Empowering Development: Maharashtra's Game-Changing Resolution for Streamlined Procurement of Development and NA Permission

  • June 6, 2023
  • Real Estate Team, Mumbai

The Maharashtra Government on May 23, 2023, vide its resolution bearing number NSP-2022/Pr. Kr. 103/J-1/A (“GR of May 2023”)[1] has simplified the process of obtaining Non-Agricultural (“NA”) permission for the utilization of land. It is expected that this change will cut short the run to multiple authorities and prove to be time-saving.

Introduction

Presently, as per section 42 of the Maharashtra Land Revenue Code, 1966 (“MLRC”), the prior permission of the Collector is required for the non-agricultural use of agricultural land or for putting land assessed for specific non-agricultural use to alternate use. Thus, the grant of NA permission was one of the functions of the revenue department. For construction on land converted to non-agricultural use as per the provisions of MLRC, the landowner is further required to obtain development permission from the planning authority as provided under section 44 of the Maharashtra Regional and Town Planning Act, 1966.

The resolution provides for the grant of both NA and development permission under a single application for certain categories of land as detailed hereinafter. The Building Plan Management System (“BPMS”), which is an online system being used to process construction and building permits is pivotal in facilitating the combined grant of NA and development permission.

The Changes

The GR of May 2023 proposes the following modality for an integrated grant of NA and development permission:

  1. The lands falling within the scope of section 42A (no permission required for change of use of land situate in area covered by development plan), section 42B (provision for conversion of land use for lands included in final development plan area), section 42C (provision for conversion of land use for lands included in the draft regional plan), section 42D (provision for conversion of land use for the residential purpose), or section 44A (no permission required for bona fide industrial use of land) (collectively referred to as “said Lands”), shall be deemed to be cleared for NA use and there is no separate NA permission to be obtained.
  2. Where the said Lands fall under Occupancy Class – I tenure, upon payment of conversion tax, the non-agricultural use license (permission) will be generated along with the development permission using BPMS.

However, if the said Lands fall under Occupancy Class – II tenure, then upon payment of Nazrana (premium) and other expenses that will be payable to the government, as may be verified by the revenue officer, the development permission generated on BPMS shall be granted to the landowner. Further, the NA use license (permission) shall be granted along with the aforementioned development permission. One copy of such NA use license (permission) shall be forwarded to the office of the village revenue records to facilitate the collection of non-agricultural land assessment from the landowner.

The Takeaway

The conversion of land from agriculture to NA, which formerly entailed the involvement of different officials and many months of work, has been simplified by providing single window clearance. A separate application for non-agricultural certification is no longer necessary for land in places where the Development Plan/ draft regional plan/ residential or bona fide industrial use has already been permitted. This will simplify life for farmers, landowners and developers. It is expected that this step will augment Maharashtra’s ranking on the ease-of-doing-business index.

We hope you find the above informative and in case of any queries or clarifications kindly feel free to reach out to us at – mumbai@foxmandal.in

References:

[1] Government resolution dated May 23, 2023, Maharashtra State Revenue and Forest Department, available at: https://gr.maharashtra.gov.in/Site/Upload/Government%20Resolutions/English/202305231835473319.pdf

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Photo by maxsattana: https://www.canva.com/photos/MADBjlIPyXU-investor-immovable-property/

The resolution provides for the grant of both NA and development permission under a single application for certain categories of land as detailed hereinafter. The Building Plan Management System (“BPMS”), which is an online system being used to process construction and building permits is pivotal in facilitating the combined grant of NA and development permission.

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An Overview of Real Estate Investment Trusts (REITs)

The concept of REITs is steadily gaining significance and investors are increasingly opting for REITs as a way to tap into the growing real estate market and diversify their portfolios. With time, REITs have become considerably popular, particularly among investors having large capital who make use of REITs to invest in high-value real estate projects. Having a wide range of investment options to select from, investors need to consider the implications involved along with their preferences and requirements before making an REIT investment.

Introduction

Real Estate Investment Trusts (REITs) refer to companies that hold ownership and/or operations in real estate. To be considered a REIT, the company must invest a minimum of 75% of its assets in real estate and derive at least 75% of its revenues from real estate-related activities. India saw its first REIT in the year 2019. As of now, there are three REITs in India – Embassy Office Parks REIT, Mindspace Business Park REIT and Brookfield India Real Estate Trust. REIT investments make it possible to have exposure and invest in real estate without having direct ownership over the property. 

Categories of REITs

When it comes to types of REITs, equity REIT is one of the most popular ones wherein rent collected through the leased-out property and proceeds received from the sale of properties is distributed to shareholders. On the other hand, mortgage REITs (also called mREITs) though don’t own real estate, advance loans to finance real estate and make profits through interests. In the case of hybrid REITs, investors have the option of diversifying their portfolios by parking their funds in both mortgage REITs and equity REITs. Accordingly, both rent and interest constitute sources of income for this type of REIT.

Private REITs function as private placements, which cater to only a selective list of investors. These are not traded on National Securities Exchanges (NSE) and are not registered with the Securities and Exchange Board of India (SEBI).

Public non-traded REITs are non-listed REITs which are registered with SEBI to carry out activities under SEBI (Real Estate Investment Trusts) Regulations, 2014. However, they are not traded on NSE. They are comparatively more stable as they are not subjected to market fluctuations. Publicly traded REITs extend shares enlisted on NSE and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE. REIT companies listed on the Indian stock exchanges are monitored and regulated by SEBI to safeguard the interest of the investors and ensure adherence to industry practices.

Risks Involved

Non-traded and publicly traded REITs pose risks, and these are not necessarily categorised as disadvantages as the cost-benefit analysis and the choices made therein are based on the discretion of the investors.

Having said that, non-traded REITs carry a higher risk than public REITs since there is no information available in the public domain to enable investors to carry out research and determine their values. In this context, the element of trust is integral. They are illiquid and the potential of having a lock-in period for the same is high, meaning thereby that investors may not be able to access their funds for a predetermined period, sometimes up to seven years. Furthermore, non-traded REITs are known for incurring high upfront fees. In the case of publicly traded REITs, the biggest challenge is the high-interest rate risk.

Tax Implications

As mentioned above, shareholders receive dividends and capital gains by virtue of REIT investments and are accordingly required to pay tax on such gains. It is necessary to mention that the dividends received in this manner are not eligible for a lower tax rate and the shareholders are liable to pay the tax as applicable to ordinary income. This is from a shareholder’s perspective. REITs are also legally bound to pay tax and cannot claim any exception available to pass-through entities such as sole proprietorships, partnerships, etc.

Benefits and Limitations

Shares in REITs are affordable for investment, and it poses a good option for small investors. The publicly traded REITs are listed on the stock exchanges which means that potential investors will have access to detailed information and make choices accordingly. Another added advantage of choosing REITs over directly purchasing commercial properties is the prospect of receiving steady dividend income.

Although REITs pose a good investing option, some challenges cannot be overlooked. First, investors are required to pay high up-front fees. The extent of risks, in the long run, is also proportional to the number of investments made and the volatile nature of the real estate market could pose a challenge to earning dividends. REITs as asset classes can lead to investors having restrictions on selling shares for a period of time.

Conclusion

REITs can prove to be a suitable retirement investment considering the steady dividend income that arises out of such an investment and on account of their growth potential. Such an investment will also help in portfolio diversification. Hence, one can connote that REITs could be a good starting point for investors to include real estate in their investment portfolio provided that the risks involved are duly assessed and the applicable tax provisions are borne in mind.

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REITs can prove to be a suitable retirement investment considering the steady dividend income that arises out of such an investment and on account of their growth potential. Such an investment will also help in portfolio diversification. Hence, one can connote that REITs could be a good starting point for investors to include real estate in their investment portfolio provided that the risks involved are duly assessed and the applicable tax provisions are borne in mind.

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Resuscitating Land Pooling and Urban Regeneration in Delhi

Land pooling policy was notified on October 11, 2018, for six zones spread across 109 sectors in 95 urbanized villages in Delhi. The land pooling technique has been successfully utilised in several states across India. The scheme aims to pool land parcels for the purpose of developing the land in toto and returning the developed land parcels back to the landowners. It creates a win-win scenario for both the state and landowners. Land pooling, unlike other schemes, ensures that the rights of landowners are protected and that the scheme is implemented through a participatory mechanism. Since there is no acquisition of land, the cost of such schemes is significantly lower.

The National Capital Territory of Delhi is one of the oldest cities in India. It is densely populated, and like many other cities in India, it suffers from unplanned development and poor habitation conditions that have plagued the city for decades. For the purpose of planned development and better living conditions, the Delhi Development Act, 1957 (DDA), was enacted, and recently, the Ministry of Housing and Urban Affairs released a set of proposed amendments to the DDA Act to facilitate and operationalize land pooling. The draft was shared for pre-legislative consultation and, this article analyses the recommendations made therein.

 

Objectives of the Proposed Amendments

The benefits of land pooling mechanisms for developing the national capital region were identified, and to facilitate the same, the proposed amendments are being mooted, along with several consequential changes that have been proposed.

The reluctance among a few landowners to participate in the land pooling policy has hindered the state from implementing planned development. In order to achieve contiguity in the land parcels available for land pooling, the proposed amendment also facilitates mandatory land pooling or urban regeneration. The Central Government is empowered to direct the urban local bodies (ULB) or the authorities to notify mandatory policies.

The tools of land pooling will be vital in achieving the goals of planned development. The proposed amendments are aimed at operationalizing two key policies, i.e., land pooling policy and urban regeneration policy.

  1. Land pooling is the assembly and redistribution of land parcels under different ownerships, for the purpose of integrated planning and development.
  2. Urban regeneration in an existing developed area, vacant land, or laldora land of an urbanised village includes re-planning, re-construction, re-development, retrofitting, up-grading, rehabilitation, and renewal (including amalgamation, pooling, and reconstitution of plots). 

It can be understood that land pooling will be implemented in less urbanised land parcels for the purpose of planned development, and urban regeneration will be employed in urbanised land parcels with unplanned development that are a source of danger.

 

Analysis of Chapter IV A

The new chapter IV A under the proposed amendment captures the flow of the two policies. The first step to the implementation of land pooling or urban regeneration is the notification of a land pooling or urban regeneration policy, followed by notification of the area for which the respective policies would be applicable.

The amendments limit landowners’ ability to develop an area after it is designated as an area eligible for policy or a mandatory policy area. The authority or the urban local body is empowered under the proposed amendment to appoint a designated officer or agency for the purpose of implementing the scheme.

Another key amendment proposed is that after the minimum threshold under voluntary participation for either of the policies is achieved, it is mandatory for the dissenting landowners to comply with the policy.

Notification of Mandatory Area for Land Pooling/Urban Regeneration at the Direction of Central Government

The proposed Act amendment allows the central government to direct the authorities or ULB to notify mandatory areas for land pooling or urban regeneration for the purpose of speedy implementation of the policy. This helps the implementing agencies effectively implement planned development even without achieving the minimum threshold for voluntary participation.

The flow chart below illustrates the process of notification for each policy area under the proposed amendment.

Land Pooling 

Urban Regeneration

Notification of Mandatory Urban Regeneration Policy by Urban Local Body

Delhi has been continuously facing several calamities, both anthropogenic and non-anthropogenic. Planned development is made mandatory in order to mitigate and avoid them. The urban local bodies are empowered under the proposed amendment to notify the Mandatory Urban Regeneration area independently, without any directions from the Central Government. Any area satisfying any one or many of the below listed conditions can be notified as an area for mandatory urban regeneration under the proposed amendment:

  1. Disaster-prone area that faces an immediate risk of loss of life and property.
  2. Lack of minimum standards of quality due to substandard construction or aging.
  3. Constructions without valid permits on untenable lands.
  4. Habitats with poor access.
Obligations of Land/Property Owners

When an area is declared eligible for land pooling or urban regeneration, or a mandatory area for land pooling or urban regeneration, all land and property owners are required to cooperate fully with the authorities concerned.

 

Policy Implementation

To effectively implement the policies, the following amendments are proposed:

SPVs

The policies are implemented through the formation of a special purpose vehicle (SPV), consortium entity, or joint venture comprised of land or property owners and the implementing agency (DDA/ULB). This ensures a participatory mechanism and protects the interests of landowners at each stage of the policy.

Restrictions on Use and Sale

The policy can impose such restrictions on the transfer or development of land or built-up structures under the Act. This is done for effective implementation of the policy.

Exemption from Stamp Duty

Another key amendment proposed is an exemption from stamp duty implications. This helps in avoiding the multiple stamp duties that are attracted when land is surrendered and then reconveyed after development, which creates a financial burden.

Lis Pendens

The proposed amendment also ensures that pending disputes over the title to land or buildings do not hamper the implementation of the policy. The person with clear title as adjudicated by a competent court will be conveyed a developed land parcel after policy implementation.

Statutory Vesting of Lands

The proposed amendment also provides for the statutory vesting of lands and buildings and empowers the implementing agency to evict people summarily for the purpose of land pooling or urban regeneration.

Exemption from the Right to Transparency and Fair Compensation in Land Acquisition Act, 2013

Since land or property is conveyed back to the owners, the policy shall not attract provisions of compulsory acquisition under the Right to Transparency and Fair Compensation in Land Acquisition Act, 2013. Also, persons whose land is acquired or whose rights over property are affected such persons shall be compensated by the grant of transferable development rights.

 

Key Takeaways

The proposed amendment act aims to create planned development that is essential for any urban center. It assures effective implementation of the policies as they remove the roadblocks that were earlier faced, such as stamp duty implications or a lack of participation by people. Where the minimum threshold for policies is achieved, it is mandatory for the rest of the owners to comply with the policy, ensuring the contiguity of lands. Also, the central government has the power to direct notification of mandatory policy areas, which provides flexibility to the government in implementing policies in a time-bound manner.

The proposed amendment act establishes criteria for an urban local body to notify an area as a mandatory area for urban regeneration; however, there is no provision in the Act seeking to show cause why such notification should not be made from landowners or property owners. And there is no room for challenging the notification for mandatory land pooling or mandatory urban regeneration policy. Therefore, there is a need for setting up a grievance redressal mechanism.

Further, the proposed amendment has introduced the concept of statutory vesting of lands and property for the purpose of the policy; however, it is silent as to when statutory vesting commences – after notification of the policy or after notification of lands for urban regeneration or land pooling, as the case may be.

The Delhi Urban Shelter Improvement Board Act, 2010, also operates in the same domain as urban regeneration policy. The proposed amendments are silent about the superseding effect of the urban regeneration policy over the Shelter Improvement Board Act.

The proposed amendment act has demarcated the roles and obligations of a landowner or property owner; however, it is silent about the occupiers of the land. Since many of the areas have a significant portion of the population residing as tenants and not as owners, it is necessary for the proposed amendment act to address the rights and duties of occupiers of the land or property under the policies.

The proposed amendment act empowers the authorities and ULB to evict people summarily, but it is silent on the provision of transit accommodation or rehabilitation or relocation allowance for persons displaced due to the policies.

The benefits of land pooling mechanisms for developing the national capital region were identified, and to facilitate the same, the proposed amendments are being mooted, along with several consequential changes that have been proposed.

The reluctance among a few landowners to participate in the land pooling policy has hindered the state from implementing planned development. In order to achieve contiguity in the land parcels available for land pooling, the proposed amendment also facilitates mandatory land pooling or urban regeneration. 

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Impact of Work from Home and Rise of Coworking Spaces on the Bengal Real Estate Sector

The COVID-19 pandemic had forced the world to undergo an overnight change with respect to the way it conducted both its personal and professional lives. It brought about boom in some industries, such as e-commerce, ed-tech, etc. and stagnation in others such as travel, hospitality, etc. The real estate industry also underwent some drastic changes, which has affected various stakeholders.

Encouraging Government Interventions

In the recently convened National Conference of Labour Ministers of all States and Union Territories, the Prime Minister said that “flexible workplaces, a work-from-home ecosystem, and flexible work hours” are the needs of the future. Another development with a similar vision of flexible workplaces was the Special Economic Zones (Third Amendment) Rules, 2022 and the Special Economic Zones (Fifth Amendment) Rules, 2022.

On 14th July, 2022, notification no. G.S.R. 576(E) was published by the Ministry of Commerce and Industry, Government of India promulgating the Special Economic Zones (Third Amendment) Rules, 2022, which permitted work from home for Special Economic Zone (“SEZ”) employees and solidified the legal framework of work from home and remote working. By this notification, Rule 43A was added to the SEZ Rules, 2006 which enabled employees (including contractual employees) to work from home or from any other place outside the SEZ up to a maximum of fifty percent of the total employees of the SEZ Unit. It extends to employees of the IT and ITes SEZ units, employees who are temporarily incapacitated, employees who are travelling and also employees who are working offsite. In order to avail itself of this, the SEZ Unit had to submit its proposal for working from home to the Development Commissioner through email or physical application at least 15 days in advance.

However, on 8th December 2022, the Ministry published another notification bearing no. G.S.R. 868(E), bringing about the Special Economic Zones (Fifth Amendment) Rules, 2022, which granted further relaxations to the SEZ work from home norms. By virtue of this amendment, the percentage of employees who can work from home has been increased from 50% to 100% till 31st December 2023. It is also no longer mandatory to get prior approval of the proposal for work from home, and the SEZ unit owners are only required to intimate the same to the Development Commissioner.

Due to pandemic/lockdowns, most officegoers started working from home or remotely. Although remote working existed even before the pandemic, especially among freelancers, it was because of the pandemic that most businesses were forced to adapt to this mode of working even for full-time employees. Although the world is back to normal at present, both employers and employees are refusing to go back to the traditional office setup. The December 8, 2022 notification will now further encourage IT companies and their employees to opt for work from home in the SEZs.

 

Increase in Demand for Residential Spaces & Shifting of People to Tier 2 And Tier 3 Cities

Another interesting trend that has come out of this pandemic is the increase in demand for bigger residential spaces, including luxurious and semi-luxurious apartments. As per the reports of CREDAI, Bengal, the sales of 2 BHK apartments have gone down from 48% in 2019 to 40% in 2021, while on the other hand, sales of 3 BHK apartments have gone up significantly from 44% in 2019 to 54% in 2021. The sales of 4 BHK apartments have also more than doubled during the same period, going up from 2% in 2019 to 4.7% in 2021. This increase in demand for luxurious residences has taken place since individuals who work from home prefer an apartment with a home office, and therefore, they are leaning towards larger residential spaces.

 

The demand for residential real estate is highly dependent on where people go to work, as people prefer to live near their workplaces in order to minimise travel. Now that a large group of people are not required to physically to work regularly, they are shifting to tier 2, tier 3 cities and suburban areas from the metro areas as these places offer affordable housing options and a better standard of living at a lower cost. The tier 2 cities across India have witnessed healthy investment in residential real estate in recent years, with more residential project launches by developers.

 

Rise of Co-Working Spaces

As a result of the change in mindset of employers and employees, a new form of commercial real estate has gained popularity recently, namely, “co-working spaces.” A lot of companies, especially small businesses and start-ups have opted for this model across India instead of investing in individual spaces, as it offers both cost-effectiveness and flexibility. Some of the reputed coworking spaces, such as Colliers, Awfis, Coworks have already set up spaces in different cities across India. Due to this huge demand for coworking spaces, companies such as Awfis, Workport Coworking, East India Works Eden, My Cube and Seamus Management have already set up coworking spaces in Kolkata.

 

Future Trend

Now that offices are transitioning from work-from-home models to hybrid models and some workplaces are also calling their employees back to the office, the demand for office space and coworking space transactions has started to pick up again. Although the employees of the IT/ITeS sector in SEZs still have the liberty to work from home, most employers in other sectors have mandated that employees come back to the office. It will be interesting to see if the volume of rentals and leasing in office spaces goes back to the pre pandemic conditions or is affected by the rise of “co working spaces” and the new notification dated December 8, 2022 allowing 100% work from home in SEZs until December 31, 2023.

 

Now that offices are transitioning from work-from-home models to hybrid models and some workplaces are also calling their employees back to the office, the demand for office space and coworking space transactions has started to pick up again. Although the employees of the IT/ITeS sector in SEZs still have the liberty to work from home, most employers in other sectors have mandated that employees come back to the office. 

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Revaluation of Capital Asset Made Liable to Capital Gains Tax

In the case of The Commissioner of Income Tax v. M/s Manuskh Dyeing and and Printing Mills (Partnership Firm) [Civil Appeal No. 8258 & 8259 of 2022], the Supreme Court panel comprising of Justice M.R. Shah and M.M. Sundresh ruled that Section 45(4) of the Income Tax Act applied where there was an increase in partners’ capital account on account of revaluation of asset (land & building).

The bench stated that the partners had access to the money in order to withdraw it. The assets so revalued and the credit made to the capital accounts of the individual partners were therefore a “transfer” and came under the category of “OTHERWISE.” As a result, Section 45(4)’s provision was applicable.

Background

The assessee a partnership firm constituted with four related individuals were engaged in the business of Dyeing and Printing, Processing, Manufacturing and Trading under the following profit-sharing structure.
Share of Profit
For ease of reference, herewith Partners are referred as A, B, C, D:

Phase 1

Execution of Family Settlement Deed dated 02/05/1991; the share of one of the existing partners (Mr. D) was reduced and distributed among new incoming partners (Let’s say E, F & G):
Partners and Share of Profit (Post Settlement)
 

Phase 2

Reconstitution of Partnership Firm; Partner B, C & D retired from the Firm:
Partnership structure (Post Retirement)
   

Phase 3

The Firm was again reconstituted on 01/11/1992; 4 new partners were added.
Partnership structure and contribution by new partners (Post Reconstruction)
In the reconstituted partnership deed two partners, namely, A and E decided to withdraw part of their capital.

Phase 4

The assessee revalued the asset (Land & Building) for an amount of Rs.17.34 crores against which the capital account of H, I, J & K was revised:  
Particulars H I J K
Initial Capital Contribution 4.5 Lac 2.5 Lac 2.25 Lac 2.25 Lac
Revised Capital Account 3.12 Cr 1.73 Cr 1.56 Cr 1.56 Cr

Facts of the Case

  1. The Return of Income was filed for Assessment Year “AY”1993-1994 declaring total income of Rs. 3,18,760/-. The same was accepted under Section 143(1) of the Income Tax Act, 1961(hereinafter referred to as the Act).
  2. However, thereafter, the assessment was reopened under Section 147 of the Act by issuance of the notice under Section 148 of the Act. The assessment was reassessed under Section 143(3) read with Section 147 of the Act determining the total income of Rs.2,55,19,490/
  3. Addition of Rs.17.34 Cr. was made towards short term capital gain under Section 45(4) of the Act. Similar addition was made for A.Y. 1994-1995.
  4. As per the Assessing Officer., the assessee revalued the land and building and enhanced the valuation from Rs.21,13,225/- to Rs. 17,56,00,000/- for AY 1993-1994 thereby increasing the value of the assets by Rs.17,34,86,772/- and therefore the revaluing of the assets, and subsequently crediting it to the respective partners’ capital accounts constitutes transfer, which was liable to capital gains tax under Section 45(4) of the Act.
  5. As land and building was involved, the assessee had claimed the depreciation on building, and the Assessing Officer assessed the amount of short-term capital gain under Section 50 of the Act.
  6. The CIT(A) confirmed the addition made by the Assessing Officer. However, ITAT allowed the appeal and has set aside the addition made by the A.O. towards Short Term Capital Gains by observing that revaluation of the assets and crediting to partners’ account did not involve any transfer.
  7. The High court dismissed the appeal preferred by the Revenue. Thus, the revenue approached the supreme court.

Question Before the Apex Court

Whether increase in partners’ capital account on account of revaluation of asset (land & building) would fall under section 45(4) of the Act as introduced by the Finance Act, 1987?

Ruling

  1. At the outset, the Apex Court stated that, the object and purpose of introduction of Section 45(4) of the Act was to pluck the loophole by insertion of Section 45(4) and omission of Section 2(47)(ii) of the Act. Earlier, omission of Clause (ii) of Section 2(47) and Section 47(ii) exempted the transform by way of distribution of capital assets from the ambit of the definition of “transfer”. The same helped the assessee in avoiding the levy of capital gains tax by revaluing the assets and then transferring and distributing the same at the time of dissolution. The said loophole came to be plucked by insertion of Section 45(4) and omission of Section 2(47)(ii). At this stage, it is required to be noted that the word used “OR OTHERWISE” in Section 45(4) is very important.
  2. In the present case, the assessee relied upon the decision of Bombay High Court in case of Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., (1972) 4 SCC 460 wherein it was stated that “unless there is a dissolution of partnership firm and thereby the transfer of the amount on revaluation to the capital accounts of the respective partners, Section 45(4) of the Income Tax shall not be applicable.” However, the Apex Court stated that, in view of the amended Section 45(4) of the Income Tax Act inserted vide Finance Act, 1987, by which, “OR OTHERWISE” is specifically added, the aforesaid case has no substance.
  3. The CIT(A) relied on the decision of Bombay High Court in case of Commissioner of Income Tax Vs. A.N. Naik Associates and Ors., (2004) 265 ITR 346 (Bom.) wherein the Court had “an occasion to elaborately consider the word “OTHERWISE” used in Section 45(4). After detailed analysis of Section 45(4), it is observed and held that the word “OTHERWISE” used in Section 45(4) takes into its sweep not only the cases of dissolution but also cases of subsisting partners of a partnership, transferring the assets in favour of a retiring partner.”
  4. Under the circumstances, for the purpose of interpretation of newly inserted Section 45(4) to the Act, the decision of this Court in the case of Hind Construction Ltd. (supra) shall not be applicable and/or the same shall not be of any assistance to the assessee. As such, we are in complete agreement with the view taken by the Bombay High Court in the case of A.N. Naik Associates and Ors., (supra). We affirm the view taken by the Bombay High Court in the above decision.
  5. In the present case, the Apex Court held that the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts.
Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable.  

Held

In view of the above and for the reasons stated above, the impugned judgment and order passed by the High Court and that of the ITAT were held unsustainable and were quashed and set aside with the original order being restored. Present appeals were accordingly allowed with no cost.

FM Comments

The Supreme Court decision clarifies the interpretation of the provisions of section 45(4) of the Act and holds that the revaluation of capital asset and consequent credit into the capital accounts of the respective partners would be chargeable to tax as capital gains. The Judgement will impact the Real Estate Industry and others who had taken the benefit of these provisions as a tax planning strategy.

The bench stated that the partners had access to the money in order to withdraw it. The assets so revalued and the credit made to the capital accounts of the individual partners were therefore a “transfer” and came under the category of “OTHERWISE.” As a result, Section 45(4)’s provision was applicable.

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Can Environment Protection and Economic Development Go Hand-In-Hand?

Sustainable development is an organising principle for meeting human development goals while also sustaining the ability of natural systems to provide natural resources and preserve the ecosystem services on which the economy and society depend. It is the duty of the State to implement a coherent and coordinated program in which economic development should not be allowed to take place at the expense of our natural resources.

With the principle of sustainable development in mind, the Hon’ble Supreme Court (“Hon’ble SC”) issued a decision on 03.06.2022 in the case In Re: T.N. Godavaraman Thirumulpad vs. UOI & Others[1] to categorically lay down the extent of Eco-Sensitive Zones (“ESZ”) that surround protected forest lands. Strict rules have been laid down with the intention of ensuring that development and preservation of the environment go hand in hand.

What is Eco-Sensitive Zone (ESZ)?

Fragile areas surrounding protected forest lands are known as eco-sensitive-zones (“ESZ”), otherwise known as “shock-absorber” or “transition zones,” and the extent of the ESZ for each protected forest land is declared by the Ministry of Environment, Forestry and Climate Change (“MoEF&CC”). The ESZ for each protected forest is a vital element for preserving and protecting the environment from hazardous activities.

In the year 2002, a ‘Wildlife Conservation Strategy-2002’ was adopted in the meeting of the National Board for Wildlife, wherein lands falling within 10 kms of the boundary of each protected forest land were to be declared ESZ and the Chief Wildlife Wardens of every State were requested to list out areas that fall within 10 kms of the boundaries of the protected forest lands. However, in response, several State Governments raised issues over the applicability of the 10 km rule as certain protected forest lands were located in urban areas, which had an uninterrupted flow of development.

Guidelines For Eco-Sensitive Zone (ESZ)

 

Taking into account the concerns raised by the state governments, the MoEF and CC issued a guideline on February 9, 2011 to ensure that development does not come at the expense of the environment and vice versa.

 

In a nutshell, the rules laid down in the Guidelines specifying the extent of each ESZ are as follows:

  • As provided in the Wildlife Conservation Strategy, 2002, the extent of an ESZ can go up to 10 kms.
  • In areas with delicate ecosystems and connecting habitats that suit the needs of a full suite of native animals and plants and are beyond 10 km in width, these shall be included in the ESZ.
  • In the context of a particular Protected Area that is specifically designated by the State Government, the area of the ESZ could be of variable width and extent.

Irrespective of the above guidelines, issues were still being raised before the Hon’ble Supreme Court, seeking modification of the restrictions pertinent to ESZ.  

Observations of Hon’ble Supreme Court

To put the question of ESZ to rest once and for all, the Hon’ble SC in the case In Re: T. N. Godavaraman Thirumulpad vs. UOI & Other, passed an order (“June Order”) that extensively dealt with ESZ and the activities permitted therein. The relevant directions that were laid down in the June Order are as follows:

  1. Each protected forest land must have an ESZ of at least 1 km measured from the protected forest land’s demarcated boundary.
  2. When the ESZ that is already prescribed by law goes beyond 1 km, the wider margin of the ESZ shall prevail.
  3. The minimum width of the ESZ may be diluted with the approval of the Central Empowered Committee, MoEFF & CC, and the Hon’ble SC.
  4. A 10 km buffer zone (ESZ) is to be implemented for any sanctuary or national park for which no proposal has been submitted.

It is noteworthy to mention that the Hon’ble Supreme Court had also observed that the above-mentioned directions may not be feasible for all sites, such as Sanjay Gandhi National Park in Mumbai (“SGNP”), Gandhi National Park in Mumbai (“GNP Mumbai”), and Gandhi National Park in Chennai (“GNP Chennai”), as these sites have gone through tremendous development in close vicinity and are located in urban areas.

However, because the Hon’ble Supreme Court’s observations on special cases were left vague, causing uncertainty, the aforementioned order had a disastrous effect on the Mumbai real estate industry, halting construction in areas surrounding the SGNP and directing local authorities to cancel Commencement Certificates issued to builders.

Subsequently, the CREDAI-Maharashtra of the Housing Industry had filed an Interim Application[1] before the Hon’ble SC, seeking clarification on the applicability of the 1 km rule in special cases such as SGNP. The Hon’ble SC had clearly set forth in the Interim Order that the directions laid down in the June Order are not applicable to special cases as a 1 km wide “no development zone” may not be feasible in all cases. Further, the Hon’ble SC mentioned that specific exceptions with regard to SGNP and GNP Mumbai had already been made in the June Order.

 

Present Situation of Guindy National Park, Chennai

GNP, Chennai, is a habitat for faunal species and the city’s vital lung, with a land area of 270.57 hectares (ha) and was designated as a Forest Reserve land in 1978, when it was known as the “Guindy Deer Park.” Right from the begining, GNP has been a tourism attraction point surrounded by numerous buildings such as the Gandhi Mandapam, IIT, Cancer Institute, Rajaji Memorial Historical Monument, etc. All of this being a source of pride, GNP has recently become a source of contention in discussions about sustainable development.

On application of the aforementioned Interim Order of the Hon’ble SC, it can be presumed that the ‘1km rule’ laid down in the June Order is inapplicable to GNP Chennai as it has been carved out as a “Special Case”. The relevant portion of the June Order is extracted hereinbelow, for ease of reference.

“We have considered CEC’s recommendation that the ESZ should be relatable to the area covered by a protected forest but the Standing Committee’s view that the area of a protected forest may not always be a reasonable criterion also merits consideration. It was argued before us that the 1 km wide “no development zone” may not be feasible in all cases and specific instances were given for Sanjay Gandhi National Park and Guindy National Park in Mumbai and Chennai metropolis respectively which have urban activities in very close proximity. These sanctuaries shall form special cases.”

However, in pursuance of the June Order, a PIL[2] has been filed by a Social Activist before the Hon’ble High Court, Madras seeking to demolish the headquarters of the Tamil Nadu Forest Department that has been constructed close to GNP Chennai with the alleged intention to protect and preserve the habitat.

An affirmation of the June Order by the Hon’ble High Court, Madras, would therefore dispel all ambiguity with regards to the rules applicable to GNP Chennai and provide the necessary clarification on what path the real estate industry in Chennai could embark on.

References: 

[1] W.P. (Civil) No. 202 of 1995 dated 03.06.2022

[1] I.A. No. 110348 of 2022 dated 23.09.2022.

[2] W. P. No. 27372 of 2022

Image Credits: Photo by Amit Jain on Unsplash

The Hon’ble Supreme Court’s observations on special cases were left vague, causing uncertainty and it had a disastrous effect on the Mumbai real estate industry, halting construction in areas surrounding the Sanjay Gandhi National Park in Mumbai (“SGNP”) and directing local authorities to cancel Commencement Certificates issued to builders.

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Rectifying the Parallel Regime of RERA & WB-HIRA

The Supreme Court issued an important verdict on May 4, 2021, when it declared that the West Bengal Housing Industry Regulatory Act, 2017 (WB-HIRA) is “repugnant” to the Parliamentary law of Real Estate (Regulation and Development) Act, 2016 (RERA). The state law created a “parallel regime” and encroached upon the identical Central law RERA, 2016, enacted the year before, and was in direct conflict with the central legislation by lacking necessary safeguards to protect consumers.

Background

The Bench of Justices D. Y. Chandrachud and M. R. Shah in Writ Petition (C) No. 116 of 2019 [Forum for People’s Collective Efforts (FPCE) & Anr. vs. State of West Bengal & Anr.], in its 190-page judgment, struck down as unconstitutional West Bengal State law WB-HIRA meant to protect home buyers, enacted in 2017, a year after the Centre passed the RERA, stating that if Parliament had passed legislation, it was not open for states to enact similar statute.

Before Parliament enacted the RERA in 2016, state legislatures had enacted several laws to regulate the relationship between promoters and purchasers of real estate. Before the WB-HIRA, one of the laws the state legislature had enacted was the West Bengal (Regulation of Promotion of Construction and Transfer by Promoters) Act, 1993 (the “WB 1993 Act”). Upon receiving the assent of the President, the Act was published in the Calcutta Gazette, Extraordinary on March 9, 1994.

In the State of West Bengal, the Real Estate (Regulation and Development) Bill, 2016 (the “RERA Bill 2016”) was introduced and draft rules under the RERA were framed on August 18, 2016, but no further progress was made in that regard. On August 16, 2017, the motion to pass the WB-HIRA Bill was adopted in the State Legislative Assembly. The Housing Industry Regulatory Authority was established under Section 20 of the West Bengal Housing Industry Regulatory Act, 2017 to regulate and promote the housing sector, to ensure the sale of plots, apartments or buildings, as the case may be, or sale of real estate projects in an efficient and transparent manner, to protect the interests of consumers in the real estate sector and to establish a mechanism for speedy dispute redressal and for matters connected therewith or incidental thereto. The State enactment received the assent of the Governor of West Bengal and was published in the Official Gazette on October 17, 2017, and came into effect from June 1, 2018.

The WB-HIRA repealed the WB 1993 Act. The remaining provisions of WB-HIRA were enforced by a notification dated March 29, 2018, issued by the Governor of the State of West Bengal in exercise of the power conferred by sub-section (3) of section 1 of WB-HIRA. Thereafter, on June 8, 2018, the State of West Bengal framed rules under WB-HIRA.

Because the Supreme Court declared the provisions of WB-HIRA to be invalid and struck them down in the current judgment, there will be no revival of the provisions of the WB 1993 Act, which were repealed upon the enactment of WB-HIRA, because the provisions of the WB 1993 Act are repugnant to the corresponding provisions of the RERA, which were impliedly repealed upon the enactment of the RERA in 2016.

The State Legislature has encroached upon the legislative authority of Parliament and this exercise conducted by the State Legislature is unconstitutional. The valuable safeguards introduced by Parliament in the public interest and certain remedies created by Parliament were absent in WB-HIRA.

Inconsistencies with RERA

RERA is a complete and exhaustive code which regulates the contractual relationship between a builder/promoter and a buyer/consumer in the real estate sector and provides remedial measures. RERA regulates the rights and obligations between promoters and buyers of real estate, in addition to the provisions of the Indian Contract Act, 1872. The enactment, in ensuring the actual transfer of property to the buyer, furthers the objects of the Transfer of Property Act, 1882. It provides for the enforcement of contracts through remedial measures that are in addition to the remedies provided in the Consumer Protection Act, 1986 and its successor legislation of 2019. RERA, in other words, is a special statute governing the real estate sector, encompassing rights and obligations found in different central enactments.

WB-HIRA covers the identical field of regulating the contractual behaviour of promoters and buyers in real estate projects. The State law is a ‘copy and paste’ replica of the central legislation (except for certain provisions which are inconsistent with RERA) and covers the field which is occupied by the central enactment. WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

The important provisions of WB-HIRA which are inconsistent with RERA are mentioned herein below:

  1. Force majeure events – The RERA restricts force majeure events to fire, cyclone, drought, flood, war, earthquake, or any other natural calamity that hinders the development of the projects, while WB-HIRA includes “any other circumstances as may be prescribed” as an added eventuality.
  2. Planning Area – The RERA specifies that only the projects that fall within the planning areas are subject to the RERA. According to Section 2 (zh) of the RERA, a “planning area” is a planning area or a development area, a local planning area, a regional development plan area, any other area specified as such by the appropriate government or any competent authority, while the WB-HIRA does not define the term “planning area”.
  3. Garage Area – RERA defines a garage as being ‘a place within a project having a roof and walls on three sides for parking any vehicle. It does not include uncovered parking spaces such as open parking areas. On the other hand, WB-HIRA has no such restrictions in defining garage or parking spaces and only mentions spaces as sanctioned by the competent authority.
  4. Compounding of Offences – If any person is found to have violated the RERA, they can be punished under the provision in the Code of Criminal Procedure, 1973 while WB-HIRA does not have provision for the compounding of offences.

Apart from the above, the subject of the provisions of the state enactment is identical, the content is identical. In essence and substance, WB-HIRA has enacted a parallel mechanism and parallel regime which the RERA already entails. In other words, the State legislature has enacted legislation on the same subject matter as the central enactment. Not only is the subject matter identical, but the statutory provisions of WB-HIRA are nearly identical to those of RERA.

WB-HIRA, since its enforcement in the State of West Bengal, would have been applied to building projects and implemented by the authorities constituted under the law in the state. In order to avoid uncertainty and disruption in respect of actions taken in the past, recourse to the jurisdiction of this Court under Article 142 was necessary. The Court, as such, exercised its extraordinary powers under Article 142 and gave effect to its judgment striking down the provisions of WB-HIRA prospective. The Court directed that the striking down of WB-HIRA will not affect the registrations, sanctions, and permissions previously granted under the legislation prior to the date of this judgment.

Down the Road

After the repeal of the WB-HIRA, the Government of West Bengal, Housing Department, by its Notification dated July 27, 2021, framed the West Bengal Real Estate (Regulation and Development) Rules, 2021, and the rules will come into force from the date of their publication in the Official Gazette. Thereafter, by another Notification dated July 29, 2021, the Government of West Bengal, Housing Department established an Authority known as the West Bengal Real Estate Regulatory Authority with immediate effect to exercise the powers conferred on it and to perform the functions assigned to it under the RERA throughout the State of West Bengal. With a further notification dated July 30, 2021, the Government of West Bengal, Housing Department, established an Appellate Tribunal known as the West Bengal Real Estate Appellate Tribunal with immediate effect. It is a sad plight that though the authorities have been established by several notifications dated July 29, 2021 and July 30, 2021, respectively, the positions of Chairperson, Members of the Regulatory Authority, Judicial Member, and Administrative Member of the Appellate Authority are still vacant. By a notice dated July 7, 2022, the Search Committee constituted under the West Bengal Real Estate (Regulation and Development) Rules, 2021, invited eligible and willing persons for the above-mentioned position.

A time-bound and proper implementation of the real estate regulatory law RERA in the state is required. Lack of implementation of RERA has left home buyers in the lurch as neither new complaints can be filed against builders nor existing complaints already filed before the erstwhile WB-HIRA can be continued and home buyers are being subjected to even more ruthless exploitation by builders since there is no mechanism in the state at present for redressal of home buyers’ grievances.

WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

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PUFE Transaction Under IBC Vis-À-Vis Real Estate Sector

Since the implementation of the Insolvency and Bankruptcy Code, 2016, (“Code”), the Real Estate Sector has been in turmoil, with many transactions entered into by the Builder(s) undermining and jeopardising the legitimate interests of innocuous creditors. The Code encompasses a collection of transactions that the Interim Resolution Professional (“IRP”) and the liquidator appointed by the National Company Law Tribunal (“NCLT”) for companies in insolvency or liquidation should avoid, as stated below. Preference, Undervalued, Fraudulent, and Extortionate Transactions (“PUFE Transactions”) is how the group of transactions is known. Each of the aforementioned has been examined in relation to the Indian real estate sector in order to advance the conceptual nature.

Understanding PUFE Transactions

 

Preferential Transactions

The factors that may lead to transactions being classified as preferential in character are discussed in Section 43 of the Code. Thus, if specific criteria exist in a set of transactions conducted by the corporate debtor that may be preferential in character, they can only be avoided if the IRP or liquidator files an application with the NCLT.

When a court determines that a transaction was not carried out in the ordinary course of business to create a new value in the corporate debtor’s interest, but instead acted to give preferential advantage to a related party or other parties, the transaction is to be avoided under Section 44 of the Code. Its main goal was to reverse the consequences of preferential transactions by requiring the person who received the preference to refund any profit gained as a result of the preference.

 

Undervalued Transactions

An undervalued transaction occurs when a corporate debtor has the malafide intention of causing a wrongful gain to a linked party or selling assets for a cheap price in a short period of time to boost cash liquidity.

In addition, the time frame for challenging an undervalued transaction has been classified according to whether the party is linked or unrelated. As a result, an undervalued transaction with a ‘related party’ might be called into question two years prior to the start of insolvency proceedings, whilst an undervalued transaction with a ‘unrelated party’ could be called into question one year prior to the start of bankruptcy proceedings.

If the NCLT determines that the transaction was undervalued and that the Resolution Professional (“RP”) or liquidator failed to report it despite having sufficient information or opportunity, the NCLT can order the position to be restored to its pre-transaction state and order the insolvency board to initiate proceedings against the liquidator or RP.

 

Fraudulent Transactions

The Code’s scope and ambit for identifying fraudulent transactions are rather broad in order to protect creditors’ legitimate rights against the corporate debtor. The phrasing used in Section 66(1) of the Code, which deals with deceptive dealing, demonstrates the same. As a result, if the corporate debtor conducted business with the intent to defraud creditors or for any other fraudulent purpose, the NCLT can issue an order directing any individual who was knowingly a party to the corporate debtor’s business conduct to make such contributions to the corporate debtor’s assets as the NCLT deems appropriate during the insolvency process.

While Section 66(2) of the Code covers wrongful trading (i.e., conduct that is not fraudulent but falls short of the standards governing directors’ duty to behave correctly in the case of insolvency), the NLCT has the authority to impose a pecuniary penalty on the director or partner.

 

Extortionate Transactions

Extortionate transactions are covered under Section 50 of the Code, which requires the corporate debtor to make exorbitant payments to any of its creditors in the two years preceding the bankruptcy beginning date. An NCLT order may be used to prevent such transactions. If a person’s debt is in line with the law, this rule does not apply.

The two-year period before the start of bankruptcy is crucial for establishing whether a transaction is excessive.

As a result, before engaging in any transaction, contractual parties and creditors must confirm that they have evaluated the company’s most recent financial status, particularly those involving the transfer of assets or value from such a business, to identify any financial crisis indicators.

 

Analysis

Troubled businesses must be prohibited from engaging in activities that may block creditor recovery if insolvency proceedings were to be commenced. In India, where promoter groups typically control enterprises, such measures are essential. Through opaque arrangements, promoter groups may seek to move income from assets to other group companies for their own benefit. As a result, the NCLT has the jurisdiction under the Code to reverse any such transaction in order to safeguard creditors’ and other stakeholders’ interests.

The case of IDBI Bank Ltd. v. Jaypee Infratech Ltd[1]. (“IDBI”), which was confirmed by the Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.[2], is an important precedent for PUFE Transactions.

M/s Jaiprakash Associates (“JAL”) established a special purpose firm, M/s Jaypee Infratech Ltd. (“JIL”), to manage the project design, engineering, development, and construction. JAL controlled 70 percent of JIL’s equity. Significantly, JIL encountered financial difficulties and failed to satisfy contractual deadlines for project completion and debt repayment. As a result, JIL’s account was designated non-performing by the Life Insurance Corporation (“LIC”). Since JIL’s account was deemed non-performing, its financial creditors, including IDBI, filed an application with the NCLT’s Allahabad Bench under Section 7 of the Code, which was granted, and the NCLT appointed an IRP. The IRP filed an application with the NCLT after reviewing the transactions, requesting that they be declared as PUFE Transactions.

According to the NCLT, JIL failed to strive diligently to decrease the creditors’ losses and mortgaged the land without JAL’s counter-guarantee since it completed the series of transactions while in financial distress. JIL had also failed to acquire the essential approvals for the challenged acquisition from the JLF lenders as well as the shareholders. As a result, the NCLT determined that the contested transactions occurred during the relevant period and that they were preferential transactions under Section 43 of the Code.

 

Conclusion

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

On the other hand, a careful examination of the modifications reveals that they are helpful to homebuyers. The amendment to the Code is favourable to buyers who are facing difficulties due to incomplete real estate developments. Homebuyers are affected by project delays since they invest a considerable portion of their cash in a down payment and an EMI on the loan while continuing to pay rent in their current location. This situation has now altered as a result of the recent Code modification.

References:

[1] Company Petition NO.(IB)77/ALD/2017

[2]  Civil Appeal NOS. 8512-8527 OF 2019

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PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

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Thinking through Timelines: Acceptance of Rent Amounts to Waiver of Termination of Lease?

On June 24, 2022, the Supreme Court of India while deciding the matter of Sri K.M. Manjunath Vs. Sri Erappa G,[i] held that mere acceptance of rent by landlord after the expiry of lease would not amount to waiver of termination of lease.

Background

 

The dispute in this matter arose in connection with unregistered lease agreements for the lease of shop premises at Banaswadi Main Road, Bengaluru. Pursuant to the expiry of the last lease deed executed between the parties, the respondent-lessor filed a suit for ejectment before the Small Causes Court against the petitioner-lessee to obtain vacant possession of the shop premises. The Small Causes Court dismissed the suit for ejectment on the grounds that the suit was not maintainable as there was no valid termination of tenancy under section 106 of the Transfer of Property Act, 1882 (“ToP Act”) (detailed hereinbelow).

Aggrieved by the aforesaid dismissal, the respondent-lessor preferred a revision petition before the Karnataka High Court (“High Court”). Upon appreciation of the evidence on record, which inter alia consisted of unregistered lease agreements executed between the parties during the period of 1989 to 1995, the High Court noted that the duration of the lease agreements could be inferred to be for a period of 11 (eleven) months each, and thus the lease granted thereunder stood terminated by efflux of time. Hence, the petitioner-lessee was not entitled to notice under section 106 of the ToP Act. The High Court thus set aside the judgement of the Small Causes Court.

The petitioner-lessee thereafter filed a special leave petition (“Special Leave Petition”) before the Supreme Court challenging the judgment and final order of the High Court.

 

Applicable Provisions and Contentions

 

The primary contention in the matter was the applicability of section 106 of the ToP Act, which provides that where there is no written contract for the lease of immovable property, not being leased for agricultural or manufacturing purposes, the period of the lease shall be deemed to be from month to month and terminable by 15 (fifteen) days’ notice. The contention of the petitioner-lessee before the Small Causes Court was that no valid notice was served by the respondent-lessor as per this provision. On the basis of the aforesaid, the Small Causes Court ruled in favour of the petitioner-lessee. However, based on the aforementioned evidence evaluation, the High Court determined that the lease in this case stood determined by virtue of section 111(a) of the ToP Act, which provides that a lease may come to an end by efflux of time limited therein.

The Supreme Court, in the Special Leave Petition, took note of the contention of the petitioner-lessee that after the expiry of the period of the last lease agreement, the petitioner-lessee was continuing as a tenant in sufferance and had paid the rent till the date of the filing of the suit for ejectment.

 

Verdict

 

Considering the above provisions and contentions, the Supreme Court appreciated the reiteration of the High Court, based on the precedents relied upon by the High Court, that mere acceptance of the rent does not amount to a waiver of the termination of the tenancy. The Supreme Court, however, granted the request of the petitioner-lessee for a grant of time to vacate the shop premises by allotting a period of 6 (six) months from the date of its judgement to hand over the possession of the shop premises to the respondent-lessor. The aforesaid extension was granted subject to the petitioner-lessee submitting an undertaking on affidavit to pay the arrears of rent at the rate of INR 1400/- (Indian Rupees One Thousand Four Hundred only) per month for the arrears pending from the year 2017 (as determined by the High Court) and extending to the aforesaid period of 6 (six) months.

Accordingly, the Supreme Court upheld the decision of the High Court and dismissed the Special Leave Petition for being devoid of merit.

 

The Takeaway

 

The reaffirmation of the Supreme Court on non-waiver of termination in this matter reinforces the significance of capturing the duration of the lease in crystal clear terms in lease agreements. Detailing timelines for termination and notice period is just as important. As seen in the facts of the discussed case, the absence of such agreed timelines can further complicate disputes arising between the parties. Hence, customising such timelines on a case-specific basis is critical, while adopting timelines based merely on common practice is best avoided.

References: 

[i]Petition For Special Leave To Appeal (C) NO.10700 OF 2022 filed before the Supreme Court Of India, Civil Original Jurisdiction.

Image Credits: Photo by  Tierra Mallorca on Unsplash

The reaffirmation of the Supreme Court on non-waiver of termination in this matter reinforces the significance of capturing the duration of the lease in crystal clear terms in lease agreements. Detailing timelines for termination and notice period is just as important. 

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Failure to Obtain Occupancy Certificate a Deficiency in Service by Developer: A Note on the Supreme Court’s Decision

On January 11, 2022, the Supreme Court of India delivered a noteworthy decision in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd.,[i] by affirming that the failure of a developer to obtain an occupancy certificate would constitute a deficiency in service under the consumer protection law of India.

Relevance of Occupancy Certificate

 

Setting up one’s perfect abode for peaceful dwelling calls not only for a perfect finishes and a picturesque interior but also entails ensuring that all housing-related statutory requirements are fulfilled. One such indispensable compliance, the very mention of which causes flat owners to prick up their ears is an occupancy certificate. Under such an occupancy certificate, the local municipal authority permits the occupation of any building, as provided under local laws, which has provision for civic infrastructure such as water, sanitation and electricity.[ii]

However, a large number of flat owners across the country are far from having a perfect legally compliant abode given the failure of developers to obtain occupancy certificates in a timely manner. As a matter of practice, flat owners would take possession of their flats before obtaining the occupancy certificate and refurbishing the interiors, which, in some cases would result in a violation of statutory requirements and would further complicate the process of obtaining an occupancy certificate. In the case of old buildings, the developers are seldom approachable, and the residents are left helpless, in anticipation and burdened with extra costs for years.

 

Background of the Case

 

The flat owners in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd., had purchased flats from Mumbai Mahalaxmi Construction Pvt. Ltd. (“Respondent-Developer”) around the year 1993, were given possession of their flats around the year 1997, and had further constituted themselves into a co-operative housing society viz. ‘Samruddhi Co-operative Housing Society Limited’ (“Appellant-Society”). The Respondent-Developer failed to obtain the occupancy certificate for the buildings of the Appellant Society but went ahead and delivered possession of the flats. Consequently, the Appellant Society, being ineligible to obtain electricity and water supply services in the absence of the occupancy certificate, was burdened with extra taxes and charges payable to the local municipal authority, including payment of excess property tax at 25 per cent over and above the normal rate and water charges at 50 per cent over and above the normal rate.

In the year 1998, the Appellant-Society instituted a consumer complaint before the State Consumer Disputes Redressal Commission (“SCDRC”) seeking that the Respondent-Developer be directed to obtain the required occupancy certificate. The SCDRC not only issued a direction to the Respondent-Developer to obtain the required occupancy certificate within a period of 4 months but also directed the payment of INR 100,000/- towards reimbursement of the excess water charges paid by the Appellant-Society. Upon the failure of the Respondent-Developer to comply with the aforesaid directions of SCDRC, the Appellant-Society filed a complaint before the National Consumer Disputes Redressal Commission (“NCDRC”), the apex consumer dispute resolution forum in the country, in the year 2016.

The aforesaid complaint was filed on the statutory ground of ‘deficiency in service’ of the Respondent-Developer and the Appellant-Society sought payment of INR 26,073,475/- as reimbursement of excess charges and tax paid by the Appellant-Society and INR 2,000,000/- towards the mental agony and inconvenience caused to the members of the Appellant-Society. However, the NCDRC dismissed the aforesaid complaint on the grounds of being time-barred and the ineligibility of the Appellant Society to seek relief as a ‘consumer’ under Section 2(1)(d) of the governing statute i.e., the Consumer Protection Act, 1986 (“CP Act”). The Appellant-Society thereafter challenged the decision of the NCDRC before the Supreme Court.

 

Operating Law

 

In addition to dealing with the point of limitation as per the CP Act, the Supreme Court, in its analysis, considered the provision of the Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (“MOF Act”), which was introduced to curb malpractices by developers in relation to the sale of flats on an ownership basis.

Section 3 of the MOF Act prevents a developer from allowing a flat purchaser to take possession of a flat before the completion certificate, as may be required under law, is duly obtained by the developer from the local authorities.

Section 6 of the MOF Act obligates a developer to discharge payment of all outgoings, including municipal or other taxes and water charges, until the developer transfers the flats to the flat owners or organisation of flat owners. Further, the aforesaid provision clarifies that the developer will continue to be liable for payment of dues and penalties related to the outgoings which were collected from the flat owners prior to the transfer of the flats, even after such transfer is completed.

By a co-joint reading of Sections 3 and 6 of the MOF Act, the Supreme Court concluded that the Respondent-Developer was obligated to provide the Appellant-Society with the occupancy certificate and was also liable to discharge payment of all outgoings until such a certificate was provided. The Supreme Court further observed that the failure of the Respondent-Developer to do so was a continuing wrong and the Appellant-Society was entitled to claim compensation for such continuing wrong.

 

The Verdict

 

Following the above analysis, the single-judge bench of Justice Dhananjaya Y Chandrachud dealt with the findings of the NCDRC and overruled the decision of the NCDRC on the eligibility of the Appellant-Society as a consumer under Section 2(1)(d) of the CP Act. Based on precedent judgments of the Supreme Court, it was concluded that the failure of a developer to obtain an occupancy certificate or abide by contractual obligations would amount to a deficiency in service under the CP Act. The Supreme Court thus held that:

“In the present case, the respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.”

Allowing the appeal, the Supreme Court thus, directed NCDRC to decide the complaint based on the observations made by the Supreme Court in deciding the appeal and dispose of the complaint within a period of 3 months from the date of the judgment therein.

 

Significance of the Judgment

 

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for regularisation of their flats.

In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of the MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.[iii] Hence, for buildings that are registered under the RER Act, the authority set up under the RER Act can be approached in case of delay by the developer to provide an occupancy certificate.

Thus, the instant matter also resounds an alarm bell for developers to ensure that the occupancy certificate requirements are complied with as a prime concern as flat purchasers may have recourse to multiple forums to seek relief in case of any delay in this regard.

References

[i]Civil Appeal No. 4000 of 2019 in the Supreme Court of India Civil Appellate Jurisdiction.

[ii]Real Estate (Regulation & Development) Act, 2016 (Act No. 16 of 2016), §2(zf).

[iii]Real Estate (Regulation & Development) Act, 2016, § 11(4)(b).

 

Image Credits: Photo by Tierra Mallorca on Unsplash

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for the regularisation of their flats. In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.

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