(2003) 260 ITR 491 (Bom)
Meaning of transfer; capital gains — charging section
Transfer occurs in the year in which the developer becomes willing to perform its part of the contract and possession is handed over in part performance, even if the conveyance is executed later.
In a development agreement, in which year does the transfer occur for capital gains purposes?
The assessee, owner of immovable property in Mumbai, entered into a development agreement with a developer. The agreement conferred extensive rights on the developer, including the right to enter upon the property, construct, and deal with the constructed area, with consideration payable in instalments linked to milestones. A power of attorney was executed in the developer's favour. The conveyance was executed only in a later year. The dispute concerned the year in which the capital gains arose — the assessee contending for the later year of conveyance, the Revenue for the earlier year in which the arrangement took effect.
The matter came before the Bombay High Court on appeal from the Tribunal, in a context where no settled test existed for identifying the year of transfer in development agreements.
For the assessee
Title passed only on conveyance; until then the developer held under a contractual licence and the owner remained the legal owner. Instalments received in the interim were advances, not consideration for a completed transfer, and the gain should be assessed in the year of conveyance.
For the Revenue
The agreement read with the power of attorney conferred on the developer substantially all the rights of an owner, including possession and the right to construct and sell. That is precisely the situation Section 2(47)(v) was enacted to catch, and the transfer occurred when those rights were made over.
The Court set out to supply a workable test, observing that development agreements had become common and that the year of chargeability could not be left to turn on the form of the documentation. It held that Section 2(47)(v) was introduced to cover arrangements which confer privileges of ownership without conveying title, and that the decisive question is whether the transaction falls within Section 53A of the Transfer of Property Act. On that footing, the year of transfer is the year in which the contract, read as a whole, indicates that the developer is willing to perform its obligations and possession has been handed over in part performance. The Court expressly held that it is not necessary for the entire consideration to have been received, nor for a formal conveyance to have been executed, before the transfer is complete for tax purposes. It cautioned that the substance of the arrangement governs, and that the presence of a power of attorney conferring wide dealing rights is a strong indicator. Applying the test to the agreement before it, the Court identified the year in which the developer's willingness and possession coincided as the year of chargeability.
Read together with Balbir Singh Maini, this sets the framework for taxing development agreements under Section 67. Kapadia supplies the willingness-and-possession test; Maini adds the prior requirement that the instrument be registered before the test can be reached at all. In practice both must be addressed — an unregistered agreement fails at the threshold, and a registered one is then dated by the Kapadia test.