Written in : May 1998

In the last two articles we discussed how capital gains can arise and that it is possible to postpone capital gains in the hands of the owner in development agreements by properly structuring agreements and drafting documents.

The next major issue that parties have to contend with is pre-emptive purchase of property by the Income Tax Department. This is popularly known as the process of 37I with the Appropriate Authority.

Under this law, the intending buyer and seller of every (eligible) property should submit the agreement to the Appropriate Authority in Form 37I explaining the transaction and the department will have the option to purchase the property at the agreed price. This law is to curb exchange of on-money in property deals. Some day we shall discuss this law in detail. For now, let us restrict ourselves to how it affects development agreements.

A question which has been very much debated is whether development agreements do at all come within the purview of the law of pre-emptive purchase. The law of pre-emptive purchase covers all transactions of transfer of immovable property. We have seen that development agreements do entail transfer of property by the owner to the developer/builder. The actual date of transfer may depend on the agreement, but transfer does take place at one time or another. What is transfer for capital gains is also transfer for the law of pre-emptive purchases. Hence, development agreements do come under the purview of pre-emptive purchases.

Recently, this matter has been looked into by the Patna and Chennai High Courts. Both have held that development agreements are covered by the law of pre-emptive purchases.

However, unlike capital gains there is one major difference. The law of pre-emptive purchase by the department becomes operative at the time of the agreement to transfer and does not wait till actual date of transfer. On the other hand, capital gains gets levied at the time of actual transfer and not necessarily on the date of agreement.

Let me illustrate. You enter into an agreement of development with a builder with respect to your property. The agreement is so drafted that transfer is postponed effectively. Hence, capital gains tax also gets postponed. Yet, since the property is an eligible property (discussed later) you are covered by the law of pre-emptive purchases.

The law requires that within 15 days of the agreement being entered into, both the buyer and seller are required to file Form 37I with the Authority. Irrespective of the date of transfer.

That is, you do not wait for the actual date of transfer to file Form 37I. You do so immediately after signing the agreement. And the government gets the right to acquire the property immediately. This is the critical difference.

However, for the property to come under the purview of this law, it should be an eligible property. Briefly, the following conditions should be fulfilled.

• There should exist an agreement to transfer immovable property.
• The property should be situated in specified areas. Of course, Hyderabad agglomeration is one of the notified areas.
• The property should be agreed to be transferred for an apparent consideration which is more than the notified amount. The amount varies from city to city. For Hyderabad the notified amount is Rs.20 lakhs currently.

The law has been clarified considerably by courts these past years. We shall study these in detail some other time.

If your agreement has eligible property which has an apparent consideration of more than the notified amount, both you and the builder are required to file Form 37I and submit yourselves to the scrutiny of the Appropriate Authority.

If you fail to do so, you can face the threat of prosecution for violating the law.

Once you file the Form, the Authority will consider your agreement, the details of the property, its value according to its own estimate etc. It will, then, hear you and decide if the property is being transferred for a consideration of less than its fair market value. If it does believe that the property is transferred for a lower consideration, it can decide to acquire the property and pay you, the seller, the agreed consideration. Otherwise, it will issue a No Objection Certificate enabling transfer and conveyance of the property

This law of pre-emptive purchase is, therefore, very critical and becomes a major consideration when you enter into agreements of development of property.