(2017) 398 ITR 531 (SC)
Meaning of transfer; capital gains — charging section
No. After the 2001 amendment to the Registration Act, an unregistered agreement has no effect in law for the purposes of Section 53A of the Transfer of Property Act. There is therefore no transfer, and no capital gain arises.
Does an unregistered Joint Development Agreement, under which possession is said to be handed over, constitute a transfer giving rise to capital gains?
Members of a cooperative house building society in Punjab entered into a tripartite Joint Development Agreement with two developers for the development of land held by the society. Consideration was to comprise a cash component and built-up flats. The agreement was not registered. The project required permissions from the competent authorities, which were never granted — a change in policy intervened — with the result that the development never proceeded and the bulk of the consideration was never received. The Assessing Officer nonetheless assessed capital gains in the hands of the members in the year the agreement was entered into, treating the arrangement as a transfer by way of part performance.
The Commissioner (Appeals) and the Tribunal took differing views across the connected matters. The Punjab and Haryana High Court decided in favour of the assessees, holding that no transfer had taken place. The Revenue appealed to the Supreme Court.
For the assessee
Section 2(47)(v) is attracted only where a transaction answers the description in Section 53A of the Transfer of Property Act. Since 2001 that section requires the contract to be registered; an unregistered agreement has no legal effect. Separately, no income ever accrued: the permissions failed, the project collapsed, and no enforceable right to receive the consideration ever arose.
For the Revenue
Possession had been made over to the developers under the agreement and substantial rights had been conferred, which is what Section 2(47)(v) is concerned with. The statutory definition of transfer is extended and should not be confined by the technical requirements of the Registration Act. The consideration had become due under the contract, whether or not it was actually received.
Justice Nariman decided the appeal on two independent grounds. On the first, the Court traced the 2001 amendment to Section 53A of the Transfer of Property Act, which deleted the words 'the contract, though required to be registered, has not been registered', and the corresponding amendment to Section 17(1A) of the Registration Act. The combined effect is that a contract of the nature referred to in Section 53A has no effect unless registered. Since Section 2(47)(v) of the Income Tax Act incorporates Section 53A by reference, an unregistered joint development agreement cannot satisfy it, and no transfer arises. On the second ground, the Court held that even setting the registration point aside, income must accrue in the real sense before it can be taxed. The agreement was contingent on permissions that were never obtained; no right to receive the consideration had crystallised; and what was recorded was at best a hypothetical accrual. Applying the settled principle that income tax is levied on real income and not on a notional entitlement, the Court held there was nothing to tax. The appeals of the Revenue were accordingly dismissed.
The timing of capital gains on development agreements remains among the most litigated questions in practice. Both limbs of the decision — registration as a precondition, and real accrual of income — carry directly into Section 67 under the IT Act 2025 and into the definition of transfer in Section 2. Practitioners should note that the separate regime for individuals and HUFs deferring tax on development agreements to the year of completion addresses only part of the field; where that regime does not apply, Maini continues to govern.