SHARING- CAPITAL ASSET • In case of revenue sharing agreement, the parties are entitled to share in revenue on receipt of the same from prospective purchasers. There is no right to receive the amount as income unless the amount is received in the “Escrow Account” with Bank. Therefore, there is no accrual or receipt of income. Accrual of income- E. D Sassoon & Co. 26 ITR 27 (SC) • Therefore, since the assessee has neither received nor any amount has accrued to the assessee, value adopted for stamp duty purposes as per section 50C will be the full value of consideration for computation of capital gain. CA. Vipin K. Gujarathi

LAND HELD AS STOCK IN TRADE • JDA in respect of land held as stock in trade & the developer agrees to allot built up area, whether entire value of the built up area will be taxable in the year in which JDA is signed? • Since the provisions of section 2(47) (v) r. w. s. 53A of the TOPA, are not applicable to transaction of stock in trade and similarly, there is no sale within the meaning of section 54 of the TOPA, no profit will be taxable immediately on execution of JD Agreement and the same will be taxed in the respective years in which it is sold. CA. Vipin K. Gujarathi

LAND HELD AS STOCK IN TRADE • Skyline Great Hills I. T. Appeal No 2299 of 2013. • Bombay HC held that the provision of section 53A of TOPA cannot be extended to stock in trade as section 2(47) of the I. T. Act has artificially extended the definition of transfer of capital asset. • R. Gopinath (HUF) Vs ACIT 133 TTJ 595 (Chennai) • Concept of S. 53A of the TOPA is borrowed concept only with respect to the transfer of capital assets as provided under Section 2(47)(v) of IT Act and the same is not applicable in other cases which do not fall under Section 2(47). CA. Vipin K. Gujarathi

LAND HELD AS STOCK IN TRADE • R. Gopinath (HUF) Vs ACIT 133 TTJ 595 (Chennai) Contd.. • The capital gain arising from the conversion of the land and building into stock-in-trade were assessable proportionately in the previous years in which the constructed property was sold by the assessee and not in the year of execution of Development Agreement. - Section. 53A of the TOPA does not provide the conditions for transfer but it provides protection to the transferee for possession of the property. CA. Vipin K. Gujarathi

LAND HELD AS STOCK IN TRADE • Dheeraj Amin ITA No. 1709/Bang/2013 • ITAT held that the land (Stock-in-trade) deal cannot be taxed as business income on entering into JDA. • ITAT held that against the land (held as stock in trade) what assessee receives is “Right to sell” constructed area which would again be in the nature of “Stock in trade” for the assessee’s business. • Profit from sale of such rights in constructed area are taxable only when such rights are actually exercised by the assessee • Until such rights in the constructed area are sold it would be regarded as inventory in the business and shall be valued at cost price (being lesser than actual market price). CA. Vipin K. Gujarathi

LAND HELD AS STOCK IN TRADE • The Hindoosthan Spinning & Weaving Mills Ltd ITA No. 3820/Mum/2003 • ITAT Mumbai held that Development Agreement for immovable Property held as stock in trade would not amount to transfer. ITAT further held that income was assessable as business income over the years and not in the year in which the possession was given. ITAT Mumbai 3820/MUM/2003 • Mumbai ITAT has taken same view in the case of Fardeen Khan Vs ACIT 1588/Mum/2013 CA. Vipin K. Gujarathi

CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE • Whether the capital gain arising on conversion of capital asset will be payable in the year in which the Joint Development Agreement is entered into • Section 45(2) merely fixes the year of liability. The year of payment of tax liability is the year in which stock-in-trade is sold. • The legislature in its wisdom, considering the fact that on conversion only notional income arises and therefore, postponed the tax liability thereon till real income was earned on that asset. CA. Vipin K. Gujarathi

CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE • This view has been up held in the following cases: • R Gopinath. 133 TTJ 595 Chennai • Upper India Mills Ltd. ITA No 61/2012 ITAT Lucknow • Hindoosthan Spinning & Weaving Mills Ltd. ITA No. 3820/Mum/2003 • Crest Hotel Ltd. 75 TTJ 0771 • Ramesh Abaji Walvalkar. ITA No 852/Mum/2009 • Fardeen Khan Vs ACIT. 1588/Mum/2013 CA. Vipin K. Gujarathi

CONVERSION OF CAPITAL ASSET TO STOCK IN TRADE • Many a times conversion is reflected by action of the assessee- application for NA or submitting building plan to local authority etc. • Filing of return and showing difference between FMV on conversion and cost price as capital gain in the year of conversion even though no Capital Gain Tax is payable. • Conversion of capital asset into stock in trade by declaration cum affidavit. • Maintaining books of account and showing the same under stock in trade. • In case of company changing “Object Clause” of the Memorandum of Association. CA. Vipin K. Gujarathi

RECENT JUDGMENTS • CIT Vs M/s Chemosyn Ltd 371 ITR 427 (Bombay) Bombay HC rejects Revenue's reliance on ChaturbhujDwarkadasKapadia ruling to tax constructed area under Development Agreement; Initial development Agreement provided for cash and construction area, but the agreement later was superseded/modified and instead consideration was received entirely in cash; HC notes that ITAT arrived at finding of fact that no income either accrued or received in the form of constructed area; HC approves ITAT's application of "real income theory", holds that substantial question of law does not arise; CA. Vipin K. Gujarathi

RECENT JUDGMENTS CIT Vs M/s Chemosyn Ltd - Contd.. • HC held that in Chaturbhuj D. Kapadia, the issue was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset? • HC held that consideration in the form of constructed area as agreed in terms of development agreement was not actually accrued to the assessee as the said agreement was not acted upon as it came to be superseded/modified by the Tripartite agreement. CA. Vipin K. Gujarathi

Direct Tax Refresher Course 2016 - Recent Judgements on JDA and Capital Gains