ITAT Explains Important Law on Capitals Gains For Development Agreements

Fibars Infratech Pvt. Ltd vs. ITO (ITAT Hyderabad)

S. 2(47)(v): A development agreement by which possession is transferred to developer is not a “transfer” for capital gains purposes if developer’s willingness to perform his part of the contract is not ascertainable with certainty


The assessee entered into a Development Agreement-cum-GPA with MAK Projects on 15.12.2006 (AY 2007-08). The agreement provided the MAK would construct a villa township in 30 months and that the assessee was entitled was entitled to a certain portion (16 villas) of the developed area as consideration for the transfer of the land. Though possession of the property was handed over to the developer, the assessee claimed that the transaction did not give rise to capital gains in AY 2007-08 on the basis that (a) the consideration was neither received nor quantified, (b) the project was at the conception stage and even the building plan approvals were not received & (c) the developer had not incurred any expenditure on the project. The AO & CIT(A) relied on Chaturbhuj Dwarakadas Kapadia 260 ITR 491 (Bom) where it was held that the execution of a development agreement amounted to a transfer u/s 2(47)(v) and gave rise to capital gains. On appeal by the assessee to the Tribunal HELD allowing the appeal:

S. 2(47)(v) provides that the term ‘transfer‘ includes “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 the Transfer of Property Act”. In order to be “of the nature referred to in s. 53A of the Transfer of Property Act”, the necessary precondition is that the transferee should be willing to perform his part of the contract. The “willingness” has to be absolute and unconditional. If willingness is studded with a condition, it is no more than an offer and cannot be termed as willingness. On facts, the “willingness” of the developer to perform his part of the obligations is not ascertainable in AY 2007-08 because (a) the consideration was not paid to the assessee, (b) the building plans had not been approved, (c) there was no progress with regard to development in the AY, (d) there was no investment by the developer in the construction activity during the AY. It is not possible to say whether the developer is prepared to carry out those parts of the agreement to their logical end. The fact that the assessee has given possession is not relevant. Consequently, s. 2(47)(v) does not apply and the capital gains is not assessable to tax (Chaturbhuj Dwarakadas Kapadia 260 ITR 491 (Bom) explained/ distinguished)

Contrast with Charanjit Singh Atwal vs. ITO (ITAT Chd) (order attached) where a contrary view was taken following Chaturbhuj Kapadia 260 ITR 491 (Bom) but without appreciating the fine point regarding certainty of developers’ “willingness” to perform his part of the bargain

Sec. 32: Sale And Lease Transactions By Banks Are Valid: ITAT Ahd

UTI Bank Limited vs. ACIT (ITAT Ahmedabad)

S. 32: Sale & lease transactions by banks are genuine and eligible for depreciation
The assessee, a Bank, purchased windmills worth Rs. 27 crore in a sale-and-lease-back transaction and claimed depreciation thereon. The AO & CIT(A) rejected the claim and held that the transaction was not one of purchase but was a finance transaction in which the windmills were received as security on the basis that (a) under the Banking Regulation Act, 1949, the assessee was not permitted to engage in any business other than banking, (b) the lease rentals were fixed on the basis of interest on advances and other charges receivable by the assessee as a financier and were not co-related to the projected income on the capacity of each wind energy generator, (c) the assessee was not entitled for surplus income on excess generation of power and was not to suffer any loss owing to lesser production or any other contingencies, (d) the return of the assessee on financing was granted by taking interest-free deposit, (e) the assessee had no responsibility of labour, repairs, taxes etc in running of the project and (f) though the purchase of wind energy generators was in the assessee’s name, the land and power purchase agreements with the Electricity Boards were not in its name. On appeal by the assessee to the Tribunal HELD allowing the appeal:

S. 32 allows depreciation if the asset is “owned, wholly or partly, by the assessee and used for the purposes of the business“. There is no requirement that the asset must be used by the assessee himself. It is sufficient if the asset is utilized for the purpose of business of the assessee. The argument, relying on McDowell 154 ITR 148 (SC), that Sale & Lease Back transactions are a devise for lowering the tax effect cannot be accepted. Sale & Lease Back transactions are genuine and cannot be considered to be sham. By virtue of the judgement in Cosmo Films Ltd 338 ITR 266 (Del), the contrary judgements in MidEast 87 ITD 537 (Mum) (SB) and Induslnd Bank 135 ITD 165 (Mum) (SB) are impliedly reversed (ICDS Ltd 350 ITR 527 (SC) & Development Credit Bank Ltd (ITAT Mum) followed).

Contrast with State Bank of India (ITAT Mum) where it was held that banks are not eligible to carry out operational leasing and that transactions of this sort cannot be regarded as genuine leases. See also Hathway Investments (ITAT Mum) where SLB transactions were held to be non-genuine