Joint Development Agreement - Landmark Judgment

Landmark orders on Joint development agreement, updated as on 21st March 2014

1. (2002) 4 CHN 115

"Development agreement comes out of the scope of the ambit of section 53A of the Transfer of Property Act. Therefore, section 53A of the TP Act, has no manner of application to a development agreement."  (Scan copy of Judgment available)

2. (2013) TaxCorp(LJ) 2478 (HC-ALLAHABAD)

S. 2(47) and 53A of the Transfer of Property Act -Extinguishment of right in the property  - Sale/Transfer Deeds in respect of the building shall be executed both the parties in favour of purchaser/allottees on the completion of building."

The capital gain can be charged only on receipt of the sale consideration and not otherwise. How can a person pay the capital gain if he has not received any amount. In the instant case, the assessee has honestly disclosed the capital gain for the assessment year 1998-99 to 2000-01, when the flats/areas were sold and consideration was received. During the year under consideration, only an agreement was signed. No money was received. So, there is no question to pay the capital gain

3. (2014) 8 TaxCorp (DT) 56444 (MADRAS)

As per Transfer of Property Act, 1882. The sale got completed when sale deeds were registered pertaining to the unpided share of the immovable property.

4. (2014) TaxCorp(LJ) 2552 (ITAT-NEW DELHI)

Deduction on account of compensation expenses - In a business, when a compensation is paid in respect of stock in trade for non-performance of a contract, the compensation paid is always considered as revenue expenditure. Merely an advance received from the buyers which were repaid with compensation. There is no transfer of title till a sale deed is executed or possession of the premise given in pursuance to part performance u/s 53A of the transfer of property Act. The compensation paid was for utilizing the funds made available by the buyers.

5. (2014) TaxCorp(LJ) 2700 (ITAT-HYDERABAD)

JDA - No possession handed over to the developer and also kept the possession with the assessee himself and only for the limited purpose of carrying on construction in the scheduled property by the developer, permission was given to the developer to enter the property. It cannot be said that absolute possession of the property was given to the developer, in other words, only symbolic possession has been given to the developer. Further, the assessee has not received any consideration whatsoever vide the Joint Development Agreement. Being so, it cannot be said that there is a transfer in terms of section 2(47)(v) of the Act.

Relied on: (2012) 6 TaxCorp (A.T.) 26630 (HYDERABAD)

6. (2014) TaxCorp(LJ) 2618 (SC)

Development agreements are NOT joint ventures 

The words `joint venture' or `collaboration' in the title of an agreement or even in the body of the agreement will not make the transaction a joint venture, if there are no provisions for shared control of interest or enterprise and shared liability for losses. 

(i) A development agreement is one where the land-holder provides the land. The Builder puts up a building. Thereafter, the land owner and builder share the constructed area. The builder delivers the `owner's share' to the land-holder and retains the `builder's share'. The land-holder sells/transfers unpided share/s in the land corresponding to the Builder's share of the building to the builder or his nominees. The land-holder will have no say or control in the construction or have any say as to whom and at what cost the builder's share of apartments are to be dealt with or disposed of. Such an agreement is not a "joint venture" in the legal sense. It is a contract for "services". 

(2) On the other hand, an agreement between the owner of a land and a builder, for construction of apartments and sale of those of apartments so as to share the profits in a particular ratio may be a joint venture, if the agreement discloses an intent that both parties shall exercise joint control over the construction/development and be accountable to each other for their respective acts with reference to the project. 

(3) The title of the document is not determinative of the nature and character of the document, though the name may usually give some indication of the nature of the document. The use of the words `joint venture' or `collaboration' in the agreement will not make the transaction a joint venture, if there are no provisions for shared control and losses. 

 7. (2014) TaxCorp(LJ) 2577 (HC-KARNATKATA)

Income Tax Sections 2(47), 139(1), 139(4), 147, 148 - Joint Development Agreement - Without possession of the property, no construction can be taken.

8. (2013) TaxCorp(LJ) 1661 (ITAT-CHENNAI) 

Entering into an agreement of sale and joint development amount to transfer u/s 2(47). Assessee contention that the possession was handed over to the builder only to enable furtherance of the project and not as a transfer of ownership rights over the property is rejected.

However allowed the assessee appeal that when the agreement is not registered, the provisions of section 50C have no application. Unless the property transferred has been registered by sale deed and for that purpose value has been assessed and stamp duty has been paid by the parties section 50C inserted by Finance Act, 2002 with effect from 1.4.2003 cannot come into operation.

Followed in: ITO Vs. Kumudhini Venugopal ( 5 ITR (Trib) 145), Navneet Kumar Thakkar Vs. ITO (110 ITD 525)

9. (2014) TaxCorp(LJ) 2498 (ITAT-HYDERABAD) 

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. '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.

10. (2013) TaxCorp(LJ) 1619 (ITAT-CHANDIGARH)

Income Tax Section 2(47)(v), 45, 54 and Section 53A of TPA - Capital gains on land held as capital asset are taxable in the year when Joint Development Agreement (JDA) is entered with a developer for development of the land wherein rights with regard to such land are transferred to the developer.

11. (2014) TaxCorp(LJ) 2691 (HC-KERALA)

Capital gains - S. 53A of TPA - Explains - Part performance of a contract of sale of immovable property

Transaction involving possession to be handed over in part performance of a contract in the nature referred to in Section 53A of Transfer of Property Act, it amounts to transfer. Section 53A clearly explains the concept of part performance of a contract of sale of immovable property. If a buyer is put in possession of a property in part performance of the obligations under the agreement on the buyer paying a substantial portion of the sale consideration, the contract of sale is treated to be in part performance.

12. (2013) TaxCorp(LJ) 2426 (HC-BOMBAY)

Income Tax Section 2(47)(iv) and 53A of Transfer of Property Act - Short or Long term capital gain - No possession handed over to the developer

CIT (A) held that the provisions of Section 2(47)(v) are not applicable for the assessment year 2003-04 and thereby deleted the addition of Rs.1,52,60,908/- made under the head, 'short term capital gain'.

Revenue contented that a development agreement was entered into by the Assessee on 5th October, 2002 with M/s. Landscape Developers for development of residential project namely Castle Rock and Cabo. It is further the case of the appellant that a similar development agreement was made with said M/s. Landscape Developers for sale and development of land admeasuring 16,140 sq. metres. As per the revenue, since the possession was handed over by the assessee to the said M/s. Landscape Developers during the said assessment year, it was a transfer within the meaning of sub-section 24 clause 5 of Section 2 of the Income Tax Act read with Section 53A of the Transfer of Property Act. As such, the Assessing Officer has rightly found that the assessee was liable to pay income by way of short term capital by the said amount.

Hon`ble High court noted that, CIT(A) as well as the learned ITAT upon basis of the factual material placed before it and upon interpretation of the agreement entered between the assessee and the developer has found that the assessee was liable to pay capital gain in the year 2008-09, inasmuch as there was no possession handed over to the developer under Section 53A of the Transfer of Property Act in the assessment year 2003-04. It can thus be seen that finding recorded are upon appreciation of material led before the CIT(A) and the Tribunal and upon consideration of the documents placed for its consideration. The said question therefore cannot be said to be a question of law, leave aside, the substantial question of law. The appeals are therefore found to be without merit and as such, stand dismissed.

13. (2013) 7 TaxCorp (DT) 55102 (UTTARAKHAND)

In absence of an agreement, transfer of land by assessee to his AOP won’t be deemed as transfer           

Where assessee contended that he formed an AOP and transferred a land to it, but no agreement between assessee and AOP was found, transaction would not amount to transfer.

14. (2014) TaxCorp(LJ) 2718 (HC-AP)

Hon`ble High court upheld the order passed by ITAT reported in (2014) TaxCorp(LJ) 2717 (ITAT-HYDERABAD), ITAT held that Unregistered agreement of sale - Possession of the land deemed to have been delivered to the developer on the date of execution of the Unregistered Development Agreement itself, reopening of the assessment is invalid.

15. (2013) TaxCorp(LJ) 2426 (HC-BOMBAY)

Income Tax Section 2(47)(iv) and 53A of Transfer of Property Act  - Short or Long term capital gain - No possession handed over to the developer . Mere execution of a development agreement is not a “transfer” if possession as per s. 53A of the Transfer of Property Act is not given

16. (2013) TaxCorp(LJ) 2405 (ITAT-MUMBAI)

Capital gains is applicable transfer under development agreement, however assessee entitled to claim S. 54/54F exemption with regards to investments/cost of construction.

17. (2011) TaxCorp(LJ) 1414 (HC-KARNATKATA)

S. 2(47)(v) and S. 53A of TPA - The development agreement granted irrevocable license to the developer to entre in to possession of the property and power of attorney had been executed to deal with the property and irrevocable license to entre upon the property after the developer obtains requisite approvals of various authorities. Karnataka HC following Bombay high court ruling held that the said transaction would amount to capital gain and attracted tax under section 45(1) of the Act. Accordingly , Karnataka HC hold that the ITAT was not at all justified in holding that ‘transfer’ in the present case do not attract capital gain and was not exigible to tax under section 45(1) and 48 of the Act. (Note: As per our information, SLP filed by assessee is dismissed)

18. (2002) TaxCorp(LJ) 1413 (SC)

Wherein certain conditions were stipulated for being fulfilled by the transferee in order to protect or defend his possession under S. 53A of the Transfer of Property Act, and the fulfillment of those conditions in the present case, it is submitted that the development agreement in the present case was not yet renewed and hence not in force, and as such the transaction is not covered by S. 53A of the Transfer of Property Act and consequently, it does not amount to transfer under S. 2(47) of the Income-tax Act, 1961.

19. (2011) 5 TaxCorp (DT) 49540 (KARNATAKA)

In view of ‘deemed transfer’ provisions under Sec 2(47), the date of granting possession was relevant for levying capital gains tax. Actual date of completion of the project was not relevant to determine taxability. 

20. (2012) TaxCorp(LJ) 1439 (ITAT-BANGALORE)

The consideration receivable by the assessee on the cancellation of a JDA for the property is taxable as capital gains in the year in which the assessee entered into sale deeds.

21. (2012) TaxCorp(LJ) 1440 (ITAT-BANGALORE)

Assessee enters into JDA, assessee obtained certain number of flats in return as her share and thereafter she sells these flat. Whether while computing income on sale of flats which came to the share of the assessee, the cost of construction (estimated/ fair market cost) should be allowed as deduction by showing the same in the debit side of the trading account. Held, yes 

22. (2013) TaxCorp(LJ) 1443 (ITAT-HYDERABAD)

Transfer of land u/s 2(47)(v) in the light of a Joint development agreement, Held there cannot be any capital gain earned by the assessee on account of the impugned development agreement.

Whether there is a transfer of property within the meaning of section 2(47) in the light of the joint development agreement?

ITAT bench observed and held that ,the Agreement did not contemplate an exchange of properties and therefore the agreement does not by itself constitute a "Transfer" within the meaning of Section 2(47) of the I.T. Act, 1961. No sale was effected on the date of agreement. No consideration has been passed between the parties on signing the agreement. Further from the date of signing of development agreement dated 28.2.2006 to 31.3.2006 no progress has taken place in the said landed property which is subject matter of development agreement, nothing has been brought on record. Further, there was no consideration in the form of money passed between the parties. There was no construction, whatsoever, taken place during the period 28.2.2006 to 31.3.2006. Even otherwise there was no General Power of Attorney given by the assessee to the developer. In such a situation, it is only the actual performance of transferees obligation which can give rise to the situation envisaged in section 53A of the TP Act. On these facts, it is not possible to hold that the developer has performed its obligation during the period 28.2.2006 to 31.3.2006 in which the capital is sought to be taxed by the Revenue authorities. In our opinion, the condition laid down u/s. 53A of TP Act was not satisfied during the period from 28.2.2006 to 31.3.2006. Once we come to the conclusion that the developer has not performed the stipulation as required by the development agreement during the period under consideration and within the meaning assigned to the expression in section 53A of TP Act, its contractual obligation in the previous year relevant to the present A.Y. 2006-07, and it cannot be said that there was a transfer u/s. 2(47)(v) of the Act so as to levy capital gain tax.

The judgement in the case of Chaturbhuj Dwarkadas Kapadia by the Bombay High Court undoubtedly lays down a proposition which, more often than not, favours the Revenue but on the facts of this case the said judgement supports the case of the assessee as "willingness to perform" has been specifically recognised as one of the essential ingredients to cover a transaction by the scope of section 53A of TP Act. The Revenue does not get any assistance from this judicial precedent.

Held, there cannot be any capital gain earned by the assessee on account of the impugned development agreement.

 23. (2011) 5 TaxCorp (DT) 49781 (MADRAS) 

Capital gains u/s 48 to be calculated on full value of consideration, not market value.

24. Vidhyavihar Containers Ltd. v. DCIT

Conversion of land into stock-in-trade covered u/s 45(2) since assessee carried real estate business.

25. ITO vs Finian Estates Developers (P) Ltd. 

No income accrues from transfer of land development rights untill obtaining of approval from town development authority.

 26. (2011) 5 TaxCorp (A.T.) 24031 (DELHI)SB,

The provisions of Section 45(3) of the Act are applicable to introduction of stock-in-trade as capital contribution, is not considered in this decision.

27. (2013) TaxCorp(LJ) 1442 (ITAT-PUNE)

S. 2(14), 45(3), 50C - Capital gains provisions to stock-in-trade.

The development rights held as stock -in- trade and introduced as capital in a Joint Venture is not transfer of the capital asset as defined under Section 2(14) and therefore, the provisions of Section 45(3) and 50C of the Act are not applicable to the transaction.

ITAT noted that the assessee  has entered into 4 development agreements for development of the property at Katraj and paid Rs.16,25,000/-  which was shown in the balance sheet under the head ‘current assets’. The assessee  has transferred the development rights to the Joint Venture as his capital contribution and valued the same at INR Rs.25,00,000/-.

ITAT considered the arguments by assessee that since the value of development rights was shown in the balance sheet under the head ‘current assets’ and since the AO in the wealth tax assessment order has excluded the land at Katraj from the purview of wealth tax, therefore, the development right shown in the balance sheet is in the nature of stock-in-trade and provisions of Section 50C are not applicable.

ITAT uphold the order passed by ld. CIT(A) that the development rights held as stock-in-trade and introduced as capital in a Joint Venture is not transfer of the capital asset as defined in Section 2(14) of the Act and therefore, the provisions of Section 45(3) and 50C of the Act are not applicable to the transaction.

28. (2010) TaxCorp(LJ) 1446 (ITAT-VISAKHAPATNAM)

Joint Development agreement - There is a difference between the contract on one hand and the performance on the other hand. The transfer took place during the accounting year payments were effected during that year and substantial permissions were obtained. In such cases of development agreement, one cannot go by substantial performance of a contract. In such cases, the year of chargeability is the year in which the contract is executed.

The impugned agreement entered into between the assessee and the builder is a "Development Agreement".   The said agreement is an absolute one with no right to revoke the agreement. As per the propositions laid down by the Hon'ble Bombay High court, the issues such as handing over the possession of land, substantial compliance of terms of agreement etc. are not relevant in the case of development agreements. Hence the development agreements result in "transfer of capital asset" and the year of chargeability is the year in which the said contract was executed.

29. Dnyaneshwar N. Mulik vs  ACIT 

Completion of ‘transfer’ of immovable property not a requirement for applicability of s. 2(47)(v) 

30. CIT vs Ashok Kapur (HUF) 

Where clauses of JDA clearly contained elements of transfer, capital gains accrued in hands of the transferor

31. (2012) 6 TaxCorp (A.T.) 26630 (HYDERABAD) 

Date of JDA not relevant for levy of capital gains tax.  Willingness of transferee to perform obligations u/s 53A of Transfer of Property Act essential for deciding accrual of capital gain and not date ofdevelopment agreement.

32. (2011) TaxCorp(LJ) 1437 (ITAT-HYDERABAD)

Held, in a Joint Development Agreement , if the Developer has performed or is willing to perform his part of the contract, then the transaction would qualify as a ‘transfer’ under section 2(47)(v) of the Income-tax Act, 1961.

33. (2013) TaxCorp(LJ) 1444 (ITAT-MUMBAI)

Capital gain can be charged in the year of handing over the possession of the property u/s 2(47)(v) and not on account of development  Rights  Agreement  entered with the developer.

34. (2013) 7 TaxCorp (A.T.) 32542 (HYDERABAD)  

There cannot be any capital gain earned by the assessee on account of the impugned development agreement.

35. (2012) 6 TaxCorp (A.T.) 27311 (PUNE)

S. 2(47) - JDA - Date of Transfer for capital Gain - Whether expression “Transfer” was to be considered from the date of development agreement was registered by way of confirmation deed on 23-1-2007 or the date assessee entered into a joint venture development agreement with Builders for development of said land on dated 12-7-2005 and pursuant to said agreement, possession of land was handed over to builder. Held, the impugned agreement entered on 12.7.2005 which contemplates taking over of possession of the property by Rohan Builders for development fulfills the requirements of section 2(47)(v), therefore, 'transfer' in terms of section 2(47)(v) has taken place during the year under consideration. The plea of the assessee that there is no transfer in favour of Rohan Builders as an independent transferee is not relevant to determine the question as to whether qua the assessees, a 'transfer' as envisaged under section 2(47)(v) of the Act has taken place or not. Even if for the sake of argument it is accepted that Rohan Builders have not taken possession of the property as transferee per se, yet there is a transfer resulting on account of handing over possession qua assessee and such possession is taken by Rohan Builders as part of the joint venture, which is again distinct from the assessee. Be that as it may, in our view, the controversy on the timing of the taxability of capital gains in this case is liable to be held in favour of the Revenue, inasmuch as capital gains on transfer of land are liable to be taxed in the instant assessment year on the strength of the agreement dated 12.7.2005.

20. 1. The bench also held that for the purpose of S. 54EC assessee received sale consideration of a property in instalments, and he invested amount in specified bonds within a period of six months from date of receipts, he was entitled to deduction under section 54EC 

36. (2012) 6 TaxCorp (A.T.) 26630 (HYDERABAD)

S. 2(47)(v) , S. 53A – Whether date of Development Agreement is the date of transfer for computing capital gain of the transfer of property. Held, unless provisions of section 53A of Transfer of Property Act are satisfied on facts of a case, transaction relating to Development Agreement of a property cannot fall within the scope of deemed transfer under section 2(47)(v) of IT Act. 

The assessee has received only a 'meager amount' out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence 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 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. 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.

37. (2012) 6 TaxCorp (A.T.) 28907 (HYDERABAD)URO

Development agreement giving right to receive a fixed share in the built-up area and putting the developer in possession of land constitutes ‘transfer’ u/s 2(47) 

The assessee owns a plot of land admeasuring 3100 sq. yds. on Road No.2, Banjara Hills, which he gave for development for construction of a building complex. The understanding between the assessee and the developer was that the assessee should get 35% of the built-up area and car park area towards his share. The agreement with the developer was entered into on 21.6.1999. The construction was continuing during this assessment year and was completed during previous year relevant for AY 2004-05. The assessee placed these facts before the AO who held that the said transaction amounts to transfer within the meaning of S. 2(47) r.w.s 53A of the Transfer of Property Act. Accordingly the AO computed the capital gains at Rs. 95,74,710/-. The AO estimated the sale consideration of the land to be the fair market value as per the SRO’s records and computed the capital gains as at Rs.95,74,710/-. 

Whether development agreement giving right to receive a fixed share in the built-up area and putting the developer in possession of land constitutes ‘transfer’ u/s 2(47) and attract capital gain where no monetary consideration was received at the time of entering into the agreement except a refundable deposit. As the understanding between the assessee and the developer is that the property has to be developed by the developer and after development the developer is entitled for 65% of the built up area and the remaining 35% will be that of the assessee. Held, Yes. 

On 21.6.1999 an agreement was entered into by the assessee with M/s. Trendset Builders Pvt. Ltd. In this case during the previous year relevant to the assessment year 2000-01 on the 21st Day of June, 1991 the assessee entered into development agreement with M/s Trendset Builders P Ltd. for construction and it is enough if the assessee has received the right to receive consideration on a later date, so  as to attract exigibility to tax on capital gains during the year under appeal. Mere accrual of the consideration, as it is to be received in the subsequent years does not defer the taxability of the capital gains. The assessee being owner of the capital asst, having parted with the possession of the land under a joint development agreement, for construction and having handed over the possession of the vacant land to the developer on promise to be handed over 35% of built up area and 35% of car parking area of the property to be constructed, it was a clear case of transfer by exchange within the meaning of S. 2(47)(i) of the Act. Property was handed over in part performance under S.53A of the Transfer of Property Act, and it could not be said that the transaction was without consideration. The possession of the land having been handed over to the developer in the assessment year under consideration, the transfer takes place in the assessment year under consideration only, and consequently the assessee is liable to be assessed to tax in relation to the capital gains in the year under consideration itself.

38. (2008) 2 TaxCorp (DT) 42000 (DELHI)

Mere grant of permissive right to builder to construct building on land belonging to assessee will not amount to transfer. A license given to the developer to make use of the property in a particular manner, keeping in mind that it was a Joint Venture between him and the assessee, did not constitute transfer. 

39. CIT & ANR vs. RUDRA INDUSTRIAL COMMERCIAL CORP.

S.45 (2). Capital gains- Computation-Cost of inflation index- Conversion of  immovable property in to stock in trade.

Assessee firm converted its immoveable property in 1987-88 into stock in trade and developed by entering into an agreement with developer. Revenue did not treat the said arrangement as a transfer at that stage. Capital gains arising on sale of flats and registration of deeds in 1992-93 is to be computed by applying the cost of inflation index as applicable to Asst year 1992-93 and not that applicable in 1987-88. ( Asst year 1993-94).

40. (2012) 6 TaxCorp (A.T.) 27496 (BANGALORE)

JDA: Capital gains will arise only when the possession of the built up area is handed over together with occupancy certificate by the developer.

Whether the Ld. CIT(A) ought to have appreciated that the sale consideration for the sale of immovable property was only Rs. 9 crores and the balance Rs. 5 crores was towards development of the area, out of which the profit derived by the appellant was offered for taxation and in the circumstances the capital gains as determined by the assessing authority was opposed to law and the impugned addition in this regard was liable to be deleted.

The AO during the course of assessment proceedings observed that during the course of survey, it was learnt that the assessee had received an amount of Rs. 30 crores from M/s. IDEB Investments Pvt. Ltd. (IDEB) and it was found that the assessee had entered into a joint development agreement with M/s. IDEB on 30.3.07. He further observed that during the course of survey, following three registered agreements/documents were found:

(i)  Joint Development Agreement between assessee-company and M/s. IDEB, dated 30.3.2007.(ii)  Agreement for sale between the assessee-company and M/s. IDEB dated 30.3.2007.(iii) General Power of Attorney executed by the assessee company in favour of M/s. IDEB dated 30.3.2007.

The explanation of the assessee before the AO was that the amount had been received as advance and once the sale deeds get executed, it will be taken as capital gains. The assessee submitted to the AO as under:-

"The monies so received by the assessee are in the nature of advances only. The capital gain on this transaction shall arise only after the constructed area is physically handed over to the assessee. Further, till date the entire land and building is in the possession of the assessee and has not handed over the physical possession to the developer. The developer has not taken any plan sanction/approval for any construction in the land so given. However, to secure the advances given, the developer has entered into an agreement of sale with the assessee and this does not constitute a sale".

Assessee further submitted that "The point where the capital gains are deemed to accrue will purely depend on the terms of the Joint Development Agreement. Where the agreement is of such nature that possession is given in part performance of a contract, the liability of capital gains tax will arise on the handing over of such possession to the builder. In case of Jaico, possession is not handed over.

Where the possession is not transferred but deferred until the construction is complete, the liability to capital gains tax will arise in the year in which the developer completes the construction.

Where the landowner and builder execute joint development agreement, if the consideration is receivable in built-up area to be constructed and handed over by the builder to the landowner, it is advisable to avoid the applicability of section 53A of the Transfer of Property Act. This can be achieved by mentioning in the agreements that license is granted to the builder to enter the premises and construct the building. The possession is retained by the landowner, which will be handed over as and when the built-up area is constructed and delivered. By this stipulation, the transfer will take place only in the year in which the built-up area is received and not before.

Hence it is concluded that the Tax incidence on capital gains will arise only when the possession of the built up area is handed over together with occupancy certificate by the developer.

The AO however did not find merit in the submissions of the assessee and was of the view that the transfer took place during the F.Y. 2006-07 relevant to assessment year under consideration i.e., A.Y. 2007- 08 and hence the capital gain was taxable. The AO worked out the capital gain at Rs. 43,61,72,341.

Held, In the instant case, it was noticed that the agreement clearly stated that the owner would continue to be in possession of the scheduled property till such time the developer completes the construction of the said complex and delivers their areas infra. In the instant case, nothing was brought on record to substantiate that the possession of the land was delivered to the developer or the land was not in assessee's possession. The claim of the assessee was that amount was received as an advance, would be offered for taxation when the sale deed got executed. In the instant case, it was not clear as to whether the three agreements were cancelled or sale deeds were executed in lieu of those agreements, particularly when there was no discussion in this regard either in the assessment order or in the impugned order passed by the Commissioner (Appeals). Therefore, considering the totality of the facts, it was viewed that this issue required fresh adjudication since the facts relating to the transfer of the property were not clear. In the instant case, nothing was brought on record to suggest that IDEB had taken possession of the property either physically or constructively. Therefore, it was deemed appropriate to remand this issue back to the file of the Assessing Officer for fresh adjudication in accordance with law, after providing due and reasonable opportunity of being heard to the assessee.

42. (2008) 1 DTR 321 (BANGALORE),  

The concerned with transfer of land in an earlier year to a builder, while possession of constructed flats was handed over 3 years later. Though the ITO levied Capital Gains in the year when possession of flats was given, the ITAT held that for charging Capital Gains under Sec 45(1), the income of the year in which the “transfer” takes place is the most crucial. The transfer of the right and handing over the possession of the land to the builder is an act done by the assessee to extinguish his interest in the said land and that would trigger the taxable event and not subsequent delivery of constructed flats by the builder. The decision of Bangalore bench in D.L Nandagopalaa Reddy v. ITO (25-6-2006) was followed.  

43. (2012) 6 TaxCorp (A.T.) 27496 (BANGALORE)  

Capital gain is on the date of development agreement was executed

Whether the capital gain in the case of development agreement is assessable in the year in which the development agreement was entered or possession of the constructed area was handed over ? where the assessee would get 50% of the constructed area in lieu of surrendering rights over 50% of plot area. 

The agreement in question is a development agreement. Introduction of the concept of deemed transfer under section 2(47)(v).  

Such development agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements, That such agreements are only a mode of remunerating the builder for his services of constructing the building (see Gurudev Developers V Kurla Konkan Niwas Co-operative Housing Society (2000) 3 Mah LJ 131). It is precisely for this reason that the legislature has introduced section 2(47(v) read with section 45 which indicates that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law. In this case that test has not been applied by the department. No reason has been given why that test has not been applied, particularly when the agreement in question, read as a whole, shows that it is a development agreement. There is a difference between the contract on one hand and the performance on the other hand. In this case, the Tribunal as well as the department have come to the conclusion that the transfer took place during the accounting year ending 31.3.1996, as substantial payments were effected during that year and substantial permissions were obtained. In such cases of development agreement, one cannot go by substantial performance of a contract. In such cases, the year of chargeability is the year in which the contract is executed.   

In this case, the agreement is a development agreement and in our view, the test to be applied to decide the year of chargeability is the year in which the transaction was entered into.  

Agreement entered into between the assessee and the builder is a “Development Agreement”. As stated earlier, the said agreement is an absolute one with no right to revoke the agreement. As per the propositions laid down by the Hon’ble Bombay High court, the issues such as handing over the possession of land, substantial compliance of terms of agreement etc. are not relevant in the case of development agreements. Hence the development agreements result in “transfer of capital asset” and the year of chargeability is the year in which the said contract was executed.  

In the instant case, the development agreement was entered on 05.11.1997 and hence the year of chargeability of capital gain is the assessment year 1998-99. In view of the foregoing discussions, we are of the view that the tax authorities are right in law in holding that the capital gain is assessable in assessment year 1998-99.  

In the instant case, the development agreement dated 14.05.1998 entered with Shri G.Seshagiri Rao is only relevant, as the apartment was built as per the said agreement.  

The developer has to finish construction within 18 months of the date of agreement and in case of his failure, he has to pay compensation to the assessee @ Rs.15,000/- per month till the date of actual delivery. As per clause X of the agreement, the assessee has given license and permission to the developer to enter upon the property with full right and authority to commence, carry on and complete development there of in accordance with the permissions mentioned in the agreement. The developer is not entitled to assign the said right or interest to any party without the consent of the assessee. Thus the impugned development agreement is an absolute one with no right to revoke the agreement.  

The capital gain in the instant case is not assessable for the assessment year 2002-03, but it is chargeable in the assessment year 1999-2000, as the development agreement was executed on 14.5.1998. Accordingly we set aside the order of Learned CIT(A)

44. (2011) TaxCorp(LJ) 1445 (ITAT-VISAKHAPATNAM)

The transaction covered by the development agreement, Dt. 5-11-1997 amounts to a transfer' contemplated u/s 2(47)(i)(iv) of the Income-tax Act, and to be more precise whether transfer of property took place under the Development Agreement Dt. 5-11-1997 in compliance of Sec.2(47)(v). whether the development agreement entered on 05.11.1997 resulted in Transfer of Property or not ? Held, the development agreements result in "transfer of capital asset" and the year of chargeability is the year in which the said contract was executed. In the instant case, the development agreement was entered on 05.11.1997 and hence the year of chargeability of capital gain is the assessment year 1998-99. In view of the foregoing discussions, we are of the view that the tax authorities are right in law in holding that the capital gain is assessable in assessment year 1998-99.

45. (2011) 5 TaxCorp (A.T.) 25468 (MUMBAI)

The development agreements, in respect of immovable property held as ‘stock in trade,’ would not give rise to transfer u/s 2(47), since land converted into stock-in-trade would cease to be a capital asset. 

46. (2011) 5 TaxCorp (A.T.) 24648 (MUMBAI)

A developer paid consideration to all members of the Housing Society in exchange for permission to construct on the society’s land. ITAT held that mere grant of consent would not amount to transfer of land or any related rights.  

47. (2011) 5 TaxCorp (A.T.) 25179 (MUMBAI)

The assessee was required to pay capital gains tax, based on stamp duty valuation, in respect of ‘transfer’ pursuant to development agreement. ITAT also held that since stamp duty valuation was higher than agreement value, provisions of Sec 50C (provision for computing full value of consideration for payment of stamp duty) would be applicable.

48. (2012) 6 TaxCorp (A.T.) 26480 (HYDERABAD)

Accrual of capital gains in the case of Joint Development Agreement – Whether Capital gain accrues on the date of execution of the JDA between the Assessee and the Developer as per S. 2(47)(v). Held, in a Joint Development Agreement , if the Developer has performed or is willing to perform his part of the contract, then the transaction would qualify as a ‘transfer’ under section 2(47)(v) of the Income-tax Act, 1961. 

49. (1982) 29 CTR 5 (GUJ)

The expression ‘transfer of capital asset effected in the previous year’ occurring in section 45 is concerned, it is not possible to take the view that the transfer is effected on the date on which the document is copied out in the books of the Registrar. It could therefore be said that section 47 would be attracted even in respect of a transaction of sale when the question arises in the context of the decisive date for ascertaining that on which the transfer of a capital asset becomes effective under section 45. The transaction must be treated as having become effective from the date on which the document was executed in case its registration is subsequently admitted before the Registrar and eventually it is registered. On this point, the Tribunal was, therefore in error in holding that the transaction in question was not effected before 1-3-1970. 

50. (2002) 173 CTR 477 (SC)

In view of the provisions of section 47, it is well-settled that a document on subsequent registration will take effect from the time when it was executed and not from the time of its registration. Where two documents are executed on the same day, the time of their execution would determine the priority irrespective of the time of their registration. The one which is executed earlier in time will prevail over the other executed subsequently. In view of the concurrent findings, referred to above, the High Court had rightly held that document executed in favour of the respondent prevailed over the document executed in favour of the petitioner. 

51. (2003) 174 TAXATION 243 (BOM)

If the developer applies for permissions from various authorities under the Power of Attorney or otherwise, and if the contract read as a whole indicates passing or transferring of complete control over the property in favour of the developer, such a DA could be construed as an agreement of sale. In such a case, the Assessing Officer is entitled to take the date of the contract as the date of transfer and the effective date of possession may decide the taxable event.  

52. (2007) 202 TAXATION 238 (AAR)  

The nature and character OF “POSSESSION” was set out to provide clarity as to what would constitute possession. 

The possession contemplated by Sec 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. The concurrent possession of the owner who can exercise possessory rights to a limited extent and for a limited purpose and that of the buyer/ developer who has general control and custody of the land can very well be reconciled. Sec 2(47)(v) will have its full play in such a situation. Therefore, there is no warrant to postpone the operation of clause (v) and the resultant accrual of capital gain to a point of time when the concurrent possession will become exclusive possession of developer/ transferee after he pays full consideration. Further if “possession” referred to in clause(v) is to be understood as exclusive possession of the transferee/ developer, then the very purpose of the amendment in 1987 expanding the definition of transfer for the purpose of capital gains may be defeated. Further the date of possession for taxable event need not be actual date of taking physical possession or the instances of possessory acts exercised. What is spoken to in clause (v) is the transaction which involves allowing the possession to be taken. By means of such transaction a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. It can be the date of execution of General Power of Attorney and the taxable event occurs then and there, in view of the incidence of “transfer” u/s 2 (47) (v) on that date. 

53. (2009) 21 DTR 80 (CHENNAI)

The assessee had received earnest money and parted with possession under the DA. ITAT held that this amounted to transfer of new asset within the meaning of Sec 2(47)(v) read with Sec 53A of Transfer of Property Act. ITAT relied on the principles enunciated in Chaturbuj Dwarkadas Kapadia and Jasbir Singh Sarkaria , holding that when the possession was handed over and total consideration was also agreed upon by the parties and the transferee was allowed to enjoy and entertain the property for the purpose it was taken over, then the transaction has fulfilled the conditions prescribed u/s 53A of Transfer of Property Act, coupled with Sec 2(47)(v) of Income Tax Act. 

54. (2005) 98 TTJ 179 (PUNE)

Examined a JDA wherein possession was given to the builder under a General Power of Attorney. The assessee acted upon the agreement and accepted payments. It was held that all conditions u/s 2(47)(v) were satisfied and transfer took place even though sale deeds in respect of flats were not executed / registered. 

55. (2007) 108 TTJ 854 (MUMBAI) ,

The transferee was not willing to perform his contractual obligations. Thus, it was held that all the conditions laid down u/s 53A of Transfer of Property Act were not satisfied and hence there was no transfer within the meaning of Sec 2(47)(v). 

56. (2009) 17 DTR 280 (BOM) & (2009) 23 DTR 140 (HYDERABAD)

The possession was handed over in a subsequent year, later than the year in which the DA was entered. The taxable event was held to be the year when the possession took place. 

57. (1999) 64 TTJ 588 (BOMBAY)

Turns on a different set of facts wherein the transfer took place in stages, in different years. Therefore, Capital Gains could not be worked out on the basis of the entire sale consideration as quoted in the agreement in one year. On the contrary capital gains had to be levied on the basis of transfer in each year.

58. (2004) 90 TTJ 217 (DELHI)

No conveyance deed was executed by the assessee. However, from the nature of the collaboration agreement, it was clear that assessee was bound to transfer the land after the possession of built up flats was given by the builder. Though the collaboration was entered into with the builders in 1984, possession was given in financial year 1991-92. Delhi ITAT held that land was transferred not on the date of the collaboration agreement, but on the date that the assessee sold the flats, in the year 1991-92. 

59. (2008) 301 ITR 124 (CHENNAI)

Found that there was no written agreement and no sale consideration was received during the relevant period. Also the revenue could not establish that the assessee had put the developer in possession of the property by receiving the consideration partially or in full. Thus, the Court held that unless there is a written agreement, Sec 53A of the Transfer of Property Act will not come into operation. Further, the Court also held that the sale consideration has to be received in part or in full, following the vesting of possession with the developer. Therefore the transfer, if at all, would be in the subsequent year when flats were sold. 

60. (2010) 4 TaxCorp (DT) 47540 (PUNJAB & HARYANA), (1994) 118 TAXATION 471 (BOM) and (1999) 152 CTR 227 (MP)

Held, If the flat has been allotted to you, posession is not material and long term capital gain arises. However, in your case there is a twist that the house is still not ready for posession, hence its sale per se cannot be considered as sale of residential house. Still the sale will result in transfer of other capital asset i.e. your right to obtain posession of the said flat, therefore long term capital gain will arise against which you can avail exemption u/s 54F.

61. (2008) 209 Taxation 87 ITAT (LUCKNOW)

The relevant and material facts for the disposal of this issue involved in the grounds of appeal taken by the assessee are that the assessee has been allotted a ‘D’ type industrial shed at Kirti Nagar Packaging Complex by Delhi State Industrial Development Corporation Ltd. (hereinafter called ‘DSIDC‘) vide letter dated 8-7-1994 which was not of any specific shed as the same was to be decided later on through a draw of lots. On 27-8-1996 by a draw of lots the Shed No. D-13 was allotted to the assessee subject to payment of all outstanding dues and interest. The assessee was allotted the plot on instalment basis and the 1st instalment of Rs. 60,000 was paid on 21-10-1993 and a 2nd instalment of Rs. 1,25,255 was paid on 28-12-1994, similarly, other instalments were paid by the assessee on different dates as given in the chart appearing at page 2 of paper book and the final instalment of Rs. 1,64,561 was paid by the assessee on 19-12-1997. In this manner a total sum of Rs. 14,04,193.50 was spent by the assessee towards the purchase of this industrial shed and the indexed cost of the same was worked out by the assessee at Rs. 1,958,008 as calculated at page 2 of the chart. The possession of the said industrial shed was handed over to the assessee by DSIDC on 18-5-1998 and the plot was sold for a sum of Rs. 17 lakhs by the assessee on 15-12-2000 and after working out the indexed cost on each paid instalment the assessee declared capital loss in the return at Rs. 2,58,008.

The short question which arose and was to be considered by the tax authorities below was whether the profit/loss which arose to the assessee from the sale of the industrial shed was a long-term or a short-term capital gain/loss. The assessee has claimed before the tax authorities below that in this case the industrial shed should be taken as having been held from 8-7-1994 i.e., when the allotment of the industrial shed was made by DSIDC in favour of the assessee.

The tribunal held as under “Now keeping in view the provisions of section 2(14) of the Income-tax Act, as well as, the ratio of the above-mentioned decisions (supra) it is absolutely clear that the words ‘capital asset’ defined in section 2(14) of the Act and the word ‘property’ used in this section is of the widest amplitude. Which means that any right which a person can be called to hold in a capital asset would be included in the word ‘property’ used and included in the definition of ‘capital asset’ in section 2(14) of the Act. Again reverting to the facts of the instant case wherein by a draw of lots the assessee was declared successful for the allotment of a shed, subject to payment of all outstanding dues and interests and in lieu thereof the assessee paid an instalment of Rs. 1,25,255 on 28-12-1994 and thereafter continued paying the remaining instalments to DSIDC, on account of which a particular Shed No. D-13 was allotted to the assessee and ultimately the possession of the same was handed over to the assessee on 28-5-1998 and thereafter the assessee sold the same on 15-12-2000. It means that when in a draw of lots an allotment of a shed was made to the assessee on instalment basis after a payment of instalment of Rs. 1,25,255 on 28-12-1994 as per the wider meaning of the word ‘property’ used in the definition of ‘capital asset’ in section 2(14) of the Act the property/shed was held by the assessee for bringing the shed within the meaning of definition of the words ‘capital asset’ on 28-12-1994 on payment of instalment of Rs. 1,25,255, hence, the sale of the shed by the assessee on 15-12-2000, after holding the same for a period of more than 36 months is to be treated as long-term capital asset and the sale of the same resulting into loss/gain also amounted to long-term capital loss/gain. 

62. (1998) 62 TTJ 314 (DELHI)

The assessee acquired such capital asset, namely, the rights or interest in the aforesaid two flats at Punjabi Bagh as soon as those flats were booked and the allotment of those flats were made in favour of the assessee by the builders in the year 1983 and 1984. The mere fact that further instalments were paid by the assessee during the years 1983 to 1988, will not lead to the conclusion that the capital asset in question, namely, the right or interest in the said flats was held by the assessee for a period of less than 36 months. The assessee held such capital asset ever since those two flats were booked and allotment of those flats were made in favour of the assessee by the builders in the years 1983 and 1984. Such a view is clearly fortified by the judgment of the Hon’ble  High Court in the case of CIT v. Vimal Lalchand Mutha  

63. (2003) 177 TAXATION 48 (GAU),

It is possible that landowner hands over possession and gives power of attorney to another person who also holds the land as a capital asset. The landowner should offer to tax the capital gain portion arising therefrom, The power of attorney holder may sell the land later and for the appreciation he gained PA holder is liable to capital gains tax -Assam vegetables & oil products Ltd.,  

64. (2006) 191 TAXATION 558 (MP)

 The assessee-firm entered into a contract to purchase certain immovable property. The agreement was not carried out by the seller and the assessee was compelled to file a suit for specific performance of contract against the owner of the property. Ultimately a compromise was arrived at. In terms of the compromise the vendor agreed to pay the assessee a sum as consideration.  The Assessing Officer treated the receipt of Rs.14,85,001 to be in the nature of capital gains in the hands of the assessee and accordingly taxed it. In appeal filed by the assessee, the Commissioner (Appeals) upheld the view of the Assessing Officer. The Tribunal however held that the receipt in question could not be regarded as and taxed as capital gains as defined under section 2(47) of the Act in the hands of the assessee. 

The High Court held that the receipt was exigible to capital gains tax as it involved transfer of property within the meaning of section 2(47).  The action on the part of an assessee in giving up her right to claim the property and instead accepting money compensation is a clear case of relinquishment of a right in the property resulting in transfer as defined in section 2(47). When the legislature defines a particular type of transaction to be in the nature of transfer for taxing purpose, effect has to be given to it.   

65. (2003) 174 TAXATION 243 (BOM)

A new dimension has been given by the Bombay High Court in Chaturbhuj Dwarkadas Kapadia Vs. CIT ( 2003) 260 ITR 491, to the issue relating to the year of chargeability in the case of development agreements. According to the High Court, the year of taxability is the year in which the contract is executed in the light of sec.2(47)(v) which reads as under :

“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 ”

The Court observed as follows :

“In this matter, the agreement in question is a development agreement. Such development agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements. That such agreements are only a mode of remunerating the builder for his services of constructing the building (see Gurudev Developers Vs. Kurla Konkan Niwas Co-operative Housing Society (2000) 3 Mah Lj 131). It is precisely for this reason that the Legislature has introduced section 2(47)(v) read with section 45 which indicated that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law. In this case that test has not been applied by the Department. No reason has been given why that test has not been applied, particularly when the agreement in question, read as a whole, shows that it is a development agreement. There is a difference between the contract on the one hand and the performance on the other hand. In this case, the Tribunal as well as the Department have come to the conclusion that the transfer took place during the accounting year ending March 31, 1996, as substantial payments were effected during the year and substantial permissions were obtained. In such cases of development agreements, one cannot go by substantial performance of a contract. In such cases, the year of chargeability is the year in which the contract is executed. This is in view of section 2(47)(v) of the Act”. 

The decision of the Bombay High court referred to above, if invoked in all cases, would cause genuine hardship because on the date of executing the agreement the land owner will have no means to pay tax or to make investment to avail exemption. In case the Department succeeds in levying tax in the year of agreement and later the transaction fails due to breach committed or on account of extraneous factors there is no effective remedy to the owner explicit under the provisions of law. No doubt a development agreement was treated as an agreement for sale in Ashok Leyland Ltd. V. Appropriate Authority (1998) 230 ITR 398(Mad) but that was in the context of Chapter XXC. If the said analogy is extended to all development agreements, there will be undue hardship for the land owners. It must also be taken note that in R. Vijayalakshmi v. Appu Hotels Ltd (2002) 257 ITR 4(Mad), development agreement was held to be executory contract and not to be construed as an agreement for sale simplicitor.

66. (2003) 176 TAXATION 276 (BOM)

Where the land owner gets built‑up area as the consideration, the value of the constructed area should be taken as the sale consideration for the proportion of the unpided share of land transferred.  The value so adopted in turn will be taken as the cost of acquisition when the said built up area is sold. When land owners sell the built‑up area so allotted together with the proportionate unpided share of land retained, capital gains arising on the land shall be long term capital gains and the gain arising on transfer of the built‑up area will be short term as the building has not been held for 36 months. It is an acceptable proposition that the same transaction for transfer of land and building can be split into two – one relating to land which may be long term and another relating to building which may be short term.

 Other Important ruling on Capital Gains

1. In (2004) 190 CTR 517 (MAD)- The right to obtain a conveyance of immovable property falls within the expression “Property of any kind” used in sec.2(14) of the Income‑tax Act and is consequently a capital asset. The payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up it amounts to relinquishment of the capital asset. There was, therefore, a transfer of capital asset within the meaning of Income‑tax Act. CIT vs. Vijay Flexible Containers 186 ITR 693 (Bom). Giving up the claim for specific performance in favour of owner for consideration amounts to relinquishment of right of specific performance resulting in transfer u/s.47. 

2. In (2003) 184 CTR 52 (KER) ; (2002) 167 TAXATION 221 (Cal) ; (2001) 171 CTR 242 (Mad); (2000) 155 TAXATION 35 (KARN); (1993) 110 CTR 216 (RAJ) . Held, If land is held for more than 36 months but the building constructed thereon is less than 36 months old as on the date of transfer, land becomes long term whereas the building is short term. Similar situation arises where depreciation has been claimed on the building and therefore it is regarded as short term capital asset u/s.50. In either case, the gain arising on transfer of land shall be computed as long term capital gain and the gain arising from the transfer of the super structure shall be treated as short term capital gain. 

3. In (2002) 168 TAXATION 86 (Mad)- Sec. 58 of the Transfer of Property Act deals with mortgage of immovable property and charges. When a property is mortgaged, it is not to be regarded as a transfer for capital gain purposes. One of the kinds of mortgages is "Mortgage by conditional sale". Where the mortgager ostensibly sells the mortgaged property on the condition that, on default of payment of the mortgaged money on a certain date, the sale shall become absolute or on repayment being made the sale shall become void. In a given case if mortgage by conditional sale is executed in January 2001 and the mortgagee failed to repay the amount within 4 months stipulated therein. The sale becomes absolute only at the time of foreclosure in May 2001 relevant to the assessment year 2002-03. The mortgage once created remained a mortgage unless it was foreclosed or redeemed. The transfer u/s. 2(47) arises only in the year of foreclosure and not in the year of creation of mortgage.  

4.  In (1997) 140 TAXATION 170 (SC)  Where a property inherited by the assessee was placed under mortgage by previous owner and where such mortgage is discharged by the assessee, the sum paid by assessee for discharge is to be treated as cost of acquisition. It is deductible in the computation of capital gains. 

5. In (1997) 139 TAXATION 708 (SC)   If the assessee transfers a capital asset which is subject to mortgage created by the assessee, the amount paid by the buyer himself to clear mortgage debts out of the sale proceeds cannot be treated as cost of acquisition or cost of improvement and therefore not deductible.  

6.   In (2009) 167 TAXATION 336 (SC)  Assessee mortgaged immovable property to State for payment of kist. Government auctioned the property and after deducting the amount of kist released the balance to the assessee. Amount recovered by Government cannot be deducted in computing the capital gains as the entire sale consideration belong to the assessee and capital gains has to be computed on the full price. 

7.  In 150 ITR 80 (Mad) the amount paid to the mother having right of residence in the property, for obtaining relinquishment of such right was held deductible in computing the capital gains. 

8.   In (1980) 17 CTR 322 (MAD)  Where a person sold, during his lifetime, a house property where he had resided, thereby earning capital gains, and his legal representative fulfills the condition as to purchase or construction of a new residential house within the stipulated period, the benefit of sec.54 is attracted to the capital gains earned by the deceased.

9.  In (1994) 118 TAXATION 471 (BOM)  The various incentives available in the form of reinvestment subject to certain conditions under sections 54 to 54G. When it comes to investment in house property, what is required is substantial compliance. Even substantial investment by the assessee is sufficient.

Another issue relevant is about making investment before the date of transfer – 129 ITR 218 (Guj); (1986) 83 TAXATION 451 (KARN); Circular No.359 dated 10.05.83 permitting investment in bonds out of advance. 

10. In (2002) 173 CTR 452 (Del) Land cost also qualifies for exemption u/s.54 and 54F – Circular No.667 dated 18.10.93. In order to avail exemption  u/s.54, purchase of a residential house, taking possession/control is a pre-condition but registration is not mandatory. 

11. 16 ITD 195-  A controversy exists about availing exemption in respect of more than one flat u/s.54 if the land owner gets two or more flats as part of consideration in the building constructed. In this regard the ITAT held, where two or more residential units (flats) are situated adjacently and are commonly occupied, all the units can be treated as one residential unit and the assessee shall be eligible to avail the exemption for the entire cost of the flats. If an assessee acquires two flats in two different floors or buildings or places, the controversy in regard to exemption u/s.54 for more than one unit still persists. In a Special Bench decision in 109 TTJ 299(Mum)(SB), two flats converted into one flat was held as entitled to exemption u/s.54. In view of the decisions in 185 ITR 499 (Bom) and 83 ITD 649 (Mum) difficulty arises in claiming exemption for more than one residential unit. 

12.  234 ITR 850 (Bom) and 247 ITR 312 (Bom) Even a tenancy right is a capital asset with nil cost in case no cost has been incurred to acquire the right. When a building is demolished by a builder and in the newly constructed building the erstwhile tenant is given a unit of equal size free of cost, is it possible to get exemption is an issue to be considered. 

13. (2003) 262 ITR 587 (Gau) and 281 ITR 210 (Bom).  Where depreciable assets are held for more than 36 months, assessee can invest the capital gain in specified bonds to claim exemption u/s.54EC. No doubt sec.50 deems the gain arising on transfer of depreciable assets only for the purpose of capital gain and thereby denies the benefit of indexation. However, such deeming fiction cannot take away the character of the asset as a long term asset for the purpose of sec. 54EC.

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Rupesh Srivastava

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