Developer Put In Possession Of The Property Under The Development Agreement, Assessee Not Liable To Pay Wealth Tax: Karnataka High Court

The Bench, consisting of Justices P.S. Dinesh Kumar and Anant Ramanath Hegde, observed that the developer had physically obtained possession of the property and that under the Development Agreement, the developer had the power to alienate its portion of the property. Hence, the Court ruled that the order of the ITAT upholding the liability of the assessee to pay Wealth Tax on the said property cannot be sustained.

The assessee Company/ appellant- M/s. Noorani Properties (P) Ltd., entered into a Development Agreement with a developer- M/s. Classic Infrastructure and Development Ltd. (CIDL), a subsidiary Company of M/s. ITC Ltd. In pursuance of the Development Agreement, the assessee handed over the physical possession of its property along with the original title deeds and received a certain sum as refundable deposit. However, CIDL did not develop the property and the said Development Agreement was determined by CIDL. Under a Settlement Agreement, the assessee conveyed the said property in favour of ITC Ltd.

The Assessing Authority took up the case of the assessee for scrutiny assessment and issued Notices under the Wealth Tax Act, 1957 for the relevant assessment years, in response to which the assessee filed a 'NIL' return. The Assessment Authority passed orders under the Wealth Tax Act determining the net wealth of the assessee for the relevant assessment years. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), who partly allowed the appeal. The assessee filed an appeal before the ITAT. The ITAT ruled that the assessee continued to be the owner of the said property/urban land under Section 2(ea) of the Wealth Tax Act and that there was no transfer of the said property/urban land by the assessee. The assessee filed an appeal before the Karnataka High Court against the order passed by the ITAT.

The assessee M/s. Noorani Properties submitted before the High Court that a Master Development Agreement was entered into between the assessee and the developer, i.e., CIDL, and consequently, the assessee handed over possession of its land to the developer. The assessee added that the appropriate authority had also issued a 'No objection' Certificate under Section 269UL (1) of the Income Tax Act, 1961, whereunder the name of the developer was mentioned as a transferee.

Hence, the assessee averred that since the possession of the said property was transferred to the developer, therefore, the assessee was not liable to pay wealth tax for the given assessment years. Thus, the assessee submitted that the orders passed by the Assessing Authority and the appellate authorities cannot be sustained.

The High Court observed that Wealth Tax is a tax in respect of the net wealth of every individual, HUF and Company, which is chargeable under Section 3 of the Wealth Tax Act, 1957. The Court noted that 'Net Wealth' is defined under Section 2(m) and that as per Section 2(ea), 'urban land' falls within the definition of 'assets'. The Court observed that it was not disputed that the assessee owned urban lands and that they were assessable for Wealth Tax.

The Court noted that the assessee/appellant had entered into a Joint Development Agreement with CIDL for development of its land. The Court observed that under the said Development Agreement, the assessee was entitled to a certain portion of the built-up area and that the Developer was entitled to sell or deal with the remaining built-up area.

The Court further observed that the said Development Agreement was determined by CIDL; and that subsequently, the assessee entered into a Settlement Agreement with the developer- CIDL, and its holding Company- ITC Ltd. The Court added that consequently, the assessee executed a Sale Deed with respect to the said property in favour of ITC Ltd.

The Court noted that the ITAT in its order had ruled that the Joint Development Agreement entered into between the parties did not provide for transfer of any title or interest in the said immovable property and hence, the assessee Company continued to be the owner of the said land and thus, it was liable to pay Wealth Tax.

The Court observed that a 'No Objection' Certificate under Chapter XX-C of the Income Tax Act was issued by the appropriate authority and that as per the Development Agreement, the assessee/owner had covenanted to convey a proportionate undivided interest in favour of the proposed purchasers or nominees of the developer. The Court further noted that the assessee had granted two Powers of Attorney in favour of the developer for the purpose of development and sale of the said property.

Therefore, the Court ruled that it was prima facie demonstrated that the developer did have the power to alienate its portion of the property and that it had entered into the said property. The Court added that a mere failure of the project did not undo the acts of the parties.

Thus, the Court allowed the appeal, set aside the order of the ITAT and remanded the matter back to the ITAT for a fresh consideration.

Case Title: M/s. Noorani Properties (P) Ltd. versus The Commissioner of Wealth Tax and Anr.

Dated: 30.06.2022 (Karnataka High Court)

Citation: 2022 LiveLaw (Kar) 271 

Counsel for the Appellant: Dr. C.P. Ramaswamy for Mr. Balram R. Rao, Advocates

Counsel for the Respondents: Mr. K.V. Aravind, Advocate

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