Real Estate – October – 2013
Supreme Court's Judgements
- M/s. Larsen &Toubro Limited &Anr. v. State of Karnataka &Anr., decided on September 26, 2013.
Facts:
The
special leave petitions were filed in order to consider the question that was
referred by a two-Judge Bench of the Supreme Court in the 2007 judgment of
Larsen and Toubro v. State of Karnataka[1]. In the referral order dated August
19, 2008, the two-judge bench after noticing the relevant provisions of the
Karnataka Sales Tax Act, 1957 (“Karnataka Act”) made the reference to the
larger Bench to consider whether the tripartite agreement can be interpreted as
works contracts, as defined under the Karnataka Act.
Larsen
&Toubro (“L&T”) had entered into development agreements with
Mr. Dinesh Ranka, owner of certain parcels of land for construction of a
multi-storeyed apartment complex. As per the agreement, the owner was required
to contribute his land and L&T was required to construct the apartment.
After development, 25% of the total space was agreed to be conveyed to the
owner, whereas the remaining 75% was agreed to be transferred to L&T. A
power of attorney was executed by the owner in favour of L&T to enable
it to negotiate and book orders from the prospective purchasers for allotment
of built up area. Accordingly, L&T entered into agreements of sale with
the intended purchasers. The agreements provided that on completion of the construction,
the apartments would be handed over to the purchasers who will get an undivided
interest in the land as well. Accordingly, sale deeds were executed in favour
of the intended purchasers by L&T and the owner.
On
October 4, 2005, the Deputy Commissioner served a show cause notice on
L&T stating that the sale of materials used in the construction of
flats was liable to tax, as per the Supreme Court’s decision in the case of
Raheja Development v. State of Karnataka[2]. As per the department, it was
empowered to impose sales tax under Section 5-B of the Karnataka Act, which
provides for levy of tax on transfer of property in goods (whether as goods or
in some other form) involved in the execution of works contract.
Held:
The full
bench of the Supreme Court, while summarising the legal position in light of
the arguments made, laid down the following principles:
- For sustaining the levy of tax on the goods, deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (1) there must be a works contract, (2) the goods should have been involved in the execution of a works contract and (3) the property in those goods must be transferred to a third party either as goods or in some other form.
- Citing Article 366(29-A) (b) of the Constitution of India, which provides for inclusionary definition of the phrase ‘tax on sale and purchase of goods’, the Supreme Court held that the aforesaid provision was included by amending the Constitution to provide for taxability of the value of goods supplied in the ‘works contract’. Notably, such contract was not liable to sales tax before such amendment in light of the Gannon Dunkerley[3] case, where it was held that in a building contract, which was one, entirely indivisible, there was no sale of goods and it was not within the competence of the provincial state legislature to impose tax on the supply of materials used in such a contract, treating it as a sale. By virtue of operation of Article 366(29-A) (b) of the Constitution of India, in a building contract or any contract to construct, if the developer has received or is entitled to receive valuable consideration, the above three conditions are fully complied. In performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.
- The expression “tax on the sale or purchase of goods” in Entry 54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services.
- Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term “works contract” in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term “works contract”.
- Building contracts are species of the works contract.
- A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.
- The dominant nature test has no application and the traditional decisions, which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, even then it is open to the States to levy sales tax on the materials used in such contract, if such contract otherwise has elements of works contract. The enforceability test is also not determinative.
- A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.
- Article 366 (29-A)(b) serves to bring transactions where essential ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale, even though it may not be sale within the meaning of the Sale of Goods Act.
- Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. Applying the above principles to the case, the court held that in the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner of the land, the developer and the flat purchaser where under the developer has undertaken to construct for the flat purchaser for monetary consideration. There is nothing wrong, if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract. The activity of construction undertaken by the developer would be works contract from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can be made chargeable to tax by the State Government. The court further held that the value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above.
2. Harsha V Rai v. State of Karnataka & Anr., decided on October 7, 2013.
Facts:
As per
the appellant, his mother was the owner of certain parcels of land. In 1953,
she gave on lease the aforesaid land to the respondent no. 2 by a registered
deed on yearly rent. The deed styled as vacant land “chalageni” was executed.
The land at the time of lease contained certain standing coconut trees and the
tenant was entitled to make improvement therein to an extent of only Rs.
5,000/-. The tenant constructed a residential house on the demised property and
continued to be in occupation of the same. As per the Karnataka Land Reforms
(Amendment) Act, 1973, (“Amendment Act”), all land held by or in possession of
the tenants with effect from March, 1 1974 shall stand transferred to and vest
in the State Government. Further, Section 45 of the Amendment Act, inter alia,
provides that the land which a tenant has been cultivating personally before
the date of vesting shall be entitled to be registered as an occupant. A tenant
entitled to be registered as an occupant was required to file a petition before
a tribunal under Section 48A of the Act.
Respondent
no. 2, filed an application in the prescribed form, inter alia, alleging that
the tenancy in question is in respect of agricultural land and she was
cultivating the same prior to 1st of March, 1974 and, therefore, she is
entitled to be registered as an occupant in terms of Act. The appellant, being
the land owner, resisted her claim and the tribunal rejected the tenant’s
claim, but the same was set aside by the High Court in a petition filed by the
tenant and the matter was remitted back to the tribunal for reconsideration.
While doing so, the High Court observed that the tribunal shall consider the
“chalageni”. After the remand the tribunal conducted spot inspection on 15th of
December, 1987 and found existence of a dwelling house, a firewood-depot and a
few coconut trees. The tribunal by majority held that the land was not an
agricultural land on the date of inspection but concluded that it was used as
agricultural land 35-40 years ago and accordingly upheld the claim of the
tenant.
Held:
While
allowing the present appeal, setting aside the impugned judgment and remitting
the matter back to the tribunal for reconsideration, the Supreme Court held
that in order to fall under the definition of tenant under the Amendment Act,
the person claiming to be registered as a tenant has to satisfy that he is not
only a tenant but also an agriculturist, who cultivates personally the land
held on lease.
The
Supreme Court noted that neither the tribunal nor the High Court went into the
question as to whether the property said to have been given on lease to the
tenant on the appointed day, to come within the definition of land under the
Act.
Holding
that the rights of the parties have to be crystallized on the basis of what
existed on the appointed day, the court remitted the matter back to the
tribunal for its consideration in accordance with law.
3. State of Haryana &others
v. Navir Singh and another, decided on
October 7, 2013.
Facts:
Ultra
Tech Private Limited, was sanctioned a term loan of certain amount and working
capital facility of certain amount by the Punjab National Bank (“Bank”). As
agreed with the Bank, original title deeds in respect of certain parcel of land
belonging to Narvir Singh and certain parcel of land owned by Rajinder Kaur
were deposited with the Bank by the borrower creating mortgage by deposit of
title-deeds. The Bank wrote to the Tahsildar, Panchkula for mutation on the
basis of mortgage effected by deposit of the title-deeds. The respondents
resisted mutation on the ground that no entry can be made as the instrument of
deposit of title-deeds is compulsorily registrable under Section 17(1)(c) of
the Registration Act. According to the respondents, in the absence of
registration and payment of registration fee and stamp duty, the prayer for
mutation cannot be allowed.
Held:
The
Supreme Court opined that the essence of mortgage by deposit of title-deeds, is
handing over by a borrower to the creditor title-deeds of immovable property
with the intention that those documents will constitute security, enabling the
creditor to recover the money lent. After the deposit of the title-deeds, the
creditor and borrower may record the transaction in a memorandum but such a
memorandum would not be an instrument of mortgage. A memorandum reducing other
terms and conditions with regard to the deposit in the form of a document,
however, will require registration under the Registration Act, 1908 but in a
case in which such a document does not incorporate any term and condition, it is
merely evidential and does not require registration. A document merely
recording a transaction which is already concluded and which does not create
any rights and liabilities does not require registration.
4. Omprakash v. Laxinarayan and ors., decided on October 7, 2013.
Facts:
The Plaintiffs filed a suit for specific performance of contract, possession and permanent injunction in respect of certain un-irrigated land. The properties in question were delivered to the plaintiffs on payment of the part consideration money in pursuance of the agreement to sell, as was also captured in the recitals of the said agreement. The defendants, however, denied the assertion of the plaintiffs and contended that neither any such agreement to sell was ever executed, nor was possession delivered. Defendant questioned its admissibility on the ground that the agreement to sell in question contains a recital that possession has been handed over to the purchaser and, therefore, it is a conveyance over which the stamp duty as indicated in Schedule 1A of the Indian Stamp Act, 1899 as substituted by M.P Act 22 of 1990 was required to be paid. It was pointed out that the agreement to sell in question was on a stamp paper of Rs. 50/- only.
Held:
The Supreme Court opined that for determination of the question of admissibility of a document, it is the recital therein which will be decisive. Whether the possession in fact was given or not, in terms of the agreement to sell is a question of fact, which requires adjudication. But, at the time of considering the question of admissibility of document, it is the recital therein which will govern the issue. Holding that the agreement is inadmissible as evidence, the Supreme Court rendered the following observations:
“……The agreement to sell shall be deemed to be a conveyance and stamp duty is leviable on an instrument whereby possession has been transferred. Thus the agreement to sell in question is a conveyance within the meaning of Section 2(10) of the Act and is to be duly stamped. Section 35 of the Act makes instruments not duly stamped inadmissible in evidence......"
Notifications
Bringing owners of vacant plots within tax
ambit, the Haryana Government has notified the property tax rates. The new
system of taxation and rates will be applicable from the financial year
2010-2011 onwards with the stipulation that for the period prior to October 11,
2013, the property owners will have the option to pay as per the new or old
policy, whichever is opted by them.
As per the notification issued by the Haryana
Government, in order to calculate property tax, the municipal corporations have
been categorised into two categories:
A-1 Cities - Municipal Corporation of Gurgaon
and Faridabad; and
A-2 Cities - Municipal Corporation of Ambala,
Panchkula, Karnal, Panipat, Rohtak, Hisar and Yamunanagar.
As per the notification, the property tax for municipal
corporations, applicable on ground floor would be as follows:
Rate (in Rs.) per square yard per year
|
Category of city
|
Plot Size
|
1
|
A-1
|
Upto 300 square yards
|
0.75
|
A-2
|
|
4
|
A-1
|
Up to 301 to 500 square
yards
|
3
|
A-2
|
|
6
|
A-1
|
501-1000 square yards
|
4.50
|
A-2
|
|
7
|
A-1
|
1001 square yards upto 2
acres
|
5.25
|
A-2
|
|
10
|
A-1
|
More than 2 acres
|
7.50
|
A-2
|
Similarly, the notification classifies various
applicable property taxes on flats, shops, commercial space (shopping malls,
multiplexes or commercial office space), industrial properties, institutional
properties (commercial, non-commercial and educational institutions), vacant
land, private hospitals, marriages palaces, cinema halls, banks, storage
godowns, clubs, hotels, standalone hostels, paying guest house/ accommodation,
private office building and restaurants. According to the notification, in case
of mixed use of premises in any property, the liability of tax will be
calculated as per the area under different usage.
Further, as per the notification, 100 % rebate
will be given to the religious property, orphanages, alm houses, municipal
buildings, crimination/ burial grounds, dharamshala, central or state
government educational institutions/ government hospitals. Further, 100 %
rebate will be given to the self-occupied residential houses up to 300 square
yards owned by serving defence/ parliamentary force personnel and
ex-service/parliamentary force personnel or his/her spouse, freedom fighter or
his/her spouse and war widows. Further, 100 % rebate will be given to the
vacant plots of 1 acre and above used for horticulture/agriculture. Also, 50 %
rebate shall be given to the state government buildings (other than building of
boards/ corporations/ undertakings/ autonomous bodies). Also, a one-time rebate of 30 % will be allowed for those property
owners who clear all their property tax dues/ arrears (up to the year 2012-13)
within 45 days of this notification.
2. News
To unlock FDI, govt to ease lock-in period for realty
Much to the cheer of
foreign real estate developers, those investing in India’s construction sector
might be allowed to exit before the mandatory three years stipulated at
present. However, for that, they would have to complete the project and procure
completion occupancy certificates from local authorities. Currently, they can
exit before three years of putting in money only with permission from the
Foreign Investment and Promotion Board. According to a Cabinet note, being
prepared by the Department of Industrial Policy and Promotion (DIPP), foreign
developers will be allowed to take back the entire invested amount before three
years, after obtaining the government’s approval.
Centre to appoint realty experts in 15
states to boost housing
The Centre is expected to appoint real estate experts and
consultants in 15 major states for helping them to prepare affordable housing
policy and streamline the rules for approving realty projects. The
Centre is expected to identify 12-15 major states where these experts would be
engaged for simplification on the rules and regulations. The realtors apex body
CREDAI have been demanding a single- window clearance for approvals of realty
projects, saying that the cost goes up by 40 per cent due to delay in
approvals, which generally takes 12-24 months. The scope of work of these
experts, as per the secretary, would include helping the states to develop a
housing policy with special emphasis on the affordable housing and also study
the various laws, rules and regulations which are involved in getting a
clearance of building activities. The experts would also develop software that
will help the states in expediting the approval process.
9 years on, society residents waiting
for flat registration
Even nine years after getting
possession, the residents of City Co-op Group Housing Society are running from
pillar to post for registration of the flats. The residents, who have already
made their complaints to the registrar office alleging irregularities by the
managing committee, comprising former and serving employees of Steel Authority
of India Limited (SAIL), have now written to the vigilance department of SAIL.
In a complaint to the SAIL vigilance department, it is stated that no member of
the society has got the clear title registration of their flat, despite payment
of the entire liability towards the costs of land and flat construction, prior to
the possession of these flats in 2004.
29 SEZ developers including TCS, Parsvnath Infra & Unitech Infracon
seek more time to implement projects
As many as 29 special economic
zone developers including Tata Consultancy Services, Parsvnath Infra and Navi Mumbai SEZ Pvt Ltd have sought more time from the government
for implementing their projects. The inter-ministerial Board of Approval (BoA)
is expected to consider these requests at its meeting on November 8. Posco-India Pvt Ltd, Unitech Infracon and Lodha Dwellers have also
requested additional time for project implementation from the BoA, according to
the agenda note of the meeting. The developers have cited reasons like global
meltdown and fluctuating market conditions for delay in
completion of projects.
TCS, which is setting up IT/ITES zone in Kolkata has requested for further extension due to
problems related to construction. Unitech Infracon Ltd, which is setting up
IT/ITES zone in Greater Noida has requested for further extension as work
started in 2008 and the pace was slow due to global melt down and fluctuating
market conditions. The developers have asked for one more year to execute their
SEZs. The validity period of the approvals for most of them has either expired
or is on the verge of expiry. The validity period for Lodha Dwellers and
Unitech Infracon expired on May 2 and May 22 respectively. The validity period
for Navi Mumbai SEZ will end on November 21. The board is also expected to take
up two applications for setting up new zones. Under the SEZ Act, the units get
100 per cent tax exemption on profits earned for the first five years, 50 per
cent exemption for the next five years and another 50 per cent exemption on
re-invested profits in the following five years.
**************************************************
DISCLAMER
This newsletter is being provided to the recipient
solely for the purpose of his/her/its information. It is meant to be merely an
informative summary and should not be treated as a substitute for considered
legal advice. This update covers significant legal developments in the field of
real estate in India for
the month of October, 2013. If you wish to receive more
information about any
item in this newsletter, please feel free to contact:
Sarthak Advocates & Solicitors
A – 35, Sector – 2, NOIDA 201 301
T: +91 120 430 9050
E: knowledge@sarthaklaw.com
[1] M/s. Larsen & Toubro Limited & Anr. V. State of Karnataka;
SLP (C) No. 17741 of 2007
[2] (2005) 5 SCC 162
[3] State of Madras v. Gannon Dunkerley & Co,; (1959)
SCR 379
No comments:
Post a Comment