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BEFORE THE AUTHORITY FOR ADVANCE RULINGS(INCOME TAX) NEW DELHI
==========
30th Day of August, 2007
P R E S E N T
HONBLE MR. JUSTICE P.V. REDDI (CHAIRMAN)
MR. A. SINHA (MEMBER)
A.A.R. NO. 724 OF 2006
Name & address of Mr. Jasbir Singh Sarkariathe applicant 1649, Woodland Avenue,
Edison,New Jersey 08820, USA
Commissioner concerned Commissioner of Income-tax-IIChandigarh.
Present for the applicant Mr. G.K. Jain, CA
Present for the department Mr. Raman Kant Garg,Joint Commissioner of Income-tax,Chandigarh
R U L I N G(Delivered by Honble Chairman)
Facts:
1. Broadly, the question that has to be answered in this case
turns on the year of chargeability of the income attributable to
capital gains. The applicant, who is a citizen of USA, is the co-
owner of agricultural land of an extent of 27.7 acres. The other co-
owners are his brother and sister. The applicant is entitled to 4/9th
share therein. The applicant and other co-owners having decided
to develop the land by constructing a residential complex thereon
through a developer entered into a Collaboration agreement on
8.6.2005 with M/s. Santur Developers Pvt. Ltd., New Delhi. On
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behalf of the applicant, the agreement was signed by his brother
and Power of Attorney holder Mr. Karanbir Singh Sarkaria.
According to the terms of the agreement, the developer should
obtain the Letter of Intent from the concerned Government
department and obtain other permissions and sanctions for
developing the land at its own risk and cost. The developer will
have 84 per cent share of the entire built up area and the
proportionate land area whereas the owners share will be 16 per
cent. The mode of apportionment of the built up area is indicated in
clause 21 of the agreement. The consideration for the agreement
is the portion of the built up area to be handed over to the owner
free of cost. Owners are entitled to visit the site in order to review
the progress of the project. It is clarified in clause 18 that the
ownership would remain exclusively with the owners till it vests with
both the parties as per their respective shares on the completion of
the project. The other clauses and the steps contemplated in the
agreement are the following:
(i) Payment of earnest money of Rs.1 crore at the time of
entering into agreement.
(ii) Execution of Special Power of Attorney in favour of
developer to enable it to deal with the statutory authorities
etc. for obtaining necessary approvals/sanctions.
(iii) Obtaining Letter of Intent not later than 8.3.2006. In case of
failure to do so, the agreement shall stand terminated. (letter
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of Intent is the license granted by the Director of Town
Planning to develop the land for the proposed purpose
subject to payment of prescribed charges and compliance
with other conditions).
(iv) On fulfillment of the requirements laid down in the Letter of
Intent, owners will have to execute irrevocable general
Power of Attorney in favour of the developer, inter alia,
authorizing it to book and sell dwelling units out of
developers share and collect the money for the same.
However, the sale deeds can only be executed after the
owners receive their share of the constructed area. [Vide
clause 15]
(v) After filing application for change of land use (licence), the
developer shall take steps to earmark the built up area of the
owners in accordance with the tentative building plan and
both the parties are entitled to lease out or sell the area
falling to their respective shares as per the agreed allocation
and to receive payments. [vide clause 26]
(vi) The owners, on completion of the construction of their built
up area, shall grant power in favour of the developer to
enable it to transfer rights, title and interest to the extent of
its share in favour of buyers of the units.
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(vii) Subject to the fulfillment of the obligations enjoined upon the
developer, the owners shall not interfere with the execution
of the development and construction work.
2. Three months later, an agreement styled as Supplementary
Agreement was entered into on 15.9.2005 between the applicant
and other co-owners on the one hand and M/s. Santur Developers
Pvt. Ltd.^ on the other. In essence, it is an agreement to sell the 16
per cent share of the owners in the built up area to the developer or
its nominee for a consideration of Rs.42 crore.
2.1. The salient features of the 2nd Agreement are:
Apart from Rs.2 crores which the owners have received
under the collaboration agreement, the balance sum of Rs.
40 crore is payable by the developer to the owners in six
instalments starting from 8.3.2006. The time for payment of
installment money may be extended subject to payment of
interest/liquidated damages as per clauses 8 and 9. The last
installment of Rs. 10 crore was payable on or before 8 th
June, 2007 subject to maximum extension of three months.
Thus, the entire consideration should be paid within 27
months from the date of Collaboration agreement. Under
clause 10 it is provided that if the payment is not made within
the maximum period of extension, the owners shall be at
^M/s. Santur Developers Pvt. Ltd. is hereafter referred to as developer or transferee for the sake of
brevity.
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liberty to terminate the collaboration agreement by giving 30
days notice and thereupon it is incumbent on the developer
to forthwith cease the development activity on the land and
remove itself and its agents therefrom. On receipt of all
payments within the prescribed or extended time, the owners
shall have to transfer all the rights, title and interest in and
over the owners developed share alongwith proportionate
land and basement underneath by executing requisite
documents. The owners shall also grant powers to the
developers enabling them to transfer rights and possession
and to execute sale deeds etc. in respect of the developers
84 per cent share together with proportionate land and
basement underneath. The GPA executed earlier in favour
of the developer will become inoperative after the title gets
transferred to the developer. In the last clause it is stated
that all other terms and conditions of Collaboration
Agreement not inconsistent with the provisions of the
supplementary Agreement will continue to be binding on
both parties.
2.2. The Supplementary Agreement has substantially
altered the legal relationship and rights and obligations of the
parties. The transaction is not the usual development
agreement under which the developer constructs on the
owners land and hands over a part of the built up area to the
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owner as consideration. It is an assorted type of
arrangement under which the developer builds on the land of
the owners and ultimately, in consideration of payment of
stipulated price to the owners, the developer requires the
owner to part with his title in favour of the developer or his
nominees. Instead, the developer could have straightway
purchased the land out-right by paying consideration to the
owners and utilized the land in whatever manner he pleased.
But, that was not done for the apparent reason that the
developer either wanted to avoid or reduce the stamp and
registration expenses, or to get over the possible difficulties
in obtaining the licence/permission.
The questions and contentions
3. Broadly the question is about the year of chargeability of
income attributable to capital gains. Integrally connected to it is the
identification of the previous year in which the deemed transfer
within the meaning of clause (v) of section 2(47) of the Income-tax
Act had taken place.
4. Whereas it is the contention of applicant that the transfer can
be said to have taken place only when the entire consideration of
Rs.42 crore has been received by the owners in terms of the
supplementary agreement, it is the contention of the Commissioner
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of Income-tax that the capital gains arise during the year in which
any of the following activities take place, i.e:
(a) Obtaining permission for change of land use by the
developers
(b) Construction/development of land
(c) Receipt of payments by the applicant from 8-6-2006onwards as per the supplementary agreement.
It is also contended that the last payment made by the
developer or completion of the building has no bearing on the
issue. As an alternative, it is submitted by the Commissioner that
capital gains accrue in the year in which different instalments of
amounts have been received by the assessee. In the course of
arguments, the departmental representative contended that the
transfer under sec. 2(47)(v) takes place in the instant case on the
date of execution of agreement itself because under clause 27, it
cannot be cancelled by any party. Thus, the Revenue's stand is
not consistent and clear. Probably, the Department wants to play
safe in the wake of subtle legal issue that has arisen.
5. Following revised questions were formulated by the applicant:
i. Whether on the facts and in the circumstances of the
case, the capital gains accrue/arise to the applicant(assessee) during the financial year 2006-07 andaccordingly subject to tax in the assessment year 2007-08 on grant of CLU (Change of Land Use) as detailed inthe letter dated 8.3.2006 (Annexure P-3)?
ii. Whether on the facts and in the circumstances of thecase, the capital gains accrue/arise to the applicant(assessee) during the financial year 2007-08 and
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accordingly subject to tax in the assessment year 2008-09 on completion of construction and on receipt of finalpayment of installment when the share of the Developeris eligible for transfer as agreed vide CollaborationAgreement dated 8.6.2005?
iii. Whether on the facts and in the circumstances of thecase, the capital gains accrue/arise to the applicant(assessee) partly during the assessment year 2006-07,assessment year 2007-08 and the assessment year2008-09 respectively, on receipt of consideration amountin proportion to its payment by the Developer, who isallowed to carry out the development activity after grantof CLU and other required permissions?
[The 4th question opening with the words any otherquestion .. is too general and omnibus and neednot be referred to]
Relevant provisions of I.T.Act
Section 45
6. In order to decide the issue, the relevant provisions of the
Income-tax Act, 1961 (for short the Act) should be noticed. Section
45 of the Act is the charging section in regard to capital gains. It lays
down that any profit or gains arising from the transfer of a capital asset
effected in the previous year, shall be deemed to be the income of the
previous year in which transfer takes place. The Section can be
analyzed thus:
(a) transfer of a capital asset effected in the previous year,
(b) resultant profits or gains from such transfer,
(c) those profits or gains would constitute the income of theassessee/transferor
(d) such income shall be deemed to be the income of thesame previous year in which the transfer had takenplace.
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6.1. Two aspects may be noted at this juncture. Firstly, the
expression used is arising which is not to be equated with the
expression received. Both these expressions and in addition thereto,
the expression accrue are used in the Income-tax Act either
collectively or separately according to the context and the nature of
charging provision. The second point which deserves notice is that by
a deeming provision, the profits or gains that have arisen would be
treated as the income of the previous year in which the transfer took
place. That means, the income on account of arisal of capital gain
should be charged to tax in the same previous year in which the
transfer was effected or deemed to have taken place.
7. The effect and ambit of the deeming provision contained in
Sec.45 has been considered in decided cases and leading text books.
The following statement of law in Sampath Iyengars Commentary (10th
Edition Revised by Shri S. Rajaratnam) brings out the correct legal
position :
Section 45 enacts that the capital gains shall by
fiction be deemed to be the income of the previous year in
which the transfer took place. Since this is a statutory
fiction, the actual year in which the sale price was received,
whether it was one year, two years, three years, four years
etc. previous to the previous year of transfer, is beside the
point. The entirety of the sum or sums received in any
earlier year or years would be regarded as the capital gains
arising in the previous year of transfer.
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.In the words of section 45, the capital gains
arising from the transfer shall be the income of the previous
year in which the transfer took place. So, the payments of
consideration stipulated to be paid in future would have to be
attributed, by statutory mandate, to the year of transfer, even
as payments made prior to the year of transfer.
7.1. This Authority in its ruling in the case of Anurag Jain, In re1
had taken the same view. After referring to sections 45, 48 and
54EB of the I.T Act, SSM Quadri J. observed : A plain reading of
these provisions makes it clear that the germane condition to claim
the relief, provided therein, from payment of tax on capital gains, is
that the assessee should invest the whole or any part of capital
gains, as the case may be, in the long-term specified asset within
six months after the date of transfer of the capital asset. Where the
full value of the consideration is paid before or immediately on
transfer of the capital asset in the previous year in which such
transfer takes place, no difficulty arises. Where, however, the full
value of the consideration is agreed to be paid at a future date or is
paid in instalments over a period, after the previous year in which
the transfer of the capital asset took place, the capital gains would,
none the less, be treated as income of the previous year in which
the transfer took place irrespective of the actual date of payment of
the consideration and any hardship that may be caused to the
transferor unless otherwise provided in the Act. In such a case the
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assessee obviously cannot avail of the benefit of the
aforementioned provisions. In the absence of any provision in the
Act ameliorating the hardship caused in a case of payment of the
full value of the consideration beyond the relevant previous year,
there is nothing which this Authority can do to relieve the assessee
of the hardship.
7.2. In T.V. Sundaram Ayyangar and Sons Ltd. vs CIT2, a
Division Bench of Madras High Court while construing section 12B
of the Income Tax Act, 1922 clarified the import of the expression
arise as follows :
Section 12B does not require that profits should have
been actually received. It is sufficient if they have arisen.
Throughout the Income-Tax Act the words accrue and
arise are used in contradistinction to the word receive and
indicate a right to receive. This was explained by Fry, L.J.,
in Colquhoun v. Brooks. The learned Judge observed :
I think, therefore, that the words arising or accruing
are general words descriptive of a right to receive profits.
See also Commissioner of Income-Tax v. Anamallais
timber Trust Ltd. To attract the operation of section 12B it is
therefore sufficient if the profits arose. They need not have
been actually received.
Thus the criterion of right to receive the profits/gains was
applied in that case.
1(2005) 277 ITR Page 1
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7.3. The legal position does not therefore admit of any doubt that the
actual receipt of the entire sale consideration during the year of
transfer is not necessary for the purpose of computing capital gains.
Section 2(47)
8. The other crucial provision is section 2(47) which contains the
definition of the term transfer in relation to a capital asset. It is an
inclusive definition, which takes within its fold not only the transfers that
are recognized or understood as such under the general law governing
transfer of property but also other transactions that are alien to the
normal concept of transfer. The definition of transfer was widened
with effect from 1.4.1988. Two clauses were added to the inclusive
definition of transfer which pertain to transactions in immoveable
property. They are clauses (v) and (vi) which read as follows:
Transfer in relation to a capital asset, includes
(i) to (iv) : xx xxx xx xx xx xx
(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 section
53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or
acquiring shares in, a cooperative society, company or other
association of persons or by way of any agreement or any
arrangements or in any other manner whatsoever) which has
the effect of transferring, or enabling the enjoyment of, any
immovable property.
237 ITR Page 26
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The object and analysis of Sec. 2(47)(v)
8.1. The purpose of introducing clause (v) in conjunction with clause
(vi) is to widen the net of taxation so as to include transactions that
closely resemble transfers but are not treated as such under the
general law. For instance, there is no valid sale under the Transfer of
Property Act unless a deed of conveyance is duly executed and
registered. An agreement of sale by itself does not create any right or
interest in or over the immovable property (vide S.54 of T.P.Act). A
long line of pronouncements under the Income-tax Act have taken the
view that unless and until a sale deed is executed and registered,
transfer cannot be said to have been effected and consequently,
capital gains do not arise. So also in the case of a development
agreement pure and simple, there is no transfer according to the
generally accepted connotation of the term transfer because the
developer develops the land of the owners and raises constructions
thereon and by an inter se arrangement, the owner directly or through
the agent (developer) executes the transfer deeds to the buyers of
dwelling units over a period of time. The resultant situation was that
the levy and assessment of tax on the income attributable to capital
gains had to be postponed indefinitely. Avoidance or postponement of
tax on capital gains by adopting devices such as the enjoyment of
property in pursuance of irrevocable power of attorney or part
performance of a contract of sale was sought to be arrested by
introducing the two clauses viz. (v) and (vi) in section 2(47). A
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reference to the CBDTs Circular No. 495 dated 22.8.87 provides an
insight into the background and objective of the said clauses :
11.1 The existing definition of the word transfer in section
2(47) does not include transfer of certain rights accruing to a
purchase, 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 theprivileges of ownership without transfer of title in the building
and are a common mode of acquiring flats particularly in multi-
storied construction 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 section 53A of the Transfer of Property Act, 1882. Now
sub-clause (v) and (vi) have been inserted in section 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-clause (vi) of section 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 normally
where transfer of ownership is legally not permitted. A person
holding the power of attorney is authorized the powers of owner,
including that of making construction. The legal ownership in
such cases continues to be with the transferor.
9. We are concerned here with clause (v) and it is this provision
that is invoked by both sides. In order to be transfer within the
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meaning of clause (v), there must be a transaction under which the
possession of immoveable property is allowed to be taken or allowed
to be retained. Secondly, such taking or retention of possession as is
well known is a facet of the equitable doctrine of part performance of
contract falling within the scope of section 53A of the Transfer of
Property Act. Section 53A is not a source by which title to immoveable
property could be acquired but it only serves as a shield to defend
ones lawful possession obtained pursuant to a contract for transfer of
immoveable property for consideration. The following passage from
the decision of Supreme Court in S. Govind Rao v.Devi Sahai3
highlights the requisite conditions for the applicability of section 53A. :
To qualify for the protection of the doctrine of part performance
it must be shown that there is a contract to transfer for
consideration immovable property and the contract is evidenced
by a writing signed by the person sought to be bound by it andfrom which the terms necessary to constitute the transfer can be
ascertained with reasonable certainty. These are pre-requisites
to invoke the equitable doctrine of part performance. After
establishing the aforementioned circumstances it must be
further shown that a transferee had in part performance of the
contract either 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. The acts claimed to be
in part performance must be unequivocally referable to the pre-
existing contract and the acts of part performance must
3AIR 1982 SC 989
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unequivocally point in the direction of the existence of contract
and evidencing implementation or performance of contract.
Two view points
10. As to the date of deemed transfer under clause (v), two
extreme view-points are put forward on behalf of the applicant and
the department. Whereas it is the contention of the departmental
representative that the date of execution of the Supplementary
agreement is itself the date of transfer giving rise to capital gains, it
is the case of the applicant that the transfer takes place only after
the full consideration of Rs. 42 crores is received by the owners
and the developer is in a position to demand transfer of title in his
favour. According to the authorized representative, till the last
installment is paid, there is no transaction in the eye of law which
authorizes the developer to retain possession.
11. We cannot subscribe to any of these extreme but plausible
views canvassed by the representatives of the applicant and the
respondent.
An insight into Clause (v) of Sec. 2(47) for determination the date of
transfer
12. There is no doubt that the agreement to transfer the entire
right, title and interest of the owners for a consideration specified in
the agreement and in accordance with the terms thereof answers
the description of a contract falling within the scope of section 53-A
of the Transfer Property Act. The crucial question then arises at
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what point of time the transaction allowing the taking of possession
in part-performance of such contract had taken place. Incidentally
it raises the question as to how the expression transaction is to be
understood. One view that could possibly be taken is that the
execution of the agreement under the terms of which the purchaser
is enabled to take possession even before the execution of
conveyance deed is itself the transaction contemplated by section
2(47)(v). It is enough if the agreement/contract falling within the
description of Section 53-A provides for taking possession at some
stage before the ownership is transferred in a manner known to
law. This interpretation has no doubt the merit of certainty. Take
the date of execution of agreement as the relevant date of transfer
and pay the tax on capital gains that would arise based on the price
stipulated in the agreement that is what this interpretation leads
to. But there are other aspects, which cannot be ignored.
12.1. It is usual that in an agreement for transfer of immoveable
property, there will be a specific provision for passing on the
possession at a particular stage. For that reason, it cannot be said
without anything more that the agreement itself is the transaction
involving allowing of the possession to be taken or that the
agreement and such transaction simultaneously take place. If the
agreement which provides for possession to be given at a future point
of time is to be regarded as transfer under clause (v), nothing would
have been easier than to say so in explicit terms and it is not at all
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necessary to refer to a transaction that gives possessory rights to the
transferee. The legislature advisedly referred to any transaction with
a view to emphasize that it is not the factum of entering into agreement
or formation of contract that matters, but it is the distinct transaction
that gives rise to the event of allowing the contractee to enter into
possession that matters. That transaction is identifiable by the terms
of the agreement itself and it takes place within the framework of the
agreement. In other words, an agreement/contract may be the broad
framework within which the transaction involving taking possession
could take place as per the terms thereof. But, the agreement/contract,
on its own may not allow possession to be taken instantaneously, but it
may spell out a transaction by which the possession will pass at the
future point of time. Under the terms of a contract, normally, a series
of acts or transactions that would at one point of time or the other take
place in furtherance of the contract will be recorded. What is
contemplated by section 2(47)(v) is a transaction which has direct and
immediate bearing on allowing the possession to be taken in part
performance of the contract of transfer. It is at that point of time that
the deemed transfer takes place. True, entering into the
agreement/contract is a transaction in a broad sense but, when the
agreement envisages an event or act on the happening or doing of
which alone the possession is allowed to be taken in part performance
of the contract, the transaction of the nature contemplated by clause
(v) cannot be said to have occurred before that date. The date of
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entering into the agreement cannot be the determining factor in such a
case, even though the agreement envisages a future transaction
pursuant to which possession will be allowed to be taken. However, it
needs to be clarified that it is not possible to lay down a rigid
proposition that an agreement as such can never be construed as a
transaction allowing possession to be taken in part-performance. For
instance, the agreement may provide for immediate transfer of
possession of the immovable property contracted to be sold. That may
happen where the transferor receives substantial consideration on the
date of agreement itself and puts the transferor in possession
immediately. In this context, the observations of a Division Bench of
Bombay High Court speaking through S.H. Kapadia, J in Chaturbhuj
Dwarkadas vs CIT4 are apposite: We quote the same:
If the Contract, read as a whole, indicates passing of or transferring
of complete control over the property in favour of the developer, then
the date of the contract would be relevant to decide the year of
chargeability
That was also a case of development agreement. On the facts, the
Revenues stand that the date of execution of agreement should be the
relevant date of transfer under clause (v) was not accepted.
Meaning of possession and how should it be understood in the context of clause (v)
13. The next question is, in what sense we have to understand the
term possession in the context of clause (v) of section 2(47). Should
4 260 ITR 491
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it only mean the right to exclusive possession which the transferee
can maintain in his own right to the exclusion of everyone including the
transferor from whom he derived the possession? Such a criterion will
be satisfied only after the entire sale consideration is paid and the
transferor has forfeited his right to exercise acts of possession over the
land or to resume possession. In our view, there is no warrant to place
such a restricted interpretation on the word possession occurring in
clause (v) of section 2(47). Possession is an abstract concept. It has
different shades of meaning. It is variously described as a
polymorphous term having different meanings in different contexts (per
R.S. Sarkaria, J in Supdt and Legal Remebrancer, W.B. vs Anil Kumar)5 and
as a word of open texture (see Salmond on Jurisprudence, Para 51,
Twelth Edition, Indian reprint). Salmond observed : to look for a
definition that will summarize the meanings of the term possession in
ordinary language, in all areas of law and in all legal systems, is to ask
for the impossible. In the above case of Anil Kumar, Sarkaria, J.
speaking for a 3 Judge Bench also referred to the comments of Dias
and Hughes in their book on Jurisprudence that if a topic ever suffered
too much theorizing it is that of possession. Much of the difficulty is
caused by the fact that possession is not a pure legal concept, as
pointed out by Salmond. The learned Judge then explained the
connotation of the expression possession by referring to the well
known treatises on Jurisdprudence:
5 (1979) 4 SCC 274
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Possession, implies a right and a fact : the right to enjoy
annexed to the right to property and the fact of the real intention.
It involves power of control and intent to control. (see Dias and
Huges)
14. .
15. While recognizing that possession is not a purely legal
concept but also a matter of fact, Salmond (12th Ed., 52)
describes possession, in fact, as a relationship between a
person and a thing. According to the learned author, the test for
determining whether a person is in possession of anything is
whether he is in general control of it.:
13.1. In Salmonds Jurisprudence, at para 54, we find an illuminating
discussion on immediate and mediate possession. The learned
author states in law one person may possess a thing for and on
account of some one else. In such a case the latter is in possession
by the agency of him who so holds the thing on his behalf. The
possession thus held by one man through another may be termed
mediate, while that which is acquired or retained directly or personally
may be distinguished as immediate or direct. Salmond makes
reference to three types of mediate possession. In all cases of
mediate possession, two persons are in possession of the same thing
at the same time. An allied concept of concurrent possession has also
been explained in para 55 of Salmonds Jurisprudence in the following
words:
It was a maxim of the civil law that two persons could not be in
possession of the same thing at the same time. As a general
proposition this is true : for exclusiveness is of the essence of
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possession. Two adverse claims of exclusive use cannot both
be effectually realized at the same time. Claims, however,
which are not adverse, and which are not, therefore, mutually
destructive, admit of concurrent realization. Hence, there are
several possible cases of duplicate possession.
1. Mediate and immediate possession coexist in respect of the
same thing as already explained.
2. Two or more persons may posses the same thing in
common, just as they may owe it in common ..
13.2. On a fair and reasonable interpretation and on adopting the
principle of purposive construction, it must be held that possession
contemplated by clause (v) need not necessarily be sole and exclusive
possession. So long as the transferee is, by virtue of the possession
given, enabled to exercise general control over the property and to
make use of it for the intended purpose, the mere fact that the owner
has also the right to enter the property to oversee the development
work or to ensure performance of the terms of agreement does not
introduce any incompatibility. The concurrent possession of the owner
who can exercise possessory rights to a limited extent and for a limited
purpose and that of the buyer/developer who has general control and
custody of the land can very well be reconciled. Clause (v) of section
2(47) will have its full play even in such a situation. There is no
warrant to postpone the operation of clause (v) and the resultant
accrual of capital gain to a point of time when the concurrent
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possession will become exclusive possession of developer/transferee
after he pays full consideration.
13.3. Further, if possession referred to in clause (v) is to be
understood as exclusive possession of the transferee/developer,
then, the very purpose of the amendment expanding the definition of
transfer for the purpose of capital gains may be defeated. The
reason is this: the owner of the property can very well contend, as is
being contended in the present case, that the developer will have
such exclusive possession in his own right only after the entire
amount is paid to the owner to the last pie. There is then a possibility
of staggering the last installment of a small amount to a distant date,
may be, when the entire building complex gets ready. Even if some
amount, say 10 per cent, remains to be paid and the
developer/transferee fails to pay, leading to a dispute between the
parties, the right to exclusive and indefeasible possession may be in
jeopardy. In this state of affairs, the transaction within the meaning
of clause (v) cannot be said to have been effected and the liability to
pay capital gains may be indefinitely postponed. True, it may not be
profitable for the developer to allow this situation to linger for long as
the process of transfer of flats to the prospective purchasers will get
delayed. At the same time, the other side of the picture cannot be
over-looked. There is a possibility of the owner with the connivance
of the transferee postponing the payment of capital gain tax on the
ostensible ground that the entire consideration has not been received
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and some balance is left. The mischief sought to be remedied, will
then perpetuate. We are, therefore of the view that possession
given to the developers need not ripen itself into exclusive
possession on payment of all the instalments in entirety for the
purpose of determining the date of transfer.
13.4. While on the point of possession, we would like to clarify one
more aspect. What is spoken to in clause (v) of section 2(47) is the
transaction which involves allowing the possession to be taken. By
means of such transaction, a transferee like a developer is allowed
to undertake development work on the land by assuming general
control over the property in part performance of the contract. The
date of that transaction determines the date of transfer. The actual
date of taking physical possession or the instances of possessory
acts exercised is not very relevant. The ascertainment of such date,
if called for, leads to complicated inquiries, which may frustrate the
objective of the legislative provision. It is enough if the transferee
has, by virtue of that transaction, a right to enter upon and exercise
acts of possession effectively pursuant to the covenants in the
contract. That tantamounts to legal possession. We are referring to
this aspect because the authorized representative has submitted
when he appeared before us in the last week of May, 2007 that even
by that date the development work could not be commenced for want
of certain approvals, and therefore, the developer was not willing to
take possession of the land. Such an unsubstantiated statement
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which is not found in the original application or even written
submissions filed earlier need not be probed into especially when it is
not his case that the developer was not allowed to take possession in
terms of the agreement.
When the transfer as per clause (v) of sec. 2(47) took place in the
present case
14. In the light of the above discussion and interpretation placed
on Section 2(47)(v), we have to consider when in the instant case,
the transaction amounting to transfer took place. Before considering
this crucial point, it is appropriate at this juncture to take note of the
important events that occurred subsequent to the execution of the
agreement-dated 15.9.2005.
14.1. Provisional licence (called as letter of intent by the
applicant) was issued by the Director of Town and Country
Planning, Haryana, on 8.3.2006. Final licence valid upto 25.5.2008
was issued on 26.5.2006. Irrevocable General Power of Attorney
was executed on 8.5.2006. An amount of Rs.30 crores was
received in five installments i.e. 8.3.2006, 8.6.2006, 8.9.2006,
8.12.2006 and 8.3.2007. This is apart from Rs. 2 crores received
earlier under Collaboration Agreement.
15. First we have to see when under the terms of the contract,
the applicant owners agreed to hand over effective possession to
the developer. The letter of Intent (LOI for short) spoken to in
the Collaboration Agreement is a licence granted by the Director of
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Town and Country Planning in favour of the owners to develop a
residential group housing colony on the land in question. Such
licence has to be issued under the provisions of Haryana
Development and Regulation of Urban Areas Act, 1975 and the
Rules. 8th March, 2006 is the date on which such licence was
issued. It is in the nature of a provisional licence as it is stated
therein that a licence was proposed to be granted to the owners on
fulfillment of certain conditions and pre-requisites within prescribed
time in order to quality for the final grant of licence. Substantial
amounts were to be paid to the concerned authorities towards
various charges and the licensee was required to furnish bank
guarantee on account of internal development charges. The
licensee had to withdraw the case pending in the High Court which
seems to relate to a dispute pertaining to acquisition of a part of the
land. It is only then that final licence could be granted. Such
licence was in fact granted on 26.5.2006. It may be noted that 8th
March, 2006 (the date of LOI) falls within the financial year 2005-06
which is also the year in which the two agreements were entered
into. The final licence date falls within the next year. Now, we shall
consider whether by virtue of the stipulation in para 18 of the
Collaboration Agreement, the right of possession has been
conferred on the developer on the date on which the so-called
letter of intent was issued.
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15.1. It is stated in para 18 of Collaboration Agreement that on
issuance of Letter of Intent, the owners will allow and permit the
developer to enter upon and survey the land, erect site/sales office,
carry out site development work and do activities for advertising,
sales promotion, construction, landscaping, etc. and any other
activity incidental to marketing, construction, development,
execution and completion of the project on the land. Though this
clause, read in isolation, may be suggestive of passing on
possession (in the sense in which we have explained earlier) on the
date of issuance of Letter of Intent itself, it is really not so.
Para 18, in our view, should be read along with and subject to
para 15. Under para 15, it is stipulated that on fulfillment of the
requirements laid down in the Letter of Intent, which is a provisional
licence, the owners should execute an irrevocable General Power
of Attorney (GPA) in favour of the developers or their nominees
inter-alia authorizing them to book and sell the dwelling units falling
to their share. Thus, only after the deposit of requisite charges with
the Urban Development authorities as per the conditions stipulated
in the provisional licence and the developer taking necessary steps
pursuant to the provisional licence that the general power of
attorney will be executed. Para 16 though not directly on point
gives an indicia that the deposit of various charges in terms of the
LOI within the prescribed time is considered to be an important
aspect that sets in motion various other acts directed towards the
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implementation of the agreement. Clause 16 enjoins that owners
shall file an application in the High Court for withdrawal of the Writ
Petition (relating to a part of this land) not merely after the issuance
of LOI but only after the developers deposit the requisite charges
as per the LOI. Para 14 makes explicit what is really implicit that
the development of land and construction will start after securing
the licenses and permissions. In this background, para 18, at best,
grants licence to the developer to enter upon the land and to do
certain preliminary work such as survey, setting up of site/sales
office and make necessary arrangements required for future
construction and marketing. It cannot be construed as an authority
to the developer to get into effective possession for taking up
construction work straightway. It cannot be said to be the intention
of the parties that at the moment the provisional licence is received,
the owners should allow the developer to take physical possession
of the land irrespective of whether there is substantial compliance
with the conditions laid down in the provisional licence. Para 15
negates any such inference. The mere receipt of provisional
licence (LOI) and the limited authority given under para 18 cannot
be regarded as a transaction that allows possession to be taken by
the developer in terms of the contract. We are of the view that the
crucial event or step that tantamounts to a transaction allowing the
possession to be taken is the execution of irrevocable GPA in
accordance with what is laid down in para 15 of the collaboration
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agreement. Such GPA was executed by the owners in favour of
the developer on 8.5.2006, i.e. during the financial year subsequent
to the year of agreement. . What, then, is provided for under that
GPA? That is really crucial.
Terms of GPA & how it is crucial
15.2. A copy of the irrevocable GPA executed in terms of para
15 of the Agreement has been furnished by the applicant. It
authorizes the developers: (i) to enter upon and survey the land,
prepare the layout plan, apply for renewal/extension of licence,
submit the building plans for sanction of the appropriate authority
and to carry out the work of development of a multi-storied
residential complex. (ii) to manage and control, look after and
supervise the property in any manner as the attorney deems fit and
proper. (iii) to obtain water, sewage disposal and electricity
connections. The developer is also authorized to borrow money for
meeting the cost of construction on the security and mortgage of
land falling to the developers share. The other clauses in the GPA
are not relevant for our purpose. The GPA unequivocally grants to
the developer a bundle of possessory rights. The acts of
management, control and supervision of property are explicitly
mentioned. It is fairly clear that the GPA is not a mere licence to
enter the land for doing some preliminary acts in relation to the
development work. The power of control of the land which is an
incidence of possession as explained Suprahas been conferred on
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the developer under this GPA. The developer armed with GPA
cannot be regarded merely as a licensee or an agent subject to the
control of the owners. His possession cannot be characterized as
precarious or tentative in nature. The fact that the agreement
describes the GPA as irrevocable and an express declaration to
that effect is found in the GPA itself is not without significance.
Having regard to the second and supplemental agreement by virtue
of which the entire developed property including the owners share
has been agreed to be sold to the developer or his nominees for
valuable money consideration, the developer has a vital stake in
the entire property. As far as the quality of possession is
concerned, he is on a higher pedestal than a developer who
apportions built up area with the owner. Even if he is an agent in
one sense in the course of developing the land, that agency is
coupled with interest. For these reasons, the pre-fix irrevocable is
deliberately chosen. As discussed earlier, the owners limited
right to enter the land and oversee the development work is not
incompatible with the developers right of control over the land
which he derives from the GPA. Exclusive possession, as already
pointed out, is not necessary for the purpose of satisfying the
ingredients of clause (v) of section 2(47). We are therefore, of the
view that the irrevocable GPA executed by the owners in favour of
the developer must be regarded as a transaction in the eye of law
which allows the possession to be taken in part-performance of the
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contract for transfer of the property in question. That transaction
took place in the financial year 2006-2007. Not only that, during
that financial year, the final licence/change of land use permission
was also obtained and moreover the owners received substantial
consideration to the tune of Rs. 30 crores. We, therefore, hold that
the transfer within the meaning of clause (v) of section 2(47) of
Income Tax Act took place during the financial year 2006-2007
corresponding to the assessment year 2007-2008 and the
entire capital gains including that attributable to the installment
amount remaining unpaid by 31.3.2007 has arisen during the
financial year 2006-2007 (assessment year 2007-2008).
Transaction & Involving - meaning
16. To reinforce our conclusion, it may not be out of place to
turn to some dictionaries which explain the meaning and ambit of
the words transaction and involving. In The Law Lexicon by P
Ramanatha Aiyer (Reprint Edition 2002), it is stated that
transaction has a very wide meaning and that in the ordinary
sense of the word is some business or dealing which is carried on
or transacted between two or more persons. A passage in AIR
1950 (Madras) 486 is quoted in that law dictionary. It says that the
term transaction in the realm of law bears, as pointed out in the
Concise Oxford dictionary (Third Edition), the sense of any act
affecting legal rights. In Blacks Law dictionary (7th Edition), the
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meanings given are: (1) the act or an instance of conducting
business or other dealings (2) something performed or carried out;
a business agreement or exchange, (3) any activity involving two or
more persons. Some of the meanings given in NEW Shorter
Oxford dictionary are:
1 .. an agreement, a covenant. 2. The action of passing or
making over a thing from one person to another. 3.
..carrying on or completion of business.
16.1. The expression involve according to the New Shorter
Oxford dictionary means, unfold, envelope include, contain,
comprehend. The Supreme Court, in the case of Addl. CIT vs.
Surat Art Silk Cloth ManufacturersAssociation6, after referring to
almost the same dictionary meanings interpreted the word
involving occurring in the phrase involving carrying on of any
activity for profit, thus, The activity for profit must, therefore, be
intertwined or wrapped up with or implied in the purpose of the
trust or institution or in other words it must be an integral part of
such purpose. The word involving in the expression involving the
actual delivery of possession thereof was construed to mean
resulting in (vide the decision of Supreme Court in Dunichand vs.
Bhuwalka Bros7.
6121 ITR 1
7 AIR 1955 SC 182
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16.2. Viewed in the light of the above meanings assigned to the
two words transaction and involving, there should be no difficulty
in holding that the execution of irrevocable GPA as a part of the
covenant in the transfer agreement is a transaction under which
possession is allowed to be taken by the transferee. Allowing the
transferee to enter into possession of land and to have general
control and management of the property is an integral part of that
GPA and as a result of such transaction possessory rights were
conferred on the developer. It was an act done in part-performance
of the contract.
Applicants contention reg. payment of entire sale price
17. As already noted, it is the contention of the applicant that
until and unless the entire sale consideration upto the last
installment is paid the developer will not be in a position to demand
the transfer of title to the land in his favour or in favour of his
nominee and therefore there is no transfer even according to the
expanded definition of transfer contained in clause (v). According to
the learned authorized representative, the possession which the
developer is authorized to take under the terms of the agreement
coupled with the GPA must be such that could be retained by the
developer. He argues that such retention is possible only when the
entire sale consideration is received by the owners. Stress is laid
down on the word retain in clause (v) and the argument is built up
on the strength of para 10 of the Supplemental Agreement. Para 10
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(already referred to in brief) provides for the consequences of delay
or default in making payments by the developer. In such an event,
it is stipulated that the owners shall be at liberty to issue a notice to
the developer giving 30 days time to either fulfill his obligations or
terminate the Collaboration agreement. In case of such
termination, the developer should forthwith cease all activities on
the land and remove themselves and their agents therefrom.
Though the authorized representative has not specifically said so,
in effect and in substance, he wants to say that the possession
which the developer initially gets is only permissive in nature and it
can only assume exclusive, indefeasible character on the payment
of entire amount. Till then, his possession is risky and liable to be
resumed any time. Such type of possession is not what is
contemplated by clause (v) of section 2(47) according to the
authorized representative. We have already pointed out that
possession given to the developers in terms of irrevocable GPA is
not merely permissive or precarious in nature, and that exclusive
possession akin to what is held by an absolute owner is not
required. The possibility of evicting the defaulting developer as per
law and in accordance with the stipulation in Para 10 does not
make a dent on the quality of possession obtained/obtainable by
means of GPA executed as per the terms of the Agreement. The
nature and character of possession which the developer is entitled
to obtain under the GPA cannot be assessed merely by reference
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to the consequences mentioned in para 10 which is a clause meant
to ensure due payment of instalments. In so far as the developer is
ready and willing to perform his part of the contract, that para does
not come into play at all. Coming to the expression retain in
clause (v), the contention of the authorized representative is rather
misconceived. The expression retain is normally meant to apply to
the case of transferee who is already in possession of the property
before the contract is entered into. If in part performance of the
contract such transferee is allowed to continue in possession, that
would fall within the scope of clause (v). That expression which
reflects the language of later part of the second limb of Sec.53-A is
not of much relevance in the context of the present case. The
learned authorized representative also sought to place reliance on
Para 11, which says that on receiving all payments within the due
date or the extended date, the owners shall transfer all rights and
interest to the developer along with the proportionate land. The
said clause is of no avail to the applicant. The fact that legal
ownership continues to remain with the owners or that the transfer
of title cannot be demanded by the developer till he pays the entire
consideration is really not germane to the applicability of clause (v)
of section 2(47). The very purpose of expanding the definition of
transfer will be frustrated if the test of ownership and title is applied.
The argument of the authorized representative also fails to take into
account the well settled legal position that the payment of entire
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consideration is not necessary to give legal recognition to the
possession secured by way of part performance of the contract.
The readiness and willingness of the transferee who is put in
possession to fulfill his obligations is sufficient to invoke the
doctrine of part performance.
17.1. For all these reasons, the contention of the authorized
representative of the applicant cannot be sustained.
One point of concern
18. We have to advert to one aspect which has caused some
concern to us. What will happen if during the year following the one
in which the deemed transfer took place, the proposed venture
collapses for reasons such as refusal of permissions, the developer
facing financial crunch etc. By that time, the owner would have
received only a part of the agreed consideration, but he is obliged
to file the return showing the entire capital gain based on the full
sale price whether or not received during the year of deemed
transfer. In such an eventuality, hardship may be caused to the
owner who would have paid full tax. No doubt, such a situation
could be avoided if the contention of the applicant is accepted. On
deep consideration, however, we find that the construction of
relevant provision should not be controlled by giving undue
importance to such hypothetical situations. Normally, the owner
executes power of attorney or does similar act to let the transferee
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take possession only after the basic permissions are granted and is
satisfied about the ability of transferee/developer to fulfill the
contract. Inspite of that, if such rare situations take place, the
owner/transferor will not be without remedy. He can file a revised
return and make out a case for exclusion or reduction of income.
However, if the time-limit for filing revised return expires, the
difficulty will arise. It is for the Parliament or the Central
Government to provide a remedy to the assessee in such cases.
Moreover, the other side of the picture as depicted in para 13.3
(supra) should also be kept in view.
DRs contention re: para 27 of the Agreement
19. The Departmental Representative relied on para 27 of the
Collaboration Agreement which says that both the owners and
developers will not cancel or back out from the agreement under
any circumstances having regard to considerable expenditure and
efforts involved on the part of the developers and the owners land
being tied up in the project. The learned DR submits that the
agreement is firm and irrevocable and therefore the date of entering
into such agreement can be legitimately treated as the date of
transfer. It is difficult to countenance such argument. First of all, it
has no bearing on the interpretation of statutory provision viz.
clause (v) of section 2(47); secondly the said stipulation in para 27
is merely a re-statement of the obvious - that the parties should
respect and abide by the agreement. It does not place the
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agreement in the instant case on a higher footing than any other
agreement for transfer of immoveable property. In fact, in the same
para, the last sentence provides for the consequences of breach by
stating that the parties, besides other rights, will be entitled to get
the agreement enforced through a suit for specific performance at
the risk of the defaulting party. We find no merit in the argument of
the Departmental Representative.
Summary
20. The following is the summary of conclusions:
1. Where the agreement for transfer of immovable
property by itself does not provide for immediate transfer of
possession, the date of entering into the agreement cannot be
considered to be the date of transfer within the meaning of
clause (v) of Section 2(47) of the Income-tax Act.
2. To attract clause (v) of section 2(47), it is not
necessary that the entire sale consideration upto the last
installment should be received by the owner.
3. In the instant case, having regard to the terms of two
agreements and the irrevocable GPA executed pursuant to the
agreement, the execution of GPA shall be regarded as the
transaction involving the allowing of the possession of land to
be taken in part performance of the contract and therefore, the
transfer within the meaning of section 2(47)(v) must be
deemed to have taken place on the date of execution of such
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39
GPA. The irrevocable GPA was executed on 8.5.2006 i.e.
during the previous year relevant to the assessment year
2007-08 and the capital gains must be held to have arisen
during that year. Incidentally, it may be mentioned that during
the said year, i.e. financial year 2006-07, a final licence was
granted and the applicant/owners received nearly 2/3rd of the
consideration.
4. Once it is held that the transaction of the nature
referred to in clause (v) of section 2(47) had taken place on a
particular date, the actual date of taking physical possession
need not be probed into. It is enough if the transferee has by
virtue of that transaction a right to enter upon and exercise the
acts of possession effectively.
Ruling
21. In view of the foregoing discussion, we answer the first
question in the affirmative; that is to say, the capital gains arise
during the financial year 2006-07 and shall be subjected to tax for
the assessment year 2007-08. Consequentially, questions No. 2
and 3 are answered in the negative.
Accordingly, the ruling is given.
Sd/- Sd/-(A. SINHA) (P.V. REDDI)MEMBER CHAIRMAN
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GPA. The irrevocable GPA was executed on 8.5.2006 i.e.
during the previous year relevant to the assessment year
2007-08 and the capital gains must be held to have arisen
during that year. Incidentally, it may be mentioned that during
the said year, i.e. financial year 2006-07, a final licence was
granted and the applicant/owners received nearly 2/3rd of the
consideration.
4. Once it is held that the transaction of the nature
referred to in clause (v) of section 2(47) had taken place on a
particular date, the actual date of taking physical possession
need not be probed into. It is enough if the transferee has by
virtue of that transaction a right to enter upon and exercise the
acts of possession effectively.
Ruling
21. In view of the foregoing discussion, we answer the first
question in the affirmative; that is to say, the capital gains arise
during the financial year 2006-07 and shall be subjected to tax for
the assessment year 2007-08. Consequentially, questions No. 2
and 3 are answered in the negative.
Accordingly, the ruling is given.
Sd/- sd/-
(A. SINHA) (P.V. REDDI)MEMBER CHAIRMAN
F.No.AAR/724/2006 Dated: 06.09.2007
(A) This copy is certified to be a true copy of the advance ruling and is sent to:1. The Applicant.2. The Commissioner of Income-tax-II, Chandigarh.3. The Joint Secretary (FT&TR-II), M/Finance, CBDT, Bhikaji Cama Place, New Delhi.4. The Joint Secretary (FT&TR-II), M/Finance, CBDT, Bhikaji Cama Place, New Delhi.
5. The Guard file.(B) In view of the provisions contained in Section 245S of the Act, the ruling should not be given forpublication without obtaining prior permission of the Authority.
(Batsala Jha Yadav)Addl. Commissioner of Income-tax
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