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Friday 28 December 2012

Capital Gain on Development Agreements

Where  assessee enters into agreement with developer to surrender his plot or building in consideration of receiving back cash and/or constructed flat/building, the transaction becomes exigible to capital gain.But the moot point is point of taxation of transaction as to whether it is:
i) Point of entering into agreement
ii) registration of plot/building in favor of developer
iii) when new plot/flat/ building is allotted
iv) when possession of plot/flat/ building is  handed over.
The department often pleads that the transaction of entering into agreement is covered by section 53A of transfer of Property Act and hence it is transfer under s. 2(47) (v) which states that transfer in relation to capital asset includes-
(v) 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 s. 53A of Transfer of Property Act, 1882
S.53A. of Transfer of Porperty Act 1882  Part performance
-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf  from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that , where there is(..........) an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
PROVIDED that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.
(Here the words under (.......) i.e. "contract though required to be registered has not been registered" have been removed due to amendment by s. 10 of Registration and other laws Amendmend Act 2001
As per s.3 of  Registration and other related laws Amendmend Act 2001:
After s. 17(1) of Registration Act following section has been inserted:
(1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882 ) shall be registered if they have been executed on or after the commencement of he Registration and Other Related Laws (AmendmentAct, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A."

HENCE SECTION 53A is not longer applicable to contracts though required to be registered are not registered

Further willingness to perform his part of the contract on the part of transferee is the essence of the section 53A.

CBDT Circular No. 495 Explaining insertion of 2(47)(v)(vi)

Definition of "transfer" widened to include certain transactions

11.1 The existing definition of the word "transfer" in s. 2(47) does not include transfer of certain rights accuring to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the
privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi-storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in s. 53A of the Transfer of Property Act, 1882. New sub-cls. (v) & (vi) have been inserted in s. 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.

11.2 The newly inserted sub-cl. (vi) of s. 2(47) has brought into the ambit of "transfer", the 
practice of enjoyment of property rights through what is commonly known as Power of Attorney
arrangements. The practice in such cases is adopted normally where transfer of ownership is
legally not permitted. A person holding the power of attorney is authorised the powers of
owner, including that of making construction. The legal ownership in such cases continues to be
with the transferor.
11.3 These amendments shall come into force w.e.f. 1st April, 1988 and will accordingly apply
to the asst. yr. 1988-89 and subsequent years.
[Sec. 3(g) of the Finance Act, 1987]
Hence 2(47)(v) was meant to cover cases only where avoidance of capital gains is possible

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