Supreme Court explains concept of JDA and tax liability us 2(47), Section 45 and 48

Supreme Court explains the concept of income tax on Joint development agreement and applicability u/s 2(47) and section 45 and 48 where the JDA was not registered and was abandoned 

In an important judgment, Supreme Court has explained the concept of income tax on Joint development agreement and applicability u/s 2(47) and section 45 and 48 where the JDA was not registered and was abandoned

ABCAUS Case Law Citation:
ABCAUS 2093 (2017) (10) SC

Important Case Laws relied upon by the parties:
Commissioner of Income Tax v. Charanjit Singh Atwal
Shrimant Shamrao Suryavanshi & Anr. v. Pralhad Bhairoba Suryavanshi (D) by LRs. & Ors., (2002) 3 SCC 676 at 682
Rambhau Namdeo Gajre v. Narayan Bapuji Dhgotra (Dead) through LRs. (2004) 8 SCC 614 at 619

Brief Facts of the Case:
A Joint Development Agreement (JDA) was entered into between the assessee owner i.e. a Cooperative Housing Building Society and two Private Ltd. Companies developer one and developer two). Under the JDA, it was agreed that both the developers, will undertake to develop 21.2 acres of land owned and registered in the name of the society. The agreed consideration was to be disbursed by developer two through developer one to each individual member of the society, and different amounts and flats were payable and allotable to members having different plot sizes. The developers were to make payments in four instalments. The developers made payments only up to the 2nd instalment payment, and 7.7 acres of land was conveyed.

The rest of the JDA could not ultimately be performed because of the orders passed by the High Court because of which necessary permissions for development of the property could not be obtained.

The Assessing Officer vide an order dated 30.12.2009, passed under Section 143(3) of the Act, held that since physical and vacant possession had been handed over under the JDA, the same would tantamount to “transfer” within the meaning of Sections 2(47)(ii), (v) and (vi) of the Income Tax Act.

The Commissioner (Appeals) dismissed the appeal upholding the order passed by the Assessing Officer. Aggrieved by the order, the assessee filed appeal before the Income Tax Appellate Tribunal (ITAT), which was also dismissed by the ITAT.

However, the High Court allowed all the appeals of the assesses.

The Substantial Questions of Law framed/urged for determination:

(i) Whether the transactions in hand envisage a “transfer” exigible to tax by reference to Section 2(47)(v) of the Income Tax Act, 1961 read with Section 53-A of the Transfer of Property Act, 1882?

(ii) Whether the Income Tax Appellate Tribunal, has ignored rights emanating from the JDA, legal effect of non registration of JDA, its alleged repudiation etc.?

(iii) Whether “possession” as envisaged by Section 2(47)(v) and Section 53-A of the Transfer of Property Act, 1982 was delivered, and if so, its nature and legal effect?

(iv) Whether there was any default on the part of the developers, and if so, its effect on the transactions and on exigibility to tax?

(v) Whether amount yet to be received can be taxed on a hypothetical assumption arising from the amount to be received?”

Observations made by the Supreme Court:

The Termination Clause

It was observed by the Hon’ble Supreme Court that as per JDA agreement, payments under the third instalment were only to be made after the grant of approvals and not otherwise, and that it was an admitted position that this was never done because no approvals could be obtained as the High Court ultimately interdicted the project. Also, the termination clause was of great significance because it showed that in the event of the JDA being terminated, whatever parcels of land had already been conveyed, would stand conveyed, but that no other conveyances of the remaining land would take place.

Effect of un-registered contract on taxability

The Hon’ble Supreme Court observed that as per the amended Registration Act, 1908 Act, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, was not registered, then it shall have no effect in law for the purposes of Section 53A. In short, there was no agreement in the eyes of law which can be enforced under Section 53A of the Transfer of Property Act.

Therefore the Hon’ble Supreme Court opined that the High Court was right in stating that in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Income Tax Act, there must be a “contract” which could be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act shows that in the eyes of law, there was no contract which can be taken cognizance of, for the purpose specified in Section 53A.

The Hon’ble Supreme Court opined that the ITAT was not correct referring to the expression “of the nature referred to in Section 53A” in Section 2(47)(v) in order to arrive at the opposite conclusion. The expression only meant to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein. It is only where the contract contains all the following six features:

(1) there must be a contract to transfer for consideration of any immovable property;

(2) the contract must be in writing, signed by the transferor, or by someone on his behalf;

(3) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;

(4) the transferee must in part-performance of the contract take possession of the property, or of any part thereof;

(5) the transferee must have done some act in furtherance of the contract; and

(6) the transferee must have performed or be willing to perform his part of the contract.

This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression “of the nature referred to in Section 53A” would somehow refer only to the nature of contract mentioned in Section 53A, which would then in turn not require registration.

The Hon’ble Supreme Court pointed out that there was no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no “transfer” can be said to have taken place under the aforesaid document.

No Capital gain tax on JDA which did not materialized

The Hon’ble Supreme Court stated that the income from capital gain on a transaction which never materialized was, at best, a hypothetical income. It was admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.

The Hon’ble Supreme Court further clarified that in the instant case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act.

Decision/Held:
The appeal of the Revenue was dismissed.

JDA and tax liability

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