This article examines the recent Income Tax Appellate Tribunal (“ITAT”) order in the case of Deputy Commissioner of Income Tax,Central Circle – 2(2),Bengaluru v. M/s. Sri Sai Lakshmi Industries Pvt. Ltd.,Hoskote Road, Kannamangals Village,White Field,Bengaluru, ITA No.1624/Bang/2019, in which it was held that permissive possession of land under Joint Development Agreement (“JDA”) for specific purpose of development is not transfer.
The industry has been grappling with various tax issues on the JDAs; which I am very much privy to owing to several matters where there is no clarity under the present tax provisions and jurisprudence (both direct and indirect taxes). This ITAT order, in my view, has provided much required clarity on one of such issues.
This matter pertained to registered JDA entered into by a developer company with certain landowners. The JDA provided for project revenues to be shared between the developer company and the landowners in a pre-agreed ratio. The term “project revenues” was defined and agreed in the JDA. The developer company also paid certain refundable interest free deposit to the landowners as security to ensure appropriate performance by the developer, which was to be recovered by the developer directly and by way of deduction from the landowner’s share of project revenues.
So, essentially a typical “rev-share JDA”, duly registered where the landowners have not got paid for the land at the time of execution of the JDA and the landowners will get paid over the life span of the project from the project revenues.
In the present matter, the Bangalore ITAT held that no transfer takes place as only “permissive possession” was given by the landowner to the developer. It further observed that possession given to develop the property cannot be regarded as delivery of possession in part performance contemplated under section 53A of the Transfer of Property Act, 1882 (“TPA”).
By way of some more background:
Before the assessing officer:
At the very initial stage, the assessing officer (“AO”) concluded that there was a “transfer of the property” by the land owners under the JDA within the meaning of section 2(47)(v) of the Income Tax Act, 1961 (“IT Act”); and the AO relied upon the case of CIT v. Dr. T.K.Dayalu, 202 Taxman 531 (Karnataka) (“Dr. T.K.Dayalu”) decided by the Hon’ble High Court of Karnataka. The said matter of Dr. T.K.Dayalu referred to the decision of the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT (2003) 260 ITR 491 (Bombay) in which it was held that the date relevant for attracting capital gain having regard to the definition under section 2(47) of the IT Act is the date of passing of or transferring of “complete control over the property” in favour of the developer. The decision of the Hon’ble Bombay High Court has observed that if the contract read as a whole indicates that at the time of entering into JDA there is transfer of complete control over the property in favour of the developer, the date of entering into JDA has to be considered to be relevant for recognising the transfer of land by the landowner. Thus, the essence of the decision is that the transfer of land under section 2(47) of the IT Act may be considered when there is transfer of complete control (or, in other words privileges of ownership) over the asset by the owner to the developer.
Before the Commissioner of Income-Tax (Appeals):
It was submitted that even in the case of Dr. T.K.Dayalu, it was conceded that as per the clause in the JDA, on the date of the JDA, possession had been handed over and certain amounts were paid in addition to the structure which the assessee was entitled free of cost. Further, as per the said JDA, actual possession of the property was handed over and an affidavit was also filed to that effect. On these admitted facts, it was concluded that the date of entering of the JDA would be construed to be the date of transfer of land by the landowner.
Therefore, the reliance placed on the decision of the Karnataka High Court in the case of Dr. T.K.Dayalu by the AO in the present case is not correct as the above judgement does not suggest that the date of entering into JDA would be construed as the date of transfer of land by the land owner, irrespective of the terms of JDA, particularly when there is no intention to “transfer” the land by the land owner to the developer.
The Commissioner of Income-Tax (Appeals) (“CIT(A)”) relied on the provisions of the JDA where only a “licence” was given to the developer to develop the property and that such permission cannot be equated with delivery of possession in part performance under the JDA within the meaning of section 53A of the TPA. The CIT(A) held that a combined reading of the relevant clauses of the JDA is necessary. He observed that possession was retained by the assesee and not passed on to the developer and that the developer has not taken possession of the property and as such the main ingredient of the jurisdictional High Court’s decision remains unfulfilled. Accordingly, the CIT(A) held that there was no transfer of the property and therefore no capital gain can be brought to tax in the relevant assessment year.
Before the ITAT:
Aggrieved by the order of the CIT(A), the revenue department filed an appeal before the ITAT. The learned departmental representative relied on the order of the AO while the learned counsel for the landowner relied on the order of the CIT(A) and the following decisions in which it had been held that if there is no delivery of possession in part performance of JDA for sale within the meaning of section 53A of the TPA, there cannot be a transfer within the meaning of section 2(47)(v) of the IT Act.
The ITAT relied on the specific clauses of the JDA, where the parties had agreed that landowner permitted “the Developer to enter as a licensee and develop the JD property in the manner and subject to the terms and conditions set forth” in the JDA. Further, in consideration of the developer’s revenue and other mutual rights and obligations specified in this JDA, the developer had accepted “the right to enter and agrees to develop the JD property in the manner and subject to the terms and conditions set forth” in the JDA. The JDA further states that “until conveyed to the purchasers of the units in the Project, the Owner shall own the entire JD property and the Developer shall own all structures, units, buildings and other infrastructure constructed, erected or installed by the Developer on the JD property pursuant to this Agreement”. (emphasis supplied)
The JDA stated that under and in terms of the JDA, the landowner “grants the Developer, its agents, servants, associates and any Person claiming through or under the Developer, permission and authorisation to enter the JD property to develop the same. Owner shall not part with, and does not intend to part with possession in favour of Developer, at any point of time during the development of the JD property. Nothing herein shall be construed as transfer or sale of the JD property or any part thereof by the Owner in favour of the Developer, delivery of part-possession under Section 53-A of the Transfer of Property Act, 1882 or “transfer” under Section 2(47) of the Income Tax Act, 1961“. (emphasis supplied)
Under the JDA, that the developer was to take possession of the property for the specific purpose of development only, that too after satisfying the conditions like obtaining approvals etc. The clause also provides that possession given to the developer cannot be regarded as delivery of possession in part performance of JDA for sale as contemplated under section 53A of the TPA.
The ITAT relied upon the judgement of the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Balbir Singh Maini and others (2017) 398 ITR 531 (SC), on identical clause in a JDA where it was held that “a reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction.”
Further ITAT relied on the decision rendered on identical clause in a JDA, where Bangalore ITAT in the case of Dr. Krishna Prasad Mikkilineni v. DCIT ITA No.929/Bang/2018, order dated 31.01.2022, made similar observations. ITAT also referred to the identical issue being considered by the coordinate bench in the case of M/s Anugraha Shelters Pvt. Ltd., Bangalore v. Deputy Commissioner of Income Tax, Bangalore, ITA No. 2314/Bang/2016, wherein it was held that “there is difference between permissive possession and legal possession“. In the case of permissive possession, the developer enters the scheduled property on behalf of the owner and not in the independent capacity of purchaser of the property.
The question whether granting of such kind of license would amount to “possession” within the meaning of section 53A of TPA read with section 2(47)(v) of IT Act was examined by the Bangalore SMC Bench of ITAT in the case of Smt. Lakshmi Swarupa v. ITO (ITA No.2278/Bang/2018 dated 12.10.2018). In such case as well, the ITAT observed that “the clause in the JDA regarding possession clearly states that what is given is not possession contemplated u/s.53A of the Transfer of Property Act and that it is merely a license to enter the property for the purpose of carrying out development. The possession in the present is traced to the joint development agreement which is in the nature of permissive possession and not possession in part performance of agreement for sale. In the present case, there is no document by which the revenue can come to the conclusion that there was delivery of possession. The mere fact that development of the property cannot be done without possession cannot be the basis to come to a conclusion that possession was delivered in part performance of the agreement for sale in the manner laid down in Sec.53A of the Transfer of Property Act. Such possession is on behalf of the Assessee and not in the independent capacity of purchaser of the property.” In the instant case the ITAT noticed that the landowners gave permissive possession and not “legal possession” as contemplated within the meaning of section 53A of the TPA. Hence, the ITAT held that the provisions of section 53A of the TPA are not applicable to the impugned JDA. Further, it held that in this view of the matter, the provisions of section 2(47)(v) of the IT Act are also not applicable. Hence, the tax authorities are not justified in invoking the above said provision and consequently, the capital gains assessed in the hands of the assessee is liable to be deleted.
The ITAT held that in the instant case also, the landowners had given “only permissive possession and not legal possession” and accordingly, following the above said decision of the coordinate bench, they held that transfer has not taken place during the year under consideration. Accordingly, capital gain is not assessable in the hands of the assessee during the year under consideration. ITAT upheld the order of the CIT(A).
This is obviously in the right directions, although one would see if the revenue now appeals this in the Supreme Court. Watch this space for more, as I shall keep tracking it.