The Supreme Court in the case of Shoorji Vallabhdas reported in [1962] 46 ITR 144 (SC) held that “No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise.”
In 1997, the Supreme Court in the case of CIT v. Podar Cement (P.) Ltd [1997] 226 ITR 625/92 Taxman 541 (SC), took a view that registration for the purpose of conferring ownership right was not necessary as regards taxability of income received in respect of the property. Following the view taken by the Supreme Court in above case the Full Bench of the Gujarat High Court in CIT v. Mormasji Mancharji Vaid [2001] 250 ITR 542/118 Taxman 276 has held that capital gain on the transfer has to be assessed to tax in the assessment year relevant to previous year within which the date of execution of deed of transfer falls and not in the subsequent assessment year in which the deed is registered. These decisions in the case of Podar Cement and in the case Mormasji Mancharji Vaid seem to have set the stage for a path breaking judgement of the Bombay High Court in the case Chaturbhuj Dwarkadas Kapadia v. CIT (260 ITR 491) (Bom).
Before we discuss this case, let us take a brief look at the related legislative provisions. Sub-clause (v) of section 2(47) which defines transfer in relation to a capital asset of the Income Tax Act,1961 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 sec. 53 A of the Transfer of Property Act, 1882.” (emphasis supplied)
A plain reading of the Section 53A of the Transfer of Property Act shows that in order for a contract to be termed to be “of the nature referred to in Section 53A of the Transfer of Property Act” one of the necessary preconditions is that the transferee should have or be willing to perform his part of the contract. This is demonstrated by grant of possession of the property. This aspect has been duly taken note of by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (260 ITR 491) (Bom) wherein their Lordships observed as follows:
“That, in order to attract Section 53A, the following conditions need to be fulfilled.
1. There should be contract for consideration;
2. It should be in writing;
3. It should be signed by the transferor;
4. It should pertain to the transfer of immovable property;
5. The transferee should have taken possession of property;
6. Lastly, transferee should be ready and willing to perform the contract”.
The law laid in Chaturbhuj Kapadia’s case quoted above sought to explain the law as it then stood [AY 1996-97]. The development agreement was entered into on 18/08/1994 that is, prior to the amendment to the Transfer of Property Act.. This judgement provided fodder for a lot of litigation from both the assessee’s side and the department’s side.
There are considerable constraints on the practical side in bringing to tax the capital gains arising out of such transactions in the year the contract/agreement was entered into along with handing over of possession and creation of a power of attorney.
1. Quite often such arrangements fail to reach completion as one or the other party abdicates his willingness to perform his part of the contract. In such cases can it be said that the property has already be transferred?
2. Suppose the transferor enters into a fresh agreement with a new builder, will he be taxed on the capital gains once again?
3. If so how does one suppose there is a subject matter [the immovable property] available with the transferor for the purpose of the second agreement, if it has already been transferred by the first agreement to another party?
4. What happens if the property is first treated as a transfer for the purpose of Section 2 (47) read with Section 53 A in one financial year and the transaction is reversed in another financial year? Will the assessee still be taxed?
5. What if no consideration was received by the assessee? Will the assessee still be liable?
6. What if only a part of the consideration was received by the assessee? Will the assessee be taxed on the whole of the agreed consideration?
While the debate continued, the income tax department failed to notice a seemingly innocuous amendment to Section 53A brought about by the Registration and Other Laws (Amendment) Act, 2001(section 10 of Act 48 of 2001) (w.e.f 24/9/2001) which omitted the expression “the contract though required to be registered, has not been registered or” …….
Section 10 of the Act 48 of 2001 should be read in conjunction with Section 3 and 6 of the said Act. These two sections relate to amendment of Section 17 and Section 49 respectively of the Registration Act, 1908. Section 17 enumerates the documents of which registration is compulsory. The amended sub- section (1A) provides that the documents containing contracts to transfer for consideration, any immovable property, for the purpose of Section 53A of the Transfer of Property Act, 1882(4 of 1882), shall be registered. There has been a simultaneous amendment of the proviso to Sec. 49 by deleting the words “ or as evidence of part performance of a contract for the purpose of Section 53A”.The cumulative effect of these amendments is that where a person contracts to transfer for consideration any immovable property in writing and the transferee has, in part performance of the contract , taken possession of the said property or any part thereof, or he being already in possession continues in possession in part performance of the contract, the benefit of section 53 A would not be available to him unless the document is registered and in the event of non- registration it cannot be used as evidence. We may therefore conclude that since a transaction, even a part performance of which is not complete without registration after 24/9/2001, will not be a transfer within the meaning of Section 2(47) of the Income Tax Act ,1961 unless it is duly registered.
Incidentally the clause “then, notwithstanding that the contract, though required to be registered, has not been registered,” itself indicates that the legislature always intended that such agreements were also meant to be registered. Section 53 A was enacted only to protect the rights of the intended transferee and nothing more. This position has now been clarified by the amendment in/omission to the Transfer of Property Act.
The reader’s attention is invited to the decision of the Apex Court in Rambhau Namdeo Gajre v. Narayan Bapuji Dhgotra [2004] 8 SCC 614 observed as under: —
"Protection provided under Section 53-A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party."
(Emphasis supplied)
Elaborating the scope of the expression “has performed or is willing to perform”, the oft quoted commentary “Mulla-The Transfer of Property Act” (9th Edn.: Published by Butterworths India), at p. 448, observes that:
“The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee’s willingness to perform his part of the contract in terms covenanted there under.”
Further willingness to perform the roles ascribed to a party, in a contract is firstly a mental disposition, an intention. However, such willingness in the context of Section 53A of the Act has to be absolute and unconditional. If willingness is embedded with a condition, it is in fact no more than an offer and cannot be termed as willingness. In judging the willingness to perform, one must consider the obligations of the parties and the sequence in which these are to be performed.
Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act.
The judgement of the Punjab and Haryana High Court in the case of C S Atwal v. CIT [2015] 378ITR 244 (P&H) as also various judgements of the Income Tax Appellate Tribunal in General Glass Co. (P.) Ltd. v. Dy. CIT [2007] 14 SOT 32 (Mum.), Ms. K. Radhika v. Dy. CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92.(Hyd.)Dy. CIT v. Tej Singh [2012], 138 ITD 489/25 taxmann.com 573 (Agra) have brought in a breath of fresh air in this suffocating vortex of litigation .These judgements indicated that after the amendment, since a transaction, even a part performance of which is not complete without registration after 24/9/2001, will not be a transfer within the meaning of Section 2(47) of the Income Tax Act ,1961 unless it is duly registered.
The Finance Bill, 2017, though it does not refer to the amendment to the Transfer of Property Act, while recognizing the genuine hardship faced by the land owner in such cases has tried to solve this conundrum by inserting a new sub-section (5A) in Section 45 of the Income Tax Act which stipulates that capital gains arising from the Joint Development Agreement will be taxed in the year in which the certificate of completion has been issued by the competent authority. Let us hope this mitigates the troubles of the landowner to a large extent even if it cannot address all the woes of the hapless transferor.
[The author is a Principal Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, Bangalore]
22 February 2017