The real estate industry has experienced unprecedented growth in the past couple of decades. This has led both landowners and developers to enter into several innovative business models to optimise their resources and maximise returns. The landowners try to ensure that they participate in the future substantial value accretion of the project being developed while developers try to avoid shelling out the entire consideration for the land before commencing any work, to avoid depletion of their resources.
Thus, entering into a joint development agreement (JDA) has become particularly common. This is where the landowner and developer collaborate on the basis that the landowner contributes his land to the project while the developer brings in his expertise in construction to develop the project and both parties share the income earned from the developed project in a pre-determined ratio. Of course, depending on the facts and circumstances of the case, multiple variations of this structure can be seen in the marketplace, with the broad contours of the arrangement remaining the same.
For a long time, litigation has arisen over the taxability of income accruing or arising from a JDA. Primarily, Indian tax authorities contend that the landowner should be liable to pay tax at the time of entering into the JDA, whereas taxpayers have been contending that the tax should be payable only at the time of registration of the JDA.
This contentious issue has hopefully been resolved with the Hon’ble Supreme Court (SC) delivering its verdict in the case of Balbir Singh Maini [CIT v. Balbir Singh Maini, Civil Appeal No. 15619 of 2017]. In the said case, the SC upheld the contentions of the taxpayers, by confirming the decision of the Hon’ble Punjab & Haryana High Court (HC).
Facts of the Case
The taxpayers were members of a housing society (Society) which owned certain land in a village. The Society entered into a tripartite JDA with certain developers (Developers). Under the JDA, it was agreed that the Developers would undertake the development of 21.2 acres of land owned and registered in the name of the Society and in respect of which it would give development rights in lieu of consideration. It is pertinent to note that although the JDA was executed, it was not registered and as per the terms of the JDA, possession of the property was to be handed over simultaneously with the registration of the JDA.
Further, the Developers made only part payment of consideration and, thus, the taxpayers offered to pay tax on the proportionate amount received. However, the JDA was subsequently abandoned as the necessary permissions for development were not granted.
The tax authorities and the Income Tax Appellate Tribunal (ITAT) held that since physical and vacant possession has been handed over under the JDA, the same would tantamount to “transfer” within the meaning of Section of 2(47)(v) of the Income-Tax Act (IT Act). They also concluded that the taxpayer was liable to pay capital gains tax in the assessment year during which the JDA was executed on the entire amount already received and/or receivable in future.
However, the High Court reversed the decision of the ITAT and held that since no possession of land was given by the transferor to the transferee of the entire land in part performance of the JDA, it did fall within the domain of Section 53A of the Transfer of Property Act, 1882 (TOPA). In the absence of the fulfilment of the ingredients of Section 53A, no ‘transfer’ under Section 2(47)(v) would take place. The High Court also observed that the possession delivered was as a licensee for the development of land and not as a transferee and in the absence of registration of JDA, the agreement would not fall under Section 53A of TOPA and consequently, Section 2(47)(v) of the IT Act would not apply.
Decision of the Supreme Court
Any ‘transfer’ of a capital asset would attract capital gains tax in the year in which the transfer of asset takes place. Further, the term ‘transfer’ has been defined inclusively under Section 2(47) of the IT Act. Traditionally, capital gains in relation to immoveable property were taxable in the year in which registered conveyance deed was executed between the parties. As a result, the purchaser would delay or not get the property registered and enjoy the possession of the property in his own right, without the seller paying the legitimate amount of capital gains tax payable by him. To overcome this, the IT Act was amended and the revised definition of ‘transfer’ now includes any transaction that allows the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of TOPA. In other words, those arrangements which confirmed the privileges of ownership without a corresponding transfer of title would now be covered under section 2(47)(v).
Section 53A of TOPA was incorporated to provide protection to a transferee to retain his possession where he had taken possession of the property, pursuant to part performance of the contract. But the following conditions have to be fulfilled, if a transferee wants to defend or protect his possession under Section 53A of TOPA:
- There must be a contract to transfer for consideration any immovable property;
- The contract must be in writing, signed by the transferor, or by someone on his behalf;
- The writing must be in such words, from which the terms necessary to construe the transfer can be ascertained;
- The transferee must in part performance of the contract, take possession of the property, or of any part thereof;
- The transferee must have done some act in furtherance of the contract; and
- The transferee must have performed or be willing to perform his part of the contract.
Section 53A of the TOPA was amended in 2001 and as per the revised provisions, documents containing contracts to transfer for consideration are required to be mandatorily registered. In other words, if a JDA is not registered, it would have no effect in law for the purposes of Section 53A of the TOPA. Thus, it provided an incentive to the parties to register the JDA since it granted them legally enforceable rights.
Given this background, the primary issue before the SC was whether an unregistered JDA, which granted access to the developers for the purposes of development in part performance of the JDA, would get covered within the extended definition of ‘transfer’ under Section 2(47)(v) of the IT Act.
After going through the facts and circumstances and contentions of the taxpayer as well as the tax authorities, the SC observed that under Section 2(47)(v) of the IT Act, the term ‘transfer’ includes any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in Section 53A of the TOPA.
Taking note of the amendment to Section 53A of the TOPA, the SC went on to hold that to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which is enforceable under law (i.e. complies with the provisions of Section 53A of the TOPA). A perusal of Section 53A suggests that in the eyes of law, there was no contract which could be taken cognisance of, if it was not registered. Therefore, for the JDA to be considered for the purposes of section 53A of TOPA, it was required to be a registered instrument and since it was not registered in the instant case, the SC held that in the absence of registration of such an agreement, the same was not enforceable under general law and, thus, the transaction would not fall under Section 2(47)(v).
The SC also observed that the ITAT was not correct in its view that, since Section 2(47)(v) of the IT Act refers to “contract of the nature referred to in Section 53A of the TOPA”, the JDA was not required to be registered to attract Section 2(47)(v) as the requirement of registration was introduced only in 2001. The SC clarified that all that was meant by this expression was to refer to the ingredients of applicability of Section 53A of the TOPA to the contracts mentioned therein and only where the contract contained all the essential ingredients under Section 53A of the TOPA, it will be covered within the ambit of transfer, as provided under Section 2(47)(v) of the IT Act. Accordingly, it was held that such an expression could not be stretched so as to say that, though registration of a contract is required only after 2001, Section 2(47)(v) of the IT Act would include within its purview only such contracts mentioned in Section 53A of the TOPA, but without the requirement of registration.
At the same time, the SC rejected the view of the HC which had held that Section 2(47)(vi) of the IT Act would not apply in the absence of any change in membership of the Society. The SC clarified that under Section 2(47)(vi) of the IT Act, any transaction that has the effect of transferring or enabling the enjoyment of any immovable property would come within its purview. Such a transfer could be by way of becoming a member or acquiring shares in a co-operative society ‘or in any other manner whatsoever’. The SC further observed that the HC had erred by not adverting to the expression ‘or in any other manner whatsoever’, which expression shows that it was not necessary that the transaction must refer to the membership of a cooperative society. It held that a reading of the JDA in the present case would show that the Assessee continued to be the owner throughout its tenor, and at no stage purported to transfer ownership rights to the Developer. At the highest, possession alone was granted under the JDA for the specific purpose of the property development. Thus, the present case did not attract the provisions of Section 2(47)(vi) of the IT Act.
Lastly, it was also held that as the JDA was abandoned due to lack of required approvals/permissions, therefore, the income from capital gain on a transaction which never materialised was merely a hypothetical income and no capital gains tax could be levied on such notional income under Section 45, read with Section 48, of the IT Act. In other words, the SC expounded the principle of “real income” and followed the well-established precedents set up by the Indian judiciary to hold that, since no profit or gain was realised, no capital gains tax could be levied.
The SC has reiterated that for a transaction to be regarded as a ‘transfer’ under Section 2(47)(v) of the IT Act, all the conditions of Section 53A of TOPA should be satisfied and possession of the property should be obtained by the transferee in part performance of the contract. It also observed that only real income should be brought to tax and not notional income.
We have discussed here the taxability of income earned from a JDA in the light of the SC decision. It is pertinent to note that there could be several other forms of JDAs, which may raise several other issues regarding taxation of income accruing or arising therefrom, depending on the terms and conditions of such JDAs.
* The author was assisted by Jyoti Anumolu, Associate