Category: Real Estate Taxation

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Deduction under section 54B is allowable on purchase of agricultural lands not through registered sale deed and another through an agreement to sell

Anil Bishnoi[2017] 86 taxmann.com 217 (Chandigarh – Trib.) SEPTEMBER  27, 2017

If someone has sold a property, consequently the other person has purchased the said property. If the transfer of property is complete as per the definition of transfer u/s 2(47) of the Act, the assessee is made labile to pay tax on the capital gains earned by him, on the same analogy, the transfer is also complete in favour of the purchaser also. The provisions cannot be interpreted in a manner to say that transfer vis-a-vis selling is complete but vis-a-vis purchase is not complete in respect of same transaction. In view of this, the word ‘Purchase’ cannot be interpreted and detached from the definition of word ‘transfer’ as given u/s 2(47) of the Act. When the transfer takes effect as per the provisions of section 2(47) of the Act, if a liability to pay tax arise in the case of the seller, the consequent right to get deduction on the purchase of property accrues in favour of the purchaser, if he otherwise is so eligible to claim it as per the relevant provisions of the Act.

For the claim of deduction u/s 54 of the Act, the registration of sale deed is not necessary. It is enough if the assessee has paid the consideration, acquired the possession with full rights and has fulfilled other requirements of the provisions of the Act:-

1. Sh. Sanjeev Lal etc. v. CIT 269 CTR 001(SC) 2014
2. CIT v. T.N. Aravinda Reddy [1979] 12 CTR 0423 (SC)
3. CIT v. K. Jelani Basha [2002] 256 ITR 0282 (Madras)
4. CIT v. Ram Gopal [2015] 372 ITR 498 (Delhi)
5. Balraj v. CIT [2002] 254 ITR 22 (Delhi)
6. CIT v. R.L. Sood [2000] 245 ITR 727 (Delhi)
7. CIT v. Dr Laxmichand Narpal Nagda, [1995] 211 ITR 804 (Bom.)
8. CIT v Mrs. Shahzada Begum, [1988]73 CTR 0229 (A.P.)
9. S. Dabir Singh, Jalandhar v. Department of Income Tax, ITA No. 27 (Asr.)/2015
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Sale proceeds of agricultural land and conversion of land by cutting trees into housing plots, brought asset in as stock-in-trade attracts capital gain being transfer u/s 2(47)(iv) rws 45(2)

Synthite Industrial Ltd.[2017] 86 taxmann.com 138 (Kerala)

Where assessee whose business included real estate development purchased a rubber estate to utilize land for non-agricultural purpose and converted said land by cutting trees into housing plots, thus, brought asset in as stock-in-trade and sold those plots to several people for construction of villas, it was held that though property was once an agricultural land, its acquisition was for non-agricultural purposes, assessee did not carry on any agricultural activity in land and at relevant date, viz. date of sale, land had ceased to be an agricultural land, if that be so, assessee could not have claimed that income gained from sale of land was from sale of agricultural land entitling it to exemption from levy of capital gains

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Taxability of Damages for breach of contract received by the buyer of Immovable property discussed by ITAT Amritsar

The law under section 51 and 56(2)(ix) provides for the taxability of forfeiture of advance money received in the hands of seller. Till AY 2014-15, the forfeited sum was deductible from the cost and even the excess of forfeited money over cost was capital receipt not taxable by virtue of Supreme Court Judgment in Travoncore Rubbers. In the hands of buyer the forfeiture of amount by reason of failure on the part of buyer was not treated as capital loss by virtue of Bombay High Court Judgement in Sterling Investment Corporation 123 ITR 441. However wef AY 2015-16, the forfeited amount is taxable in the hands of seller as Income from other Sources and no reduction from cost of the asset has to be made.

 

However Income tax law is silent about the treatment of compensation received by the buyer of immovable property for breach of contract by the seller. ITAT Amritsar has in a recent decision in Rajesh Mayor ITA 571/ASR/2014 pronounced on 04-05-2016 has revisited the law on the subject:

Facts of the case: The assessee entered into agreement with proposed seller for the purchase of a house for 4.04crores. Biana of 50 lacs was paid by the buyer. The seller however backed out of the agreement. The buyer filed a suit in civil court. The Court ordered return of biana of 50 lacs to buyer and also ordered to pay 54 lacs as compensation to the buyer. By way of two cheques of 27 lacs each. While payment against one of cheques was honored, other cheque got bounced and the buyer could recover the amount only by filing suit u/s 138 of Negotiable Instrument Act. The AO assessed the receipt of 54 lacs as capital gains. CIT A dismissed the assessee’s appeal.

The development of the law on the subject may be discussed as under:

  1. Tata Services Limited  [1979] 1 Taxman 427 (Bom.): It was held by Bombay High Court that:

“………..Under an agreement to purchase a plot of land, assessee paid Rs. 90,000 as earnest money. Vendor failed to obtain requisite permission within stipulated time. Assessee, however, obtained permission and parties agreed to register the plot on a specified date. Parties thereafter came to an arrangement under which assessee received the earnest money of Rs. five lakhs and assigned right, title and interest under the agreement to third party. Held that assessee owned a capital asset under the agreement and Rs. five lakhs was liable for capital gains tax…..”

  1. Delhi High Court in J. Dalmia (1984)149 ITR 215 : It was held by Delhi High Court :

“9.…………………..There was a breach of contract and the assessee received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be ‘property’ this could not be transferred under s. 6(e) of the Transfer of Property Act. The relevant provision may be reproduced:

“6. Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force:…..

(e) A mere right to sue cannot be transferred.”

We do not find any exception under the IT Act though the word ‘transfer’ in relation to capital asset has been defined in s. 2(47) of the Act which includes ‘sale, exchange or relinquishment of the asset or the extinguishment of any right therein’. The damages which were received by the assessee cannot be said to be on account of relinquishment of any of his assets or on account of extinguishment of his right of specific performance under the contract for sale.

  1. Under s. 5 of the Transfer of Property Act, ‘transfer of property’ means an act by which a person conveys property to another and ‘to transfer property’ is to perform such act. A mere right to sue may or may not be property but it certainly cannot be transferred. There cannot be any dispute with the proposition that in order that a receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a ‘transfer’ within the meaning of s. 45 r/w s. 2(47) of the Act. Since there could not be any transfer in the instant case, it has to be held that the amount of Rs. 1,02,500 received by the assessee as damages was not assessable as capital gains.”

In above case, the decision of Tata teleservices(supra) was distinguished on the facts that the right to specific performance had been specifically given up by the assessee J. Dalmia and what was left was a mere right to sue for damages. While in Tata Teleservices, the buyer had assigned his rights to purchase the property to third party.

Hon’ble Supreme Court has dismissed the SLP of the department against the Delhi High Court decision in J.Dalmia(supra) in 189 ITR 22(ST.)

  1. Vijay Flexible Containers (1990) 186 ITR 693 (Bom) & Laxmi Devi Rattani (296 ITR 363)(MP)

In this case the buyer was constrained to file suit for specific performance/ damages for breach due to seller’s failure to comply agreement. Consent terms were arrived at in the suit and a decree was passed in favour of the assessee for the sum of Rs. 1,17,500 and interest.Dissenting J. Dalmia (supra) held by Mumbai High Court that :

“………..Having regard to the statutory provisions and the authorities which we have cited above, we cannot, with respect, agree that the right acquired under an agreement to purchase immovable property is a mere right to sue. The assessee acquired under the said agreement for sale the right to have the immovable property conveyed to him. He was, under the law, entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right. What he acquired under the said agreement for sale was, therefore, property within the meaning of the IT Act and, consequently, a capital asset. When he filed the suit in this Court against the vendors he claimed specific performance of the said agreement for sale by conveyance to him of the immovable property and, only in the alternative, damages for breach of the agreement. A settlement was arrived at when the suit reached hearing, at which point of time the assessee gave up his right to claim specific performance and took only damages. His giving up of the right to claim specific performance by conveyance to him immovable property was a relinquishment of the capital asset. There was, therefore, a transfer of a capital asset within the meaning of the IT Act………….”

In Laxmi Devi Ratani, facts were found similar to Vijay Flexible Containers(supra) and hence decision was given accordingly.

  1. K.R. Sri Nath  (Madras) 268 ITR 436:

Held that

“……………10. As seen already, the assessee had a right to insist on specific performance, gave up the right readily and received a sum referred to supra. There can be no doubt that by termination of the earlier agreement and by allowing the vendor to sell the said property to any person at any price, the assessee had given up or relinquished his right of specific performance and as consideration for relinquishing that right, the assessee was paid a sum of Rs. 6,00,000. The right, title and interest acquired under the agreement of sale clearly fall within the definition of capital asset [s. 2(14)]. Instead of assigning the right to third party/parties, the assessee relinquished those rights. We have already seen that the definition of transfer in s. 2(47) is wide enough to include relinquishment of an asset.

  1. With regard to the contention that there was no cost of acquisition incurred by the assessee for obtaining the rights under the agreement dt. 3rd April, 1986, and consequently there could be no capital gains assessable, it is to be noted that at the time of agreement of sale the assessee paid Rs. 40,000. That payment was made pursuant to the agreement. Only by paying the said amount the assessee acquired the right to get the sale deed executed in his favour. At this juncture, we may refer to the observation in the decision of the Bombay High Court in CIT vs. Tata Services Ltd. (supra), where it is observed as under :

“The assessee had paid at the time of the execution of the agreement of sale Rs. 90,000. He had then acquired a right to obtain a sale deed. When he gave up that right or assigned it in favour of M/s Advani and Batra, he received Rs. 5,90,000 and Rs. 90,000 was treated as refund of consideration. Therefore, actual cost to the assessee of the right to obtain the sale deed on the date of the agreement of sale was Rs. 90,000.”

Even in the other case referred to in CIT vs. Vijay Flexible Containers(supra), the Bombay High Court held that the capital asset had been acquired at a cost of Rs. 17,500 paid as and by way of earnest money. In that case also the Court observed as follows :

“We may, at this stage, also deal with the further argument that there was no consideration for the acquisition of the capital asset. In our view, this Court was right in the view that it took that the payment of earnest money under the agreement for sale was the cost of acquisition of the capital asset.”

  1. Now that we have come to the conclusion that the assessee incurred Rs. 40,000 for acquiring the right to acquire the sale deed, the contention of learned counsel for the assessee that there is no cost of acquisition and so there could be no assessment of capital gain on the transfer of the capital asset falls to the ground.
  2. It has been held by Supreme Court in Saurashtra Cement Ltd 325 ITR 422 that compensation received for delay in procurement of capital asset is capital receipt not chargeable tax.
  1. Mumbai High Court in Kumarpal MohanLal Jain 41 Taxmann.com 55 held that compensation of Rs. 15000/- awarded for failure of builder to hand over possession to the buyer is tax exempt.

Two Views Theory :It has been held by Supreme Court in  :

  1. a) CIT v. Poddar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) –

Where there are two possible interpretations of a particular section which is akin to a charging section, the interpretation which is favourable to the assessee should be preferred while construing that particular provision. Reiterating the same view, in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC) it has been held that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. The Court must interpret the statute as it stands and in case of doubt, in a manner favorable to the taxpayer.

(b)        CIT v. Vegetable Products Ltd [1973] 88 ITR 192 –

It has been held that if the Court finds that the language of taxing provision is ambiguous or capable of more meaning than one, then the Court has to adopt the interpretation which favours the assessee.

ITAT Amritsar after consideration of the law on the subject

held that compensation received by the buyer of property for breach of agreement is not taxable in the hands of buyer.

 

Conclusion: The dispute on the issue in centered around the issue whether breach of contract by seller gives buyer a right to sue or something more. The issue whether giving up of right of specific performance in lieu of compensation for breach in itself constitutes transfer under section 2(47). Till the legislature comes out with some solution, following a view favorable to the assesee seems to be the only rational solution.

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Mere Application to change the use of land does not alter the chracter of agricultural land for 2(14)(iii)

As per Section 2(14)(iii), agricultural land outside specified limit is not capital asset and hence there can be no capital gain on transfer of such agricultural land. Hence it is important to determine whether land is agriculture land or not.

Where assesse enters into agreement to sell agri land. There after makes  an application to the authorities to permit to covert the land into farm houses  and authority replies that no such conversion required for farm houses and there after the sale deed with buyer is registered. Whether the land ceases to be agricltual land on the date of registration of sale deed. What is the relevant date of transfer, the date of agreement or date of registration of sale deed?

Held by Jaipur Tribunal in Megh Chand Meena, HUF [2016] 70 taxmann.com 374 (Jaipur – Trib.)MAY  17, 2016  that  it was clear that there was no conversion of agricultural land and what had been transferred by assessee continued to be agricultural land beyond 8 Kms. of municipal limits. it was not a capital asset under section 2(14)(iii) . therefore, sale consideration was not liable to capital gains tax under section 45.

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Supreme Court Settles the Income Tax matter of Tata Chemleot Project matter of MLAs in the favor of assesse in Balbir Singh Maini Case dtd 04-10-2017 [2017] 86 taxmann.com 94 (SC). However differs from High Court reasoning in CS Atwal case

Important Excerpts from the Order

1 An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. This position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act have been omitted.

 

[Para 19 on Page 28 of SC Order]

 
2 There is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. (Para 20 on Page 31 of SC Order)

 
3 On the basis of Arguments above SC concluded that “……….we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted…………..”

[Para 20 on Page 32 of SC Order]

 
4 “…………..the High Court has held that Section 2(47)(vi) will not apply for the reason that there was no change in membership of the society, as contemplated. We are afraid that we cannot agree with the High Court on this score………………..”

 

“……………The High Court has not adverted to the expression “or in any other manner whatsoever. in sub-clause (vi), which would show that it is not necessary that the transaction refers to the membership of a cooperative society. We have, therefore, to see whether the impugned transaction can fall within this provision……………….” [Para 21 of SC Order]

 
5 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 [S(47)(vi)]will also not rope in the present transaction. [Para 23]

 
6 In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is 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. [Para 27, Page 37 of SC Order]

 
7 Supreme Court in Excel Industries has said that “……………in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount……………” [Para 26,Page35]

 

In the present 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. [Para 28]

 
8 Hence Supreme Court has concurred with the Conclusion of Punjab and Haryana High Court in CS Atwal but not with the reasoning .
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Case laws on agricultural use of land for exemption from capital asset definition u/s 2(14)(iii)

In Gemini Pictures Circuit (P.) Ltd. v. CIT [1981] 130 ITR 686/6 Taxman 42 (Mad.) it was held that onus is on the department to prove that land is non agricultural or that it forms part of business assets. Once the assessee proves that the land is raagricultul land the burden of proving that it is not agricultural land is on the revenue.

In case of Gordhanbhai Kahandas Dalwadi v. CIT [1981] 127 ITR 664 (Guj.), it was held that the correct test that has to be applied is whether on the date of sale the land was agricultural land or not. Just because after the sale the purchaser was going to put the land to non-agricultural use, it does not mean that the land had ceased to be agricultural land on the date of sale.

In case of CIT v. Borhat Tea Co. Ltd. [1982] 138 ITR 783/[1981] 7 Taxman 388 (Cal.), it was held that for the purpose of land being agricultural land, actual agricultural operations or cultivation or tilling of the land is not necessary. What is to be seen is whether such land is capable of agricultural operations being carried on.

In case of CIT v. Modhabhai H. Patel [1994] 208 ITR 638/77 Taxman 408 (Guj.), it was held that if a land is recorded as agricultural land in the revenue records and if till the date of its sale it is used and exploited as agricultural land, and if the owner of the land has not taken any step which would indicate his intention to exploit the land thereafter as non-agricultural land, then such a piece of land would have to be regarded as agricultural even though it was included within the municipal limits or it was sold on a per square yard basis and not acreage basis.

The purpose for which such a land is sold, though not relevant, will not have that much importance and weight as it would have in a case where the land has remained a spadatar or idle or is used for agricultural purposes only by way of a stop-gap arrangement.