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December 11, 2020

Landowner is Consumer in Joint Development Agreement – SC

by CA Shivam Jaiswal in Income Tax

Landowner is Consumer in Joint Development Agreement – SC

A joint development agreement (JDA) sets the terms for two or more parties working together to develop a particular product or technology. The JDA is typically negotiated before or during the working relationship. For instance, if Mr A owns a residential land and a builder approached him to construct flats on his land. This arrangement is beneficial for both parties. However, will Mr A be considered as a consumer or a party to a joint venture? Let us refer to the case of Bunga Daniel Babu vs M/s Sri Vasudeva Constructions to answer this issue.

Facts of the Case:

  • The appellant is the owner of some plots within the limits of Visakhapatnam Municipal Corporation.
  • Being desirous of developing the site, the land owner entered into a Memorandum of Understanding (MOU) with the M/s Sri Vasudeva Constructions (respondent) for development of his land by construction of a multi-storied building comprising of five floors, with elevator facility and parking space.
  • Under the MOU, the apartments constructed were to be shared in the proportion of 40% and 60% between the appellant and the respondent.
  • Additionally, it was stipulated that the construction was to be completed within 19 months from the date of approval of the plans by the Municipal Corporation and in case of non-completion within the said time, a rent of Rs. 2000 per month for each flat was to be paid to the appellant.
  • The occupancy certificates for the 12 flats were handed over to the occupants after a delay of about three years and three months.
  • In addition, the appellant had certain other grievances pertaining to deviations from sanction plans and non-completion of various other works and other omissions for which he claimed a sum of Rs. 19,33,193 through notices.
  • These claims were repudiated by the respondents by communications
  • Being aggrieved by the aforesaid communications, the appellant approached the District Forum for redressal of his grievances.

Proceedings of the District Forum

  • The District Forum held that the transaction between the parties could not be termed as a joint venture, in order to exclude it from the purview of the Act.
  • Accordingly, the District Forum opined that the complainant came under the definition of Consumer under Section 2(1)(d)(ii) of the Act.
  • On the second point of deficiency as well, it partly allowed the claim in favour of the appellant-complainant by awarding a sum of Rs. 15,96,000 towards rent for delayed construction, Rs. 19,800 as reimbursement of vacant land tax, Rs. 70,000 as cost for rectification of defects in the premises and Rs. 25,000 for mental agony.
  • It was further directed that the above said sum shall carry interest @ 9% per annum from the date of filing of the complaint.

Proceedings of the Commission

  • The respondent preferred an appeal before the State Commission which did not agree with the finding of the District Forum and came to hold that the appellant- complainant did not come within the ambit of definition of consumer under the Act and accordingly dismissed his claims as not maintainable.
  • The appellate forum expressed the view that as the agreement was entered into by the appellant-complainant for more than two plots and there was an intention to sell them and let them on rent and earn profit, the transaction was meant for a commercial purpose.
  • Grieved by the said decision, the appellant-complainant invoked the revisional jurisdiction of the National Commission which concurred with the view expressed by the State Commission.

Observations of the SC on the meaning of the term ‘consumer’

The issue for consideration was whether the appellant-complainant fell within the definition of consumer under Section 2(1)(d) read with the Explanation thereto of the Act. According to Section 2(1)(d) “consumer” means any person who:

  • buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment, when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose; or
  • hires any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person

The aforesaid definition, did not include a person who obtained such goods for resale or for any commercial purpose

Observations of the SC on the meaning of the term ‘commercial purpose’

  • According to the SC, a consumer means insofar as is relevant for the purpose of this appeal:
    1. a person who buys any goods for consideration; it is immaterial whether the consideration is paid or promised, or partly paid and partly promised, or whether the payment of consideration is deferred
    2. a person who uses such goods with the approval of the person who buys such goods for consideration
    3. but does not include a person who buys such goods for resale or for any commercial purpose.
  • The expression resale was clear enough.
  • Controversy had, however, arisen with respect to meaning of the expression commercial purpose.
  • It was also not defined in the Act.
  • In the absence of a definition, SC went by its ordinary meaning.
  • Commercial denoted pertaining to commerce (Chambers Twentieth Century Dictionary); it meant connected with, or engaged in commerce; mercantile; having profit as the main aim (Collins English Dictionary) whereas the word commerce meant financial transactions especially buying and selling of merchandise, on a large scale (Concise Oxford Dictionary).

Observations of the SC on whether the appellant is a consumer or not

  • In the said case a stand was taken by the respondent that the agreement was a collaboration agreement as it was so titled.
  • Emphasis was laid on the fact that the agreement showed the intention to collaborate and, therefore, it was a joint venture.
  • SC ruled that the title or caption or nomenclature of the instrument/document was not determinative of the nature and character of the instrument/document, though the name usually gave some indication of the nature of the document and, therefore, the use of the words joint venture or collaboration in the title of an agreement or even in the body of the agreement would not make the transaction a joint venture, if there were no provisions for shared control of interest or enterprise and shared liability for losses.
  • After so stating, SC proceeded to observe that if there was a breach by the land owner of his obligations, the builder would have to approach a civil court as the land owner was not providing any service to the builder but merely undertook certain obligations towards the builder, breach of which would furnish a cause of action for specific performance and/or damages.
  • It was also stated that while the builder committed breach of his obligations, the owner had the option to enforce specific performance and/or claim damages by approaching civil court or he could approach consumer forum under the Act.
  • SC proceeded to state that the important aspect was the availment of services of the builder by the landowner for a house construction (construction of the owners share of the building) for a consideration.
  • To that extent, the landowner was a consumer, the builder was a service provider and if there was deficiency in service in regard to construction, the dispute raised by the landowner would be a consumer dispute.
  • SC mentioned that it made no difference for this purpose whether the collaboration agreement was for construction and delivery of one apartment or one floor to the owner or whether it is for construction and delivery of multiple apartments or more than one floor to the owner.
  • The principle would be the same and the contract will be considered as one for house construction for consideration
  • It was clear as day that the appellant was neither a partner nor a co-adventurer. He had no say or control over the construction.
  • He did not participate in the business. He was only entitled to, as per the MOU, a certain constructed area.
  • Therefore, the conclusion was that the appellant is a consumer under the Act.

Consequently, the appeal was allowed, the judgments and orders passed by the National Commission and the State Commission were set aside and the matter was remitted to the State Commission to re-adjudicate the matter treating the appellant as a consumer.

In simple words, Land Owners are “Consumers” under JDA Contract, if they have no say or control over the construction and if they did not participate in the business.

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