Land Uses and terminology in Mumbai

LAND Terminology

I.          Introduction

Real estate is a sector which touches almost everyone’s life.  One often comes across concepts such as land reservation, nature of land, etc., while dealing with the real estate sector. Further, while dealing with taxation issues connected with real estate, such as s.80-IB(10), knowledge of these terms is of immense value. The types of uses for which land in Mumbai can be used are explained in the Development Control Regulations for Greater Bombay, 1991 (“the DC Regulations”). The Regulations have been framed under the Maharashtra Regional and Town Planning Act, 1966 (“ the MRTP Act”). As the name suggests, these Regulations are applicable only for the City and suburbs of Mumbai. The MRTP Act provides for the town planning and the development of land for public purposes within the State of Maharashtra. This Article gives a bird’s eye-view of the land usage provided under the DC Regulations. 

II.        Division into Zones

2.1       As per the town planning scheme for Mumbai, the entire city has been divided into various zones and sub-zones. Accordingly, land has been designated or reserved for certain development purposes. This is to ensure an equitable distribution of the available land for different purposes. Some of the important land uses specified in the DC Regulations are as under:

            (a)        Residential (R)

                        (i)         Residential (R-1)           

(ii)        Residential with Shopping Line (R-2)

            (b)        Commercial (C)

                        (i)         Local Commercial (C-1)

                        (ii)        District Commercial (C-2)

                        (iii)       Shopping Centre (SC)

            (c)        Industrial (I)

                        (i)         Service Industries (I-1)

                        (ii)        General Industries (I-2)

                        (iii)       Special Industries (I-3)

                        (iv)       Industrial Estate (IE)

            (d)       Public / Semi-Public

                        (i)         School – Primary / Secondary

                        (ii)        College

                        (iii)       Recreation Ground (RG)

                        (iv)       Playground (PG)

                        (v)        Garden (G)

                        (vi)       Park (P)          

The Municipal Corporation, which administers the DC Regulations, decides the purpose for which certain land is to be used depending upon various factors, such as, the need for green spaces in every locality, provision of public amenities like theatres, schools, etc. in residential areas, open spaces in industrial zones, etc. 

2.2       Although, the names of the zones specify the type of usage permitted in that zone, certain ancillary uses are also permitted in these zones, subject to the fulfillment of certain conditions. Some of the important ancillary uses permitted are as follows:

(a)        Pure Residential Zone (R-1) : An area up to 50% of the floor space of the principal zone may also be used for clinics of doctors / dentists, nursing homes, students’ hostels, bus shelters, crematoriums, police stations, etc.  Further, convenience shopping is allowed at the rate of one shop per 15 tenements on the ground floor. Such shopping line will not be permitted in more than two adjoining plots in any locality and shall not cover more than 5% of the plot area. “Convenience shopping” is defined to mean shops, each with a carpet area not exceeding 20 sq. m. except where otherwise indicated and comprising those dealing with day to day requirements, as distinguished from wholesale trade or shopping.  It  includes, foodgrain or ration shops, each with carpet area not exceeding 50 sq. m., dry cleaners, tailors, groceries, beauty parlours,  bakeries, restaurants and eating houses each with a carpet area not exceeding 50 sq.m, shoes and sports shops each with a carpet area not exceeding 75 sq.m.

(b)        Residential Zone with Shopping Line (R-2) : In addition to the uses permitted under R-1 zone, certain additional uses are allowed, such as, retail stores, professional offices not exceeding 100 sq.m. in area,  restaurants and eating houses each with a carpet area not exceeding 200 sq.m. on the ground floor, establishments of a larger size than those permitted in a R-1 zone, etc. The shopping line must confirm to certain additional restrictions, e.g., the area of any shop cannot exceed 100 sq.m., they must only be on the ground floor, etc. Most of these shopping lines have been the bone of contention in cases u/s. 80-IB(10) of the Income-tax Act. Developers in Mumbai have constructed shopping lines in accordance with the permissible limits under the DC Regulations.    

2.3       Recreation/Amenity Open Spaces - In residential and commercial layouts  certain open spaces must be earmarked for recreational areas. In any layout or sub-division of vacant land in a residential and commercial zone, open spaces shall be provided as under :

               (i)    Area from 1001 sq. m. to 2500 sq.m.  ..          ..          15%.

(ii)   Areas from 2501 sq. m. to 10,000 sq.m.  ..       ..          20%                                                                                                                                      (ii)   Areas above 10,000 sq. m.        ..           ..         ..          25%

                        These open spaces shall be exclusive of areas of accesses/internal roads/designations or reservations development plan roads and areas for road-widening and shall as far as possible be provided in one place.  Where however, the area of the layout or sub-division is more than 5000 sq.m., open spaces may be provided in more than one place, but at least one of such places shall be not less than 100 sq. m. in size.  Such recreational spaces will not be necessary in the case of land used for educational institutions with attached independent playgrounds. The minimum area of such recreational space shall not be less than 125 sq. m.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

2.4       The maximum permissible Floor Space Index or FSI earmarked for some of the areas in Mumbai are as under :

No.	Area and type of Occupancy	FSI permissible
1.	Residential Zone & Commercial Zone
(a)	Island City of Mumbai (i.e., from South Mumbai to Mahim)	1.33
(b)	Suburbs	Ranges from 0.5 to 1.00
2.	Service Industrial Zone	1.00
3.	Educational Buildings, Medical Institutions and Institutional Buildings
(a)	Island City of Mumbai (i.e., from South Mumbai to Mahim)	1.33
(b)	Suburbs	1.00

Under the DC Regulations, the plot size for the FSI computation is done as under :

No.	Plot size	Area for FSI computation
1.	Residential and Commercial Zones
(a)	Up to 1,000 sq.m.	Total Area
(b)	1,001 – 2,500 sq.m.	Total Area subject to maximum of 2,125 sq. m.
(c)	2,501 sq.m. and above	Total Area (-) 15% of the area for recreational / amenity open space
2.	Industrial Plots
(a)	Up to 1,000 sq.m.	Total Area subject to maximum of 900 sq. m
(b)	Above 1,000 sq. m	Total Area (-) 10% of the area for recreational / amenity open space

2.5       Many times a land falls within the zones demarcated or areas reserved for public purpose / additional amenities in the development plan prepared under the MRTP Act.  These are known as reservations under the DC Regulations. In such a case the Town Planning Authorities require the plot of land for carrying out their developmental activities, such as reservation for garden area, road widening, construction of schools, parks, playgrounds, etc. Thus, there are conflicting objectives of the BMC / Town Planning authorities on one hand who want to use the land for reservation purpose and the Owner of the land on the other hand who wants to use the land to construct residential / commercial, other projects. These divergent objectives are balanced by Transferrable Development Rights or TDRs.

Thus, where an owner whose land is reserved for any town planning purpose under the MRTP Act has surrendered his land free of cost to the BMC in the manner specified under the DC Regulations, then he is eligible for FSI in the form of Development Rights. The FSI by way of Development Rights would be of the like manner and to the same extent had the land not been  reserved. Alternatively, the Owner may be granted TDR after he has completed the development of the reservation and surrendered the same to the BMC. The Development Rights are granted in the form of a Development Rights Certificate which the owner may either use himself or he can transfer it to any other person.  If the owner instead of merely surrendering his land to the BMC, also develops or constructs the amenity on the surrendered plot at his own cost and then hands over the developed/constructed amenity to the BMC, free of cost, then he is eligible for additional Development Rights. These additional Development Rights would be  equal to the FSI equal to the area of the constructed by him. 

V.        How a CA can help?

Although an Auditor is not supposed to enquire about the compliance of DC Regulations, etc., it would be of great utility to him if he has a basic understanding of the provisions of the law in this respect. The Auditor may be able to use this knowledge in judging whether the going concern of an entity which is engaged in real estate construction has been affected because of severe violations of these Regulations. Further, while providing tax advise to clients on matter such as the provisions of s.80-IB(10), knowledge of these provisions would be of great assistance.

Attachment of property

ATTACHMENT OF PROPERTY

I.          Introduction

In case of a decree from a Court, the Court may require any person (known as the defendant) to pay any sum to the decree holder (or the plaintiff). In case the defendant fails to do so the Court can, in execution of its decree, attach the movable and immovable properties of the defendant and recover the amount due by disposal of these assets. However, certain assets are not liable to attachment under a Court decree. In last month’s issue relating to Debt Recovery Tribunals, we had seen that the Recovery Officer of the DRT can require any debtor of the defendant to pay any sum directly to him. This excludes any amount exempt from attachment in execution of a Court decree u/s. 60 of the Code of Civil Procedure, 1908. This Article examines some of the provisions relating to Attachment of assets in execution of a Court decree. 

II.        Execution of a Decree

2.1       The Civil Procedure Code, 1908 (“the Code”) deals with the provisions relating to a court decree and its execution. S.2(2) of the Code defines a decree as the formal adjudication which conclusively determines the rights of the parties with regard to the controversial matters covered by the suit. The decree could be interim or final. 

2.2       The judgment debtor is a person against whom a decree has been passed or an order capable of execution has been made.

2.3       The decree holder means a person in whose favour a decree has been passed or an an order capable of execution has been made.

III.       Attachment

3.1       The property belonging to the judgment debtor, or property over which, or the profits of which, he has a disposing power which he may exercise for his own benefit, is liable to attachment and sale in execution of a decree.

3.2       The property liable to attachment may be lands, houses or other buildings, goods, money, bank notes cheques, bills of exchange, hundis, promissory notes, Government securities, bonds or other securities for money, debts, shares in a corporation and, other than the assets expressly excluded, all other saleable property, movable or immovable. The property may be held in the name of the judgment debtor or by a trustee for his benefit or on his behalf.

3.3       The following property of the judgment debtor shall not be liable to such attachment or sale :

3.3.1      Personal property

(i)        clothes, cooking vessels, beds of the judgment debtor, his wife and children, and personal ornaments which as per religious usage, cannot be parted with by any woman

(ii)       tools of artisans – court decisions have held that it only includes movable tools and not immovable equipment.

(iii)      if the judgment debtor is an agriculturist, his implements of husbandry and such cattle and seed grain as the court deems fit to enable him to earn his livelihood as such, and such portion of agricultural produce or of any class of agricultural produce as may have been declared to be free from liability 

(iv)      houses and other buildings along with the materials and the land
 appurtenant thereto which is necessary for their enjoyment, which belongs to an agriculturist or a labourer or any domestic servant and is occupied by him

(v)        all moneys payable under a policy of insurance on the life of the judgment debtor – no conditions have been stipulated as to when the money should become payable, i.e., policies which mature after a fixed term or after the death of the assured.  In certain circumstances, policies for the benefit of a judgment debtor’s wife and children under the Married Woman’s Property Act, 1874, are free from attachment.      

(vi)       tenancies in respect of a residential building covered by the provisions of any Rent Control Act

3.3.2       Salary

(i)        stipends and gratuities allowed to pensioners of the Government or of a local authority or of any other employer, or payable out of any notified service family pension fund and political pension 

(ii)       the wages of labourers and domestic servants, whether payable in cash or kind

(iii)      salary to the extent of the first Rs. 1,000 and 2/3 of the balance in execution of any decree other than a decree for maintenance. If any part of the attachable salary has been under attachment,  for 24 months, then such portion shall be exempt from attachment until the expiry of a further period of 12 months. Where the attachment has been made in execution of one decree, it shall, after the attachment has continued for a total period of 24 months, be finally exempt from attachment in execution of that decree

  (iv)       1/3 of the salary  in execution of any decree for maintenance

(v)        salary payable to persons covered by the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957,

(vi)       all compulsory deposits and other sums in or derived from any fund to which the
Provident Funds Act, 1925, or Public Provident Fund Act for the time being applies, in so far as they are declared by the Acts to be not liable to attachment

(vii)      any allowance forming part of the emoluments of any servant of the Government/ railway / local authority which has been notified to be exempt from attachment, and any subsistence grant or allowance made to any such servant while under suspension

(viii)    any allowance declared by any Indian law to be exempt from liability to attachment or sale in execution of a decree

3.3.3      Incorporeal property

(i)        a mere right to sue for damages

(ii)       any right of personal service

(iii)       an expectancy of succession by survivorship or other merely contingent or possible right or interest

(iv)       a right to future maintenance       

(v)       where the Judgment debtor is a person liable for the payment of land revenue, any
movable property which, under any law for the time being applicable to him, is exempt from sale for the recovery of an arrears of such revenue

(vi)      books of account

Notwithstanding anything contained in any other law, an agreement by which a person agrees to waive the benefit of any exemption under this section shall be void.

IV.       Mode of Attachment

4.1       Rules 41 to 57 of Order 21 deal with the manner in which various properties are to be attached.  Rules 44 and 45 deal with the attachment of agricultural produce.

4.2       Rule 46 provides that where the movable property is

(i)    a debt, the attachment would be by prohibiting the recovery of the debt or the debtor from making payment thereof; or

(ii)   a share in a body corporate, the attachment would be by prohibiting the transfer of the shares or from receiving any dividend. 

(iii)  any other movable property, the attachment would be by prohibiting the person in possession of the property from giving possession to the judgment debtor.

4.3       In case the judgment debtor has a co-share in a movable property, then the attachment will be by a notice prohibiting him from transferring his share/interest or in any manner creating a charge on the share in the property.   

4.4       In case the property is a negotiable instrument the attachment shall be made by way of an actual seizure and brought to the court.

4.5       Rules 49 and 50 provide for attachment of property of a partnership firm.

4.6       Under Rule 54, if the property is immovable, then attachment will be made by a order prohibiting any transfer or charge on the property. Any alienation after the attachment will be null and void against all claims enforceable under the attachment.  

V.        Effect of Attachment

5.1       An attachment does not create any title of the decree-holder to the property nor does it create a lien or charge over the property for the sum due to the decree-holder.

5.2       The judgment debtor continues to enjoy the attached property.

5.3        All that an attachment does is to prevent a private-transfer and that no person can benefit from a subsequent transfer of the attached property. S. 64 of the Code provides for such private alienation. Once a property has been attached, any private alienation of such property by private transfer or delivery and any payment to the judgment debtor of any debt, dividend, etc., contrary  to such attachment shall be void as against all claims enforceable under the attachment. S.64 applies whether the property stands in the name of the judgment debtor or any other person who is a name lender, i.e., benami property – Pradyut Shah, AIR 1979 Bom 166. However, if the transfer is by an operation of law or pursuant to a Court order, then s.64 does not apply. It only covers private transfers, such as, voluntary sales, gifts, mortgages.  It may be noted that the private transfers are not void ab initio but only void as against all claims enforceable under the attachment. There is a difference of opinion amongst various Courts as to whether or not any private transfer after attachment but in pursuance of a contract of sale executed prior to attachment is covered by s. 64. Various decisions have held that in order that an attachment renders a subsequent alienation as void u/s. 64, the attachment must follow the process laid down under the Code, e.g., Rules 41 to 57 of Order 21. 

VI.       Auditor’s duty

            The Auditor should enquire of the auditee whether any attachment proceedings are pending against it. The Auditor can provide value added services to his clients by enlightening them about which assets are not attachable and what are the rights and obligations in respect of an attached property. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.  The Auditor should also enquire whether the entity has obtained ‘attachment’ in cases filed by it. This will enable the Auditor to assess the provisions for bad and doubtful debts. Though an ‘attachment’ does not create any rights in favour of the entity but the courts normally do not grant attachment unless the plaintiff establishes a prima facie case.

Essential of Good Corporate Governance

INGREDIENTS OF GOOD CORPORATE GOVERNANCE (CG)

Key Points of Kumar Mangalam Birla Committee Report

1.                  CG is an important instrument of investor protection and it is therefore a priority on SEBI’s agenda. To improve the level of CG , need was felt  for a comprehensive approach at the stage of development of the capital market, to accelerate the adoption of globally acceptable practices of CG.

2.                  Fundamental objective of CG is enhancement of shareholder value, keeping in mind interests of other stakeholders.

3.                  Imperative for CG lies not merely in drafting a code but in practicing it. What is important is the way in which the standards, rules, codes are put to use.

4.                  The code should not be treated as a mere structure but as a way of life.

5.                  Real onus in achieving good CG lies in the Proactive initiatives taken by the companies and not in the extent of the code or stringency of enforcement norms.

6.                  The extent of discipline, transparency and fairness, and the willingness shown by the companies themselves in implementing the code, will be the crucial factor in achieving shareholders confidence and fulfilling goals of the companies.

N.R. Narayan Murthy Committee Report on CG

1.         CG deals with conducting the affairs of a company in a way that there is fairness to all stakeholders.

2.         There should be openness, integrity, and accountability.

CII Code on CG

1.         Code of CG cannot be static. It must be reviewed periodically, say, every 5 years.

2.         CG refers to an economic, legal and institutional environment that allows companies to diversify, grow, restructure and exit and do everything necessary to maximize long-term shareholder value.

3.         CG is an interplay between companies, shareholders, creditors, capital markets, financial sector institutions and company law. Hence, a code of CG must attempt to address all these issues.

Institute of Chartered Accountants in England & Wales- Response to Initial Consultation of the CG Committee  (This Report has reviewed Cadbury, Greenbury and Blue Ribbon Report)

1.         The prime responsibility for effective Governance lies with the Board of the company. Shareholders and auditors can only play a secondary role.

2.         Observance of standards should be based on transparency, disclosure and effective communication with stakeholders.

3.         The approach to CG must focus on the quality of the Board and to ensure that the right Board is in place.

OECD Report

1.         Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.

2.         While a multiplicity of factors affect the governance and decision making processes of firms, and are important to their long-term success, the Principles focus on governance problems that result from the separation of ownership and control. However, this is not simply an issue of the relationship between shareholders and management, although that is indeed the central element. In some jurisdictions, governance issues also arise from the power of certain controlling shareholders over minority shareholders. In other countries, employees have important legal rights irrespective of their ownership rights. The Principles therefore have to be complementary to a broader approach to the operation of checks and balances.

3.         The Principles are evolutionary in nature and should be reviewed in light of significant changes in circumstances. To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities.

4.         The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

5.         Moreover, in developing a corporate governance framework in each jurisdiction, national legislators and regulators should duly consider the need for, and the results from, effective international dialogue and cooperation. If these conditions are met, the governance system is more likely to avoid over-regulation, support the exercise of entrepreneurship and limit the risks of damaging conflicts of interest in both the private sector and in public institutions.

6.         The legal and regulatory requirements that affect corporate governance

practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable.

7.         Corporate governance requirements and practices are typically influenced by

an array of legal domains, such as company law, securities regulation, accounting and auditing standards, insolvency law, contract law, labour law and tax law. Under these circumstances, there is a risk that the variety of legal influences may cause unintentional overlaps and even conflicts, which may frustrate the ability to pursue key corporate governance objectives. It is important that policy-makers are aware of this risk and take measures to limit it.

 Effective enforcement also requires that the allocation of responsibilities for supervision, implementation and enforcement among different authorities is clearly defined so that the competencies of complementary bodies and agencies are respected and used most effectively. Overlapping and perhaps contradictory regulations between national jurisdictions is also an issue that should be monitored so that no regulatory vacuum is allowed to develop (i.e. issues slipping through in which no authority has explicit responsibility) and to minimise the cost of compliance with multiple systems by corporations.

An Insight on Development Rights Agreement

All About Development Rights Agreement

1. Meaning

A popular mode of developing property, especially in Mumbai, is by way of an Agreement granting Development Rights, popularly known as “Development Agreement” or “DA”. DAs are the by-products of outdated legislations such as the Urban Land Ceiling Regulation Act. The owner of the land grants development rights to a builder /developer to carry out various activities such as, to:

(a) obtain the necessary permissions

(b) construct the building

(c) market and sell the flats

(d) receive the consideration and

(e) form a society / association of flat purchasers

Thus, while the owner retains the possession of the land, he gives a licence to the builder to enter upon his land, construct the building and market and sell the flats so constructed. DAs are increasingly accepted because of their many advantages both for the owner and the developer. The developer does not have to block huge funds in buying the land and thereby he can improve his cash flow. He may pay a DA premium but it would be significantly lower than buying the land on an outright basis. This is one of the biggest advantages of a DA structure. As regards the owner of the land, he gets an opportunity to share in the profits of the development. With real estate prices touching all-time highs, most owners do not want to lose out on the potential gains they can make from selling the flats. Thus, in several cases, a DA is a win-win situation for both parties.

2. Consideration for DA

In consideration for the above rights, the owner may be given a lump sum consideration. However, in several cases, the owner shares the constructed area or shares a percentage of the profits from the development with the developer.

3. Kapadia’s judgment

The Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom) has threadbare examined the concept of a DA in the context of the point of taxation of the land owner. It looked at whether a DA can be treated as a part performance of a contract u/s. 53A of the Transfer of Property Act. The court has laid down the following 6 conditions necessary to attract s.53A of the Transfer of Property Act:

(a) there should be a contract for consideration;

(b) it should be in writing;

(c) it should be signed by the transferor;

(d) it should pertain to immovable property;

(e) the transferee should have taken possession of the property; and

(f) the transferee should be ready and willing to perform his part of the contract.

It further held that if under the Development Agreement a limited power of attorney is intended to be given to the Developer and even if the actual power of attorney is not given, then the date of such Development Agreement would be relevant to decide the date of transfer u/s. 2(47)(v) read with s.53A of the Transfer of Property Act. For this purpose, the date of the actual possession or the date on which substantial payments are made would not be relevant. If the contract as a whole indicates passing of or transferring complete control over the property in favour of the developer, then the date of the contract would be relevant to decide the year of chargeability. In this case the Court held that the conditions of s.53A were fulfilled and hence, capital gains tax was attracted u/s. 2(47)(v) of the Income-tax Act.

4. DA or Partnership or AOP

4.1.In several cases, the owner and the builder enter into a profit sharing arrangement, which is quite similar to that under a partnership. An issue in such a case would be, whether the arrangement is one of a Development Rights Agreement or is a partnership? The income-tax and stamp duty consequences on the owner and the developer would vary depending upon the nature of the arrangement.

4.2.S. 6 of the Indian Partnership Act is relevant for this purpose. It provides that the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in the property does not of itself make such persons partners. The relevant extracts are given below :

“6. Mode of determining existence of partnership.- In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
Explanation I. – The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
Explanation II.- The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment –

(a)by lender of money to person engaged or about to engage in any business,

(b) by a servant or agent as remuneration,

(c) by the widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof,

does not of itself make the receiver a partner with the persons carrying on the business.”

4.3.In addition to profit sharing, mutual agency is also a key condition of a partnership. Each partner is an agent of the firm and of the other partners. The business must be carried on by all or any partner on behalf of all. What would constitute a mutual agency is a question of fact.

Recently, the Bombay High Court in the case of Sanjay Kanubhai Patel, 2004 (6) Bom C.R. 94 had an occasion to directly deal with this issue. The Court after reviewing the Development Rights Agreement, held that it is settled law that in order to constitute a valid partnership, three ingredients are essential. There must be a valid agreement between the parties, it must be to share profits of the business and the business must be carried on by all or any of them acting for all. The third ingredient relates to the existence of mutual agency between the concerned parties inter se. The Court held that merely because an agreement provided for profit sharing, it would not constitute a partnership in the absence of mutual agency.

4.4.In some cases, the income-tax may also contend that it is not a DA arrangement but an Association of Persons or an AOP and hence, it is the AOP which should be taxed. This stand may have several repercussions under the Stamp Act, deduction u/s. 80-IB(10), etc. It is important to note that unlike in the case of a partnership, the condition of mutual agency is not necessary in the case of an AOP.

4.5.From the above discussions, it would be clear that a proper structuring of the transaction and a proper drafting of the relevant documents is essential to achieve the desired results.

5. Stamp Duty

5.1.In Maharashtra, under the Bombay Stamp Act, 1958, a DA attracts stamp duty @ 1% of the market value of the property. However, if stamp duty has been paid under Art.48(g) dealing with a Power of Attorney in respect of the same property, then stamp duty on a Development Agreement would only be Rs. 100.

5.2.The term “market value” is defined by s.2(na) of the Bombay Stamp Act to mean the higher of :

• the price which the property covered by the instrument would have fetched if sold in an open market on the date of execution of the instrument (which in other words means the Stamp Duty Ready Reckoner Value); or
• the consideration as stated in the instrument

5.3.The Gujarat Stamp Act also contains an express provision to this effect. The Stamp Acts of several other States do not contain an express provision for levying stamp duty on a DA.

How to read an agreement

Reading an Agreement

1. Introduction

 From time immemorial, the commercial world has worked on contracts and agreements. The only difference between then and now, is that earlier a lot of these agreements were oral in nature, whereas nowadays, most businesses, if not all, prefer a binding written agreement. An agreement may be entered into for the smallest of matters to the largest of issues. Agreements in India are governed by the Indian Contract Act and in addition by specific statutes depending upon the nature of the agreements. For instance, an agreement to assign a copyright must bear in mind the provisions of the Copyright Act, 1957. In addition, certain taxing statutes, such as the Stamp Act, contain certain provisions which must be borne in mind while executing the agreement. It is interesting to note that there is no specific format for an agreement. There are various ways in which an agreement can be drafted. The American style of drafting is substantially different from the English style. However, it is important that it contains the vital provisions or else the purpose behind the agreement would be defeated. This Chapter looks at some of the important parts of an agreement.

2. Standard Clauses

2.1.Name Clause

This is the first part and contains the names and addresses of the parties to the agreement. It also specifies whether the agreement includes the heirs, assigns, executors, successors, administrators, etc., of the parties to the agreement. In case there is no provision for an assignment then it would be difficult for any party to do so. This clause also contains the Date of the Agreement when it is executed.

2.2.Recitals

The recitals give a brief background about the agreement. They explain the purpose behind the agreement and the objectives which it seeks to achieve. In case of property conveyancing documents, the recitals also contain a brief title history of the property. The recitals are an integral part of the document and should be carefully drafted so that it becomes easy to construe the agreement.

2.3.Representations and Warranties

This is a very important clause and due care and precaution is required while drafting the same. The parties give out certain representations and warranties in this clause and hence, if they turn out to be false then the other party has a right of action against the party making such false statements. For instance in a flat sale agreement, the flat seller can give a representation that he has not sold or mortgaged the flat to any other party and if there is a claim to the contrary, then he would indemnify the flat purchaser. This clause is also very significant in a Shareholders’ Agreement or a Joint Venture Agreement.

2.4.Prior Permissions and Approvals

Quite often, it may happen that a particular agreement is subject to prior permission from Governmental authorities. In this case, the agreement must clearly mention its conditional nature or else it may be a cause for action. For instance, a share subscription agreement which requires the prior FIPB / RBI permission must clearly state so. In the event the permission is refused then the agreement would terminate.

2.5.Costs and Charges

This Clause mentions who would bear various expenses, professional fees, etc. pertaining to and incidental to the agreement. This may also include the stamp duty cost in case of a transaction pertaining to an immovable property. It is always a good practice to have a clear understanding on this front so as to avoid disputes later on.

2.6.Notice

This clause lays down the address and contact details of the parties in case any notice, demand or other communication is to be delivered to them by any of the parties to the agreement. It provides complete postal address, telephone, fax, etc. Emails as a form of notices are frowned upon by many people and hence, not included.

2.7.Arbitration

In this Clause, the parties agree that all the disputes between them shall be amicably settled. In the event of failure to do so, the same shall be settled by an arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 shall apply. This is a very vital part as in its absence all disputes would go to Court and that would be a long drawn out process.

The clause normally provides the place of arbitration and the language of the proceedings. It also mentions that all arbitral awards given in respect of disputes referred to arbitration in accordance with the provisions of this Clause shall be final and binding on all parties concerned

The importance of drafting this clause carefully in case of international contracts cannot be overstressed.

2.8.Variation

Variation to the agreement shall be binding on any of the parties only if and to the extent, such variation is recorded in a written document executed between the parties.

2.9.Confidentiality

Several agreements, such as joint venture agreements, share purchase agreements, etc., contain a Confidentiality Clause. It provides that the parties would not disclose any information to a third person unless there are circumstances such as statutory requirements, etc. In certain highly sensitive agreements it is also provided that the leakage of information may be taken as a ground for termination of the agreement.

2.10.Force Majeure

“Man proposes and Nature Disposes”. The best of intentions and actions are sometimes undone by acts of God or forces of nature. These include, but are not limited to any Act of God, strike, lockout, labour dispute, epidemic, cyclone, flood, earthquake, drought, fire, explosion, atmospheric disaster, war, riot, revolution, etc. In times like these, it becomes impossible to perform one’s obligations under an agreement. Hence, the Force Majeure Clause provides that no party shall be liable for any default or delay in the performance of his obligations when such default or delay is due to any contingency beyond his reasonable control.

2.11.Schedules

These are the Schedules, if any, which have to be annexed to the agreement. For instance, in a conveyancing document, it would contain the description of the property being conveyed along with a property map. Schedules are also a part and parcel of the agreement and are as important as the main agreement.

2.12.Signature Clause

This is the Clause where the parties to the agreement sign. Each person signs in the presence of a witness. The witness need not know the contents of the agreement. All he has to certify is that the person signing has done so in his presence. There can be one witness for all signatories. The capacity in which a person is signing must be mentioned in case he is doing so for and on behalf of someone else, e.g., the Director of a Company, Partner of a Firm, Guardian of a minor, etc. In addition to signing in the Signature Clause, normally, each page is also initialled as a mark of identification.

3. Novel Clauses

3.1.Transaction Clause

This is the heart of the Agreement as it deals with the Transaction contemplated therein. For instance, in a Share Purchase Agreement, this Clause would lay down that the seller is interested in selling certain number of shares and the buyer is interested in purchasing them It would also lay down any conditions precedent which must be fulfilled by either party for the successful completion of the transaction. This Clause requires the utmost scrutiny and care while drafting.

3.2.Consideration Clause

One of the important tenets of Contract Law is that “No Consideration, No Contract”. A contract without any consideration is void ab initio except in certain cases. This Clause mentions the consideration payable in respect of the obligations of the party and should carefully scrutinised since it creates obligations for either party. Thus, in case of a share purchase agreement, the consideration clause would mention the price per share and the aggregate consideration. It would also mention the mode and the time of discharge of the consideration.

3.3.Escrow Mechanism

Certain agreements provide for an Escrow Mechanism with a reputed person, e.g., a commonly accepted solicitor or a CA. The Escrow Holder would retain in his custody the payment or documents due to the other party until such party fulfills his part of the obligations. For instance, in case of the sale of a property which is the subject matter of a mortgage, the buyer may deposit the consideration in Escrow till such time as the Seller clears the mortgage. As soon as the mortgage is redeemed, the Escrow Holder would hand over the consideration to the Seller. The events under which the Escrow Holder would release the Escrow should be very clearly specified in unambiguous terms. Escrow Mechanisms are increasingly used in agreements and are a common feature in agreements for complex infrastructure / power projects.

4. Director’s Responsibility

4.1.As agreements are the basis on which a company functions, it is imperative that they are properly drafted and safeguard the company’s interests. If the agreements suffer from some infirmity or legal handicap, then the company may have to incur severe losses. Hence, Directors must be extremely careful and cautious in all such matters. The best way to ensure this is to entrust the task to competent professionals wherever possible. The old adage better safe then sorry should always be borne in mind.

5. Auditor’s Duty

5.1.This is one area where the Auditor can make substantial value addition. As an Auditor one comes across several agreements which the auditee would enter into the course of business. The Auditor would refer to many of these agreements during his audit. He may check these agreements and advise the auditee whether those contracts are legally valid or do they suffer from some patent infirmity due to which the entity may suffer heavily. All agreements, have economic implications, which if material, impact the true and fair view.

5.2.Even otherwise than as an Auditor, a Chartered Accountant can render tremendous services in this area. If Chartered Accountants have a basic knowledge of the important provisions of the Act, they would be able to contribute towards pointing out gross errors or inadequacies in contracts entered into by their clients. This in itself would be a big service to the clients.

5.3.By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.