Income Tax On Development Agreements – Story Of An Elephant And Six Blind Men

CA. Vinay V. Kawdia has provided interesting insights into the law on taxation of Joint Development Agreements (JDA). He has identified the numerous controversies arising therein. He has provided a clear-cut analysis of the statutory provisions and also given practical examples to explain their impact. A large number of important judicial precedents have also been referred to

A. Introduction:

In The Blind Men and the Elephant, by American poet John Godfrey Saxe (1816-1887), six blind men meet an elephant for the first time and each man touches a different part of the elephant and makes predictions about what the elephant is like. The same is the story of Income Tax on Joint Development agreement. Land owners, developers, assessing officers, tax consultants, auditors and appellate authorities are like those six blind men who touches the various facets of the elephant called JDA and makes predictions about what should be the tax implications!

In real estate sector, model of Development Agreement [‘DA’] or Joint Development Agreement [‘JDA’] has emerged as a popular arrangement wherein property owner and developer enter in to a joint development agreement to develop the property. Generally, under this type of arrangement, in lieu of land owner surrendering his land in favour of the developer through General Power of Attorney {GPA} to develop/construct the same at the developer’s cost and expertise, may get monetary or non-monetary consideration in the form of either lump sum consideration or certain percentage of future sales proceeds of project to be developed or even certain percentage of built-up area in the future project or mix of the above, depending upon the terms and conditions agreed upon between them. Sometimes the developer would give a lump sum amount to the landowner as refundable security deposit on entering into JDA. When the development/construction is completed, the landowner is handed over built up area in the form of flats/shops etc. allocated to his share which he may keep for personal use or may even rent out or sell outright to the prospective buyers.

B. Background:

Under the charging section 45 (1) of the Income Tax Act, 1961, any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, etc. be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

Section 2(47) defines transfer in relation to capital asset, to include-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) conversion of asset in to Stock in trade of business; or

(iva) the maturity or redemption of a zero coupon bond; or

(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.

 In the above scenario, prior to 01.04.17, in view of charging section 45 read with Section 2(47) of the Act, many complex issues as to date of transfer of land by landowner (especially in light of section 53A of Transfer of Property Act 1882), value of non-monetary consideration received/accrued or receivable, manner in which resultant profits are to be taxed etc. used to arise which were subject matter of prolonged litigation.

To put these controversies at rest, Finance Act 2017 introduced section 45(5A) with following legislative intent-

Under the existing provisions of section 45, capital gain is chargeable to tax in the year in which transfer takes place except in certain cases. The definition of ‘transfer’, inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.

With a view to minimize the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.

It is further proposed to provide that the stamp duty value of his share, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. It is also proposed to provide that benefit of this proposed regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion. 

It is also proposed to provide that in such a situation, the capital gains as determined under general provisions of the Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account this proposed provisions.

It is also proposed to define the following expressions "competent authority", "specified agreement" and "stamp duty value" for this purpose.

It is also proposed to make consequential amendment in section 49 so as to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the said proposed provision.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

To summarize, the new section 45(5A), inter alia, fixed the year of taxability of capital gain irrespective of year of transfer of capital asset (in the form of Land) u/s 2(47) of the Act; and also removed the subjectivity in valuation of non-monetary consideration received/accrued as result of transfer under development Agreement. 

Year of ‘transfer’ post section 45(5A):

Even post section 45(5A), there is no change to the definition of ‘transfer’ and section 45(5A) only postpones the year of taxability from year of transfer to year in which the certificate of completion for the whole or part of the project is issued to the developer by competent authority.
Thus newly inserted sub-section 5A of section 45 can be summarized as follows:

•		Applicable in respect of JDA entered on or after 1-4-2017.
•		Applicable only to the Individual and HUF assessee.
•		Only in case Land or building is held or treated as capital asset by the land owner.
•		Not applicable where entire sale consideration is only in monetary terms.
•		Applicable only where a registered agreement is executed.
•		Not applicable where his share is transferred by landowner before completion of project by developer.

Even post section 45(5A) date of transfer shall be crucial, since benefit of indexation shall be available till the date of transfer of capital asset irrespective of year of taxability of capital gain under the new S. 45(5A). Further, time limit to make investment u/s. 54 and 54F will be reckoned- from the date of transfer only. In fact, from where will be the time limit to make investment u/s. 54 and 54F will be reckoned i.e. from date of Joint Development Agreement or from the date of completion certificate? Is an unanswered question.

C. Case of conversion of land held by land owner as capital asset to Stock-in-trade before entering in to JDA:

As already discussed the new tax regime of Section 45(5A) is applicable only in case of transfer of capital asset under JDA. In case of conversion of capital asset to stock in trade by owner thereof before executing a registered development agreement, the benefit of section 45(5A) i.e. deferment of tax liability till date of completion of project is not available and capital gain on conversion and consequential business gain on sale/transfer of stock in trade, shall be taxable as provided in section 45(2) of the Act. 

As per Section 45(2) of the Act, the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

The term transfer has been defined under the Act in section 2(47) in relation to capital asset only. The definition of transfer under section 2(47) thus can’t be applied for sale/transfer of stock in trade emanating from JDA or otherwise.

Thus, event of conversion of land held as capital asset to Stock in Trade [SIT] will give rise to capital gain which will be charged to tax in the year of transfer/sale of SIT. What shall be the date of transfer/sale of stock in trade in case of transfer of land (after converting it to SIT) to developer under JDA?

Now under these facts, whether entering in to DA / handing over the possession of land under DA amounts to sale of stock-in-trade so as to make assessee liable for capital gain tax in view of s. 45(2)? 

Lets take an example: Mr. X converted his land held as capital asset to Stock in Trade in F.Y. 2019-20. In F.Y. 2020-21, he entered in to registered JDA with developer and handed over the land to him for development. Crux of the crucial terms of the JDA was as follows:

– Possession of the property was given to the developer for specific purposes to develop the property only. It is not a right akin to the ownership of the land.

– The owners are desirous of constructing a building on the said land but due to not having proper experience in construction and development of land, entrusted the same for development to developer

– The owners hereby permit and authorize the developer to enter upon the Schedule property only for the purposes of development.

– Developer has been granted license to enter upon and develop the property. Possession of the said land continues to be with the owner.

– Nothing contained in the agreement shall be construed as grant of possession in part performance of the agreement under s. 2(47)(v) and 2(47)(vi).

– After completion of project, Mr. X shall be entitled to 60% of built up area in the project in the form of flats/shops etc. as per Schedule to agreement

– To safeguard the interest of land owner, initially he is entitled to receive Rs. 1 Crores as non-interest bearing refundable security deposit from developer before commencement of project

The possibilities can be explored as follows:

Sr.	Activity	Date	Date of transfer/sale of Stock-in-Trade
1	Assessee executed Regd. JDA and handed over the possession of land to developer for development	FY 20-21	No sale/transfer of Land
2	Developer completed the project and handed over the 60% of built up area to assessee land owner by way of Regd. deed	FY 21-22	Transfer of proportionate area of land in the nature of SIT (developer’s share)is complete
3	Assessee sold the area so received in the form of flats/shops etc. in two years through Regd. Sale deeds	FY 22-23 and FY 23-24	Sale of SIT in the form of Flats/shops etc. is complete

Judicial views on the above:

ITO vs. Vilas B. Rukari (HUF) ITA No. 1640 of 2014 (PUNE)

Section 28(i), of the Income-tax Act, 1961 – Business income – Chargeable as (Advances) – Assessment year 2009-10 – Assessee was owning land, which it converted into stock-in-trade in assessment year 2006-07 and entered into development agreement with developers for developing project on said land and sell tenements/flats to different prospective buyers – Only physical possession of said property was to be handed over to developer at time of execution of impugned agreement – As per agreements, assessee land owner, to safeguard its interest, received advance equivalent to his share in current year out of amount collected by developers from prospective buyers – Revenue opined that such advances were to be taxed in hands of assessee in year of receipt itself – Assessee had received advance amount equivalent to his share in year under consideration in order to safeguard its interest and it is not case where assessee sold developed plot of land in year under consideration.In fact, right to collect said amount would crystallize on day when tenements or portion of land was sold by developer to prospective buyers.Further since developer had recognized completion and sale of developed portion in subsequent assessment year 2011-12, business profits arising to assessee would be taxable in assessment year 2011-12.

Where business profits were to be taxed in hands of assessee land owner in subsequent year when flats under project were fully developed and handed over to flat buyers, capital gains arising on conversion of assessee’s land into stock-in-trade prior to development agreement would also be taxed in hands of assessee in said subsequent year.

Shri Challa Ramakrishna vs. ACIT (ITA No. 955/Hyd/2018) (Hyderabad)

The stock in-trade can be considered as transferred only in the year in which the assessee has executed the sale deed transferring the stock-in-trade and not when the assessee has given stock-in-trade for joint development to the builder. As already held in the above cases, the provisions of section 2(47)(v) would apply only to the capital asset and not to stock-in-trade.

ACIT vs. Medravathi Agro Farms P. Ltd. [2015] 63 taxmann.com 274 (Hyderabad)

Section 45 of the Income-tax Act, 1961 – Capital gains – (In case of conversion of capital asset into stock-in-trade) – Assessment years 2008-09 and 2009-10 – Assessee-company purchased a land in year 2002 – On 30-12-2005, it transferred said land to a developer by way of development agreement – In lieu of such transfer, assessee was given 27 per cent of built up area in form of flats/bunglows which were subsequently sold to various buyers – Income arising from transfer of land by way of development agreement and subsequent sale of flats and bunglows was required to be computed as per provisions of section 45(2). Since 27 per cent of built up area of project was received by assessee as consideration for transfer of 73 per cent of land area, cost of construction of this 27 per cent area could reasonably be taken as fair market value of 73 per cent of land area in order to compute capital gains arising to assessee on transfer of land by way of development agreement, which simultaneously resulted in conversion of capital asset into stock-in-trade.This capital gain would be chargeable to tax in hands of assessee-company on pro rata basis as and when stock-in-trade in form of flats and bunglows comprised of built up area and proportionate share in land was sold, while amount received over and above cost of such flats and bunglows would be chargeable to tax in hands of assessee-company as business income.

Thus, for the purpose of section 45(2), as per above decisions, in case certain percentage of developed project in the form of flats/units etc. are received by the land owner as a part of sale consideration, capital gain on conversion shall be taxable in the year when such SIT in the form of flats/units are eventually sold by land owner to ultimate purchasers.

D. Alternate view:

Alternatively, for the purpose of section 45(2), in case certain percentage of developed project in the form of flats/units etc. are received by the land owner as a part of sale consideration, only the land (SIT) proportionate to such flats/units shall be treated as sold /transferred when such flats/units are eventually sold by land owner to ultimate customers.

To elaborate it further, to the extent of land proportionate to the built-up area retained by the developer, it is safer as well as prudent to recognize the business profits and the concerned capital gain on conversion both in the year in which assessee gets the complete and unconditional possession of his share in the constructed property. This is because though the SIT in the form of flats/shops etc. has not yet been sold, still, the transfer of SIT in the form of land proportionate to the built up area retained by developer can be said to be complete in the year when developer completes the project and hand over the assessee’s share of constructed area to him, as per situation (2) in above table. In such eventuality, for the purpose of ascertaining income under the head business, sale consideration of SIT (i.e. proportionate area of land retained by developer) can be taken at FMV of constructed area allotted to assessee in the year of allotment.

As far as sale of land (SIT) proportionate to the builtup area received by the land owner is concerned, it shall be treated as sold /transferred when such built up area in the form of flats/units are eventually sold by land owner to ultimate customers. Accordingly, in the year of actual sale of flats/units concerned capital gain on conversion as well as business gain shall be charged to tax.

Refer: R. Gopinath (HUF) vs. ACIT (2010) 133 TTJ 595 (Chennai)

The provisions of section 2(47) are applicable only in case of capital asset. As per section 2(14), capital asset does not include stock-in-trade. Therefore, once the capital asset is converted into stock-in-trade, the provisions of section 2(47) become irrelevant and do not apply.

Where assessee converted his land into stock-in-trade and entered into development agreement with developer to construct residential building thereon, capital gain arising from conversion of land into stock-in-trade would be taxable proportionately in previous years in which assessee’s share of constructed property as per development agreement was sold by assessee or retained for self-use and corresponding business income was offered.

The possession was handed over for carrying out the construction work by the developer and there was no other document except the development agreement which transferred the title of the property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure for carrying out the construction work by the developer and the exclusive possession of the property in legal sense remained with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assessee. The assessee had executed all the sale deeds for transfer of the constructed apartments in favour of the end-user/purchaser, Therefore, the transfer of the proportionate land took place only when the assessee transferred the constructed property by way of sale deeds and offered the business income which was accepted by the department. In any case, when the assessee had retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there was no question of transfer of the entire land to the developer.

Tej Pratap Singh vs. ACIT [2010] 127 ITD 303 (Delhi)

Assessee was owner of a plot of land – It entered into collaboration agreement with ‘S’ for development of land as on 2-5-1987. In terms of agreement, assessee agreed to surrender 40 per cent of plot of land in lieu of 60 per cent of construction to be made on land – Building was finally constructed in year 2000 – Thereupon, assessee issued irrevocable power of attorney in favour of ‘S’ to sell area allocated to it on 10-9-2003. on facts, property stood converted into stock-in-trade on signing of agreement between assessee and ‘S’ and such a conversion would amount to ‘transfer’ under section 2(47)(iv).

Conversion of land into stock-in-trade would be taxable under section 45(2) in year of its sale on basis of fair market value on date of conversion. Since stock-in-trade was transferred by assessee to ‘S’ on 10-9-2003, i.e., date on which irrevocable power of attorney was issued by assessee in favour of ‘S’ under which latter became entitled to possession and disposal of area allocated to it, profit arising on account of transfer of stock-in-trade, representing difference between fair market value of built-up area allotted to assessee and fair market value of capital asset on its date of conversion into stock-in-trade would become taxable as business profits in relevant assessment year only.

This view is explained by way of example below:

Assessee owning long Term Capital asset being plot of land having size 10000 Sq. Ft. purchased for Rs. 10 Lacs, converted the same to SIT. FMV on date of conversion was at Rs. 20 Lacs.

Assessee entered in to JDA with developer and handed over the land to him. As a consideration, assessee was entitled to 60% of built up area in the proposed project. Other details are as follows:

Total Land area	10000 Sq. Ft.
Land purchase Cost	10 Lacs
Land converted to SIT in	FY 2019-20
FMV on date of conversion	20 Lacs
JDA registered in	FY 2019-20
Total built up are developed	20000 Sq. Ft.
Assessee’s share-60%	12000 Sq. Ft.
Project completed in	FY 2020-21
FMV of assessee’s share of built up area in 20-21	1.20 Crores
Assessee sold his share	FY 2021-22
Sale value	1.50 Cores
Proportionate area of land surrendered	4000 Sq. Ft.
Proportionate Cost of above	4 Lacs
FMV of above on date of conversion	8 Lacs
Proportionate area of land retained by owner	6000 Sq. Ft.
Proportionate Cost of above	6 Lacs
FMV of above on date of conversion	12 Lacs

Capital gain on conversion of land to SIT and related business gain (i.e. proportionate area of land retained by developer i.e. 4000 Sq. Ft.) are taxable in AY 21-22 i.e. the year in which project is complete and assessee gets his share in the developed project.

Sale consideration of SIT (i.e. proportionate area of land retained by developer i.e. 4000 Sq. Ft.) = FMV of constructed area allotted to assessee in the year of allotment = 1.20 Crores.

Thus, the working of income under the head LTCG and PGBP for AY 2021-22 is as follows:

Capital Gain	Amount	Remarks
Full value of consideration	8,00,000	FMV (on date of conversion) of area of land retained by developer
Less: Cost of acquisition	4,00,000	Original cost of above
Capital Gain	4,00,000	subject to indexation as applicable
Business Gain
Sale value	1,20,00,000	FMV of assessee’s share of built up area
Less: Cost	8,00,000	FMV of land surrendered on the date of conversion
Business Gain	1,12,00,000/-	Subject to deduction of other business expenses, if any

The working of income under the head LTCG and PGBP for AY 2022-23 is as follows:

Capital Gain	Amount	Remarks
Full value of consideration	12,00,000/-	FMV of remaining area of land on date of conversion
Less: Cost of acquisition	6,00,000/-	Original cost of above
Capital Gain	6,00,000/-	subject to indexation as applicable
Business Gain
Sale value	1,50,00,000/-	Actual sale value of flats
Less: Cost	1,20,00,000/-	FMV of assessee’s share of built up area offered to tax in AY 2021-22
Business Gain	30,00,000/-	Subject to deduction of other business expenses, if any

Though the above view is not free from doubt, it is surely a fair view under conservative approach so as to avoid future litigation.
E. Provision of TDS introduced w.e.f.1-4-2017 for JDA:

A new section 194IC has been inserted whereby deduction of tax at source (TDS) @ 10% is made applicable by the developer on any sum by way of consideration paid/payable (not being consideration in kind) to the resident individual/HUF landowner under the agreement referred to in Section 45(5A). Further no threshold limit is provided meaning thereby it is applicable irrespective of quantum of payment.

It appears that Rule 30,31,31A, 31B & 37BA and Form No.16A, 24G, 26AS,26B, 26Q and 27A may apply in relation to section 194IC.

F. Section 54/54F benefit from Long Term capital gain arising on transfer of land/building under JDA-  

– When residential property is allotted in lieu of transfer of land as per DA with developer, assessee is entitled to exemption u/s 54F. [R. Gopinath vs. ACIT (2010) 133 TTJ 595 (Chennai)]

– Capital gain due to application of S. 45(2) [capital asset converted to stock in trade and sold thereafter] shall be chargeable to tax proportionately in the ratio of land/stock sold in different years. [Ajay Kumar Sah Jagati vs. ITO, DCIT vs. Crest Hotels Ltd., etc.]

– Accordingly, time limit of 2/3 years for investment as required u/s 54/54F shall run from date of actual sale/transfer of stock-in-trade from time to time. [Mahesh Nemichandra Ganeshwade vs. ITO (2012) 17 ITR 116 (Pune)]

– Pre amendment to section 54F by Finance Act 2014 w.e.f. A.Y. 2015-16, there are lot of judgments to the effect that, deduction u/s 54F on more than one residential flats received by virtue of a development agreement is allowable. However, the amendment restricted the benefit to only one residential house.(see: TAV Gupta vs. ITO [2018] 93 taxmann.com 249 (Bangalore), Mrs. Adeebunnisa Begum Vs. ITO, ITA No. 816/2017 (Hyderabad), etc.]

The issue here is when assessee received multiple flats as a package in lieu of surrender of land under JDA, to what extent the benefit u/s 54F shall be available w.e.f. AY 2015-16. The guidance can be taken from –

CIT vs. Gumanmal Jain [2017] 80 taxmann.com 21 (Madras HC)

Section 54F of the Income-tax Act, 1961 – Capital gains – Exemption of, in case of investment in residential house (‘A residential house’ Position prior to 1-4-2015 ) – – Phrase ‘a residential house’ occurring in section 54F covers more than one flat/appartment as long as all flats are in same location/address. Where as a product of one development agreement, several flats were built on same piece of land, even if flats/apartments’ were in different blocks and different towers, as long as they were in same address/location, assessee was eligible for claiming deduction under section 54F.

Dr. SudhirNaik vs. ITO (Hyderabad)

As seen from the agreements and the principles of law involved, all the apartments received in the development agreement would become one house technically for claim u/s 54/54F, even though they are of independent units.

G. Beware of GAAR:

GAAR is in itself a subject matter of complete commentary. However, it would be unfair if I fail to caution the readers, at least in summary manner, about its possible application to the arrangements in the form of development agreements.

General Anti Avoidance Rules [GAAR] inserted in Income Tax Act- Chapter X-A vide sections 95 to S. 102 read with Rule 10U, 10UA, 10UB and 10UC of Income Tax rules are the provisions empowering the I.T. Authorities to curb efforts of tax payers to avoid payment of tax by adopting tax planning methods which are mainly aimed at obtaining tax benefits without commercial substance.

As a general rule, tax evasion is illegal but tax avoidance is legal and one is entitled to arrange his affairs in such a manner that his tax liability is minimum. The GAAR is there to unsettle this settled judicial principle.

Section 95 provides that an arrangement entered in to by an assessee may be declared to be ‘impermissible avoidance arrangement’ [IAA]. Section 96 defines the scope of term ‘impermissible avoidance arrangement’. It has been provided that in case the ‘main purpose’ of the arrangement is to obtain tax benefitand–

–  it either creates rights or obligations which are not ordinarily created between the persons or

– it results in misuse or abuse of the provisions of the Act or

– same lacks commercial substance or

– is entered in to in a manner which is not ordinarily employed for bonafide purpose,

the whole arrangement or any part thereof can be considered to be impermissible and consequences as provided in section 98 shall follow. Section 97 lists the circumstances under which an arrangement shall be deemed to be lacking commercial substance.

Section 98 provides that the arrangement can be disregarded or re-characterized or treated as if it had not been entered into. There are certain other consequences also such as nature of the transaction may be changed from capital to revenue or vice-versaor deduction for expenses may be denied. Even place of transaction can be considered to be modified. It has also been provided that transaction can also be looked into by disregarding any corporate structure.

Tax benefit is defined inclusively in section 102(10) and the ambit thereof is very wide to include any kind of avoidance or deferral of tax or any other amount payable under the Act, an increase in refund, whether by applying a tax treaty or otherwise or a reduction in total income or an increase in loss in the relevant previous year or any other previous year.

Provision of section 144BA provide for the mechanism for implementation of the GAAR provisions. On going through the mechanism provided in the Act it appears that there are sufficient safeguards provided for implementations of the provisions and same will be implemented in systematic manner so as to safeguard the genuine business transactions. However, the wording used in the relevant sections providing the scope of impermissible transactions are very wide and provides sweeping powers to the Department to hold any transaction to be [IAA]. Heavy onus has been cast on the assessee to prove that the arrangement is not for the ‘main purpose’ of obtaining a tax benefit, which may be quite difficult for an assessee to prove since establishment of negative is much harder than establishment of positive. Further even if a step or a part of the arrangement is to obtain tax benefit, it will be considered to be an IAA notwithstanding that main purpose of whole arrangement was not to obtain a tax benefit.

Relief by CBDT Circular No. 7/2017: GAAR will not interplay with the right of the taxpayer to select or choose method of implementing a transaction. Meaning thereby, in the context of subject matter of this write up, if there are two ways of carrying out a transaction, the taxpayer is free to choose whichever suits him best.

Threshold provision: As per Rule 10U of I.T. Rules, GAAR provisions shall not apply to an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore. Here, though the threshold of tax benefit is high i.e. Rs. 3 Crores, but in today’s unstable world, the value of money is fast depleting and accordingly in high value transactions, GAAR can no longer be ignored in planning one’s affairs.

Judicial GAAR: Even otherwise, in absence of statutory GAAR as above, the powers of the courts even beyond specific provisions of GAAR will continue to be there (judicial GAAR) and even if a particular case in not falling under the specific provisions of GAAR, (may be due to tax benefit below threshold of Rs. 3 Cr. or for any other reasons) courts may hold the same to be abusive tax avoidance arrangement by exercising its inherent powers as in the past right from leading judgments of Supreme courts like Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC), Mcdowell & Co. vs. CTO (1985) 154 ITR 148 (SC), etc. to recent judgments’ of High courts like CIT vs. Carlton Hotels Pvt. Ltd. (2017) 399 ITR 611 (All. HC), CIT vs. M. P. Purushottam (2019) 105 CCH 106 (Madras), etc.

H. Examples of Judicial GAAR applied to development agreements:

In the pre section 45(5A) scenario, there are certain judgments’ which confirmed the transfer of capital asset in the form of land in the year in which JDA was entered in to by disregarding various clauses in the JDA which were to the contrary. Further, at times, judiciary went further to disregard the act of the assessee of converting capital assets to Stock in Trade and confirmed the transfer as that of capital asset only, changing the entire tax scenario. To stretch it further, there are judgments where appellate authorities, having regard to the facts and circumstances of the case, suomoto treated the date of entering in to JDA as date of conversion of capital asset to SIT without any such entry voluntarily done by the assessee in his books! (see: ACIT vs. Medravathi Agro Farms P. Ltd. (supra), TejPratap Singh vs. ACIT (Supra), etc.]Some of the representative cases are shared below:

– K. Vijaya Lakshmi vs. ACIT [2018] 91 taxmann.com 253 (Hyderabad)

Where, under a development agreement, assessee permitted developer to enter premises of its plot to do all necessary things for construction of apartments, it could be said that assessee did hand over possession of its plot to developer and, thus, there was ‘transfer’ as per section 2(47) and same was taxable as capital gain in year in which agreement was entered into. Since there is part performance of the contract in the nature referred to in Section 53 of Transfer of Property Act, 1882, Clause(v) of Section 2(47) is clearly attracted.

– Tamilnadu Brick Industries vs. ITO [2018] 97 taxmann.com 1 (Chennai – Trib.)

In this case, apart from disregarding various clauses in JDA to the effect that there is no transfer of ownership, ITAT also disregarded the act of the assessee firm of conversion of capital asset to Stock in Trade in earlier assessment years and treated the transfer as that of Capital asset only. It was held that,

The activity of the developer is the adventure in the nature of trade and for the landowner it is a mere handing over of the possession of the land to the developer. Section 45(2) is not applicable to the case of the assessee. The relevant section applicable is section 2(47)(v) read with section 53A of the Transfer of Property Act, as per which the transfer takes place during the year in which the JDA was entered giving the right of possession and the developmental activities to be carried on by the developer. Under section 2(47) of the Act, transfer includes allowing possession of any immovable property to be taken or retained in part performance of a contract in the nature referred to in section 53A of the Transfer of Property Act.

– DCIT vs. Sathak Ahmed Shaw [ITA No. 401/Chny/2018 (Chennai)]

The fact that the legal ownership continued with the owners to be transferred to the developer at the future distant date really does not affect the applicability of section 2(47)(v) as per the reasons assigned herein above. The transferee was undisputedly willing to perform its part of contract, in this circumstances we have to hold that there is a transfer u/s 2(47)(v) of the Act. Thus, the possession and control of the property is already vested with the transferee and the impugned development agreement has not been duly cancelled and it is still in operation, it has to be decided that there is a transfer u/s 2(47)(v) of the Act. We have to see the real intention of the parties. As per the well-known canon of construction of document, the intention generally prevails over the obvious and ordinary meaning of the words used and that such a construction placed on the word in a deed as is most agreeable to the intention of the parties.

I. CONCLUSION:

Discussion can be summed up by referring to the elaborate judgment in case of ACIT vs. Jawaharlal Agicha (2016) 75 taxmann.com 121 (Mumbai):

It is generally seen that there may be several stages or events arising in a joint development arrangement made between owner of the land and the developer. For the purpose of determining the actual date of transfer of the land by the land owner, all these stages / events needs to be collectively analsysed and after evaluating overall effect of the same we can determine the actual date of transfer. These stages / events may be described as date of entering into JDA, date of executing power of attorney authorising the developer for taking various approvals / permissions etc., handing over the possession of the land to the developer for various purposes, receipt of part / full sale consideration from the developer, date of execution of power of attorney in favour of developer authorising him for the sale of developed units to the customers at his absolute discretion; and transfer of developed units to the customers etc. There may be few more stages / events to complete the transaction. Though, one single event may trigger the process of transfer but may not necessarily complete it also. Whether the transfer has, in substance, taken place, can be determined by analysing the inter-play and effect of all these stages / events combined and put together. For example, possession may be given for various purposes, viz. possession given to a contractor, or to a tenant also, but such an event in itself cannot be regarded as “transfer” of land. Possession of land may also be handed over as licensee only for the purpose of development of real estate on land. Here again, it shall not give rise to “transfer”. Thus, when the possession is given along with other legal rights to the developer resulting into entitlement of the developer for full use and enjoyment of the property as well as its further sale after converting it into developed units at its full, own and sole discretion, then it may result into ‘transfer’ provided other conditions also suggest so. Thus, handing over of the possession has to be necessarily coupled with the intention of transferring the rights of ownership and enjoyment of the property to the developer. Handing over of the possession for the limited purpose of developing the land while still retaining the ownership and control of various legal rights upon the property by the land owner would not fall in clause (v) of section 2(47).

Without going in to the authority of the various favourable/unfavourable judgments as above, peculiar facts and circumstances of each case should be analysed independently and one should be cautious enough while drafting the development agreement and planning the overall affairs so that what is apparent should prevail without necessitating the courts to look in to the substance over form/real intentions of the parties. Further, if the landowner is transferring the land as stock-in-trade under JDA in lieu of certain % of built up area (flats, shops etc.) to be received from developer and willing to sale the same in future as a stock-in-trade, in addition to various safeguards discussed as above, applicability of relevant accounting standards/ICDS also need to be checked carefully.

Further, the conundrum of ‘transfer ’of capital asset under JDA, which necessitated the parliament to introduce section 45(5A), shall continue to haunt in following circumstances:

– Where the capital gain arises under JDA to assessee other than Individual/HUF;

– Where assessee landowner sale/transfer his share under JDA before completion of project by developer.

– Transfer of asset under JDA after converting in to Stock-in-Trade

Before I conclude, let me remind all the moral of the story with which I started this write up – To help people understand the importance of using all evidence and listening to other stalwarts before coming to a conclusion. To put it otherwise, having regard to the complexities involved, conflicting judicial precedents and various unresolved issues in the subject matter it is always better to take second opinion before taking any decisions because the author is nothing but one of those six blind men!!

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