Background

In a plethora of decisions, various Courts and Tribunals have held, on the facts of each case, that under real estate Development Agreements (‘DA’), transfer for the purpose of taxability of capital gains in the hands of land owner takes place on entering the DA and granting possession of the land to the real estate developer for construction thereon. Such interpretation is based on Sec. 2(47)(v) defining transfer, inter alia, as 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. 53A of the Transfer of Property Act, 1882.

The taxability of capital gains as above posed challenges for land owners who entered into DA with area sharing arrangements i.e. the developer would give certain pre-agreed constructed area to the land owner in consideration for the land owner allowing the construction on its land. In such situations, the land owner was required to pay tax on the capital gains arising on the so-called transfer of land at the time of entering the DA and giving possession of the land to the developer for construction thereon, while it would receive the consideration in form of constructed area in future.

Accordingly, Sec. 45(5A) was introduced vide Finance Act, 2017, effective AY 2018-19, prescribing the taxability of area-sharing arrangement under a DA in the hands of land owner, in the year in which the capital asset i.e. constructed area is received by it against the transfer of land under the DA.

An interesting question, however, arises as to whether Sec. 45(5A) can be applied retrospectively for DA with area-sharing arrangements entered prior to AY 2018-19, though the amendment states it to be effective from the said AY.

In this respect, at the outset, it may be noted that a Single Member Bench of the Honourable Hyderabad Tribunal has recently, in the case of K Vijaya Lakshmi v. ACIT [TS-5722-ITAT-2018(Hyderabad)-O], held, inter alia, that Sec. 45(5A) cannot be applied retrospectively as they are substantive provisions.

While the above judgement holds good within the jurisdiction of the Hon’ble Hyderabad Tribunal, based on principles of jurisprudence, the author, with utmost respect, submits that the Tribunal did not have the opportunity to consider the jurisprudence on the subject as discussed herein below, and its applicability to the background in which Sec. 45(5A) was introduced; since the same was not presented to/ argued before it.

The author accordingly discusses herein, the background of the introduction of Sec. 45(5A) and the jurisprudence that may be applied thereto, based on which it may be possible to argue that the said section should have a retrospective application for DA with area sharing arrangements.

Legislative objective for introduction of Sec. 45(5A)

The Memorandum explaining the provisions of Finance Bill, 2017 states as under with respect to the introduction of Sec. 45(5A):

“With a view to minimise 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.”

The amendment thus seeks to minimise the genuine hardships that the land owner may face by taxing the capital gains in its hands for area-sharing arrangements under DA, in the previous year in which the certificate of completion is issued; and not in the year in which the DA is entered into or the possession of the land is given to the developer pursuant thereto.  

Some relevant principles and decisions of retrospective applicability of statutes

In the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [TS-125-HC-2010(BOMBAY)-O], Hon’ble Bombay HC has referred to various decisions of SC (ITO v. M.C. Ponnoose [TS-5035-SC-1969-O];  Allied Motors (P.) Ltd. v. CIT [TS-7-SC-1997-O]; CIT v. Podar Cement (P.) Ltd. [TS-17-SC-1997-O]; CIT v. Alom Extrusions Ltd. [TS-31-SC-2009-O]; CWT v. Sharvan Kumar Swarup and Sons [TS-5024-SC-1994-O]; Associated Cement Company Ltd. v. CTO 4 SCC 578; Sedco Forex International Drill Inc. v. CIT [TS-14-SC-2005-O]; DCIT v. Core Health Care Limited [TS-36-SC-2008-O]; CIT v. Gold Coin Health (P.) Ltd. [TS-50-SC-2008-O]) with respect to retrospective effect of statutes, and has observed, inter alia, that in determining as to whether an amendment is to take effect prospectively or retrospectively, the date from which the amendment is made operative does not conclusively decide the question and that the Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive. It further observed that where the amendment is curative or where it is intended to remedy unintended consequences or to render a statutory provision workable, the amendment may be construed to relate back to the provision in respect of which it supplies a remedial effect.

In the case of Zile Singh v. State of Haryana and Others 8 SCC 1, Hon’ble SC observed that in absence of a retrospective operation having been expressly given, Courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed the intention to give the statute retrospective effect; for which it suggested the following four factors as relevant:

i. general scope and purview of the statute;

ii. the remedy sought to be applied;

iii. the former state of the law; and

iv. what it was the legislature contemplated

Background of introduction of Sec. 2(47)(v)

Clauses (v) and (vi) of Sec. 2(47) were introduced by Finance Act, 1987, effective from AY 1988-89. The Memorandum explaining the objective of said amendment read as under:

“Under the Transfer of Property Act, the transfer of property can be effected only by means of a registered instrument. However, in the recent times other devices are sought to be employed for transferring one’s ownership in property. As a result, there are situations in which the actual owner, say, of an apartment in a multi-storeyed building, or a holder of power of attorney, is not the legal owner of a property. In some cases, pending resolution of disputes, the legal owners as well as the beneficial owners are assessed to tax in respect of the same income.”  

The following observations of Hon’ble SC in the case of Suraj Lamp Industries Pvt. Ltd. v. State of Haryana (2012) 1 SCC 656 are very relevant to understand the mischief that was sought to be arrested, inter alia, by introduction of Sec. 2 (47)(v):

“……As noticed in the earlier order, these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on  deeds of conveyance, to avoid payment of capital gains on transfers, to invest unaccounted money (`black money') and to avoid payment of `unearned increases' due to Development Authorities on transfer.

2. The modus operandi in such SA/GPA/WILL transactions is for the vendor or person claiming to be the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:

………

16. We therefore reiterate that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance.

………

19. We make it clear that our observations are not intended to in any way affect the validity of sale agreements and powers of attorney executed in genuine transactions. For example, a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance. A person may enter into a development agreement with a land developer or builder for developing the land either by forming plots or by constructing apartment buildings and in that behalf execute an agreement of sale and grant a Power of Attorney empowering the developer to execute agreements of sale or conveyances in regard to individual plots of land or undivided shares in the land relating to apartments in favour of prospective purchasers. In several States, the execution of such development agreements and powers of attorney are already regulated by law and subjected to specific stamp duty. Our observations regarding `SA/GPA/WILL transactions' are not intended to apply to such bonafide/genuine transactions.

The Hon’ble Bombay HC in the case of Chaturbhuj Dwarkadas Kapadia v CIT [TS-1-HC-2003(BOMBAY)-O], observed as under:

“…In this matter, the agreement in question is a development agreement. Such development agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements. That such agreements are only a mode of remunerating the builder for his services of constructing the building (see Gurudev Developers v. Kurla Konkan Niwas Co-operative Housing Society [2000] 3 Mah LJ 131). It is precisely for this reason that the Legislature has introduced Section 2(47)(v) read with Section 45 which indicates that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law…”

Hence, Sec. 2(47)(v) was introduced to cover all types of transactions where the control of ownership was transferred without a registered instrument i.e. conveyance deed, and capital gains thereon was not offered on the basis that there was no transfer till the time conveyance deed is registered. It accordingly covered all such cases, including sale of immovable property through power of attorney arrangements as well as DA.

However, DA involved both kinds of arrangements i.e. those where the entire consideration to the land owner is paid/ payable in monetary terms, as well as those where the entire/ part consideration to the land owner is payable by way of constructed area on the concerned land. Accordingly, in respect of DA involving constructed area-sharing, the assessees faced genuine hardships as they did not get any money from which they could pay the taxes. Also, the determination of consideration which could be said to be accruing to the land owner in such cases was posing a challenge.

Representations made to the Government

In the above background, therefore, various representations were made to the Government to the effect that the taxation of DA in the year of entering the agreement, in cases of constructed area sharing arrangements, has been causing genuine hardships to assessee.

The Institute of Chartered Accountants of India, in its pre-budget memorandum for 2017, had also raised this aspect of land owners facing genuine hardships with respect to levy of capital gains under DA with area-sharing arrangements, and offered suggestions for amendments.

Closing Remarks – Case for retrospective applicability of Sec. 45(5A)

Based on the above discussion, it may thus be argued that while Sec. 2(47)(v) also includes DA within its fold as held by Hon’ble Bombay HC in the case of Chaturbhuj Dwarkadas Kapadia (supra); the land owners faced genuine hardships in cases of area-sharing DA which was represented to the Government and Sec. 45(5A) was introduced to minimise such hardships. Even SC has, in the case of Suraj Lamps & Industries Private Limited (supra), observed that genuine/ bonafide transactions, including those of DA, should be kept out of the purview of transfer by employing such other devices including Power of Attorneys.

The SC and HCs have held that amendments that are declaratory, clarificatory or curative should be considered to be retrospective, even if introduced prospectively by the Legislature (The decisions stated hereinabove are relevant for this purpose. The decisions in the cases of Dharamshibhai Sonani v. ACIT [TS-6252-ITAT-2016(AHMEDABAD)-O] and ITO v. Dhan Sai Srivas and Others [TS-5460-HC-2009(CHHATTISGARH)-O] may also be referred to in this regard).

In the humble opinion of the author, it cannot be the intention of the Legislature that after recognizing the genuine hardships faced by the assessees in respect of area-sharing DA, the relief provided by Sec. 45(5A) would be made applicable to cover only DAs entered after a particular date and not to those entered before that date.