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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
आदेश/O R D E R
PER PRADIP KUMAR KEDIA - AM: The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals), Gandhinagar (‘CIT(A)’ in short), dated 23.10.2015 arising in the assessment order dated 26.03.2013 passed by the Assessing Officer (AO) under S. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2010-11.
ITA No. 73/Ahd/16 [ITO vs. Balaji Electrical Insulators Pvt. Ltd.] A.Y. 2010-11 - 2 -
The grounds of appeal raised by the assessee read as under:
“1. The ld.CIT(A) has erred in law and on facts in directing the AO to delete the addition of Rs.3,13,18,468/- made on account of sale of land, by way of Development Agreement. 2. The ld.CIT(A) has erred in law and on facts in deleting the disallowance of consultancy fees of Rs.4,50,000/- by observing that the assessee has complied with the TDS provisions.”
Briefly stated, the assessee company is engaged in the business of L.T. Insulators, sale/purchase of land and development of properties. The assessee filed return of income for AY 2010-11 declaring total income at Rs. Nil. The return filed by the assessee was subjected to scrutiny assessment. In the course of assessment, the AO disputed the return of income and made addition of Rs.3,13,18,468/- against sale of land on the ground that the development agreement executed by the assessee for certain parcel of land held by it in favour of the developer M/s. Balaji Associates for construction of residential/commercial unit as transfer under s.2(47) of the Act and thus chargeable to capital gain. The AO also made disallowance of consultancy fees amounting to Rs.4,50,000/- and added the same to the total income of the assessee.
Aggrieved, the assessee preferred appeal before the CIT(A). It was vehemently contended with reference to the various clauses of the development agreement that the developer do not have any domain over the land and it is the prospective buyer who buys specified share of undivided interest in the land from the owner and therefore no transfer of land could be contemplated from the assessee to the developer. The assessee has filed a detailed reply before the CIT(A) which has been summarized by the CIT(A) in para no.5.2 of its order as under:
“5.2 During the course of Appellate Proceeding it was submitted by the Appellant that the (and was originally held by Balaji Cinevision (India)
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Pvt Ltd. The said company was amalgamated with the Appellant Company from 01/04/2008 as per the order of Hon'ble Gujarat High Court vide order dated 14th September, 2009. Appellant submitted that the land was held by Balaji Cinevision (India) Pvt Ltd as stock in trade and the Appellant has also treated the same as stock in trade from the beginning in the books of accounts as the land being received in amalgamation as part of stock in trade. The Appellant argued that AO has erred in applying the provisions of section 2(47) while making addition as such provisions are applicable to the capital asset only and not asset held as stock in trade. In the present case even the AO has while making assessment order made addition of the profit as business profit and even considering the same the provisions of section 2(47) r.w.s 53A of the transfer of property Act, 1882 applied to stock in trade are not justified. The Appellant argued that as per terms and conditions of the development agreement the possession remains with the Appellant and merely development rights are transferred to the Appellant. Further, Appellant refers to the clause (f) of the development agreement and argued that as per the terms the developer was to collect price of land as per Jantri Rate and hand over the same to the Appellant from time to time. Further, Appellant submitted that as per condition 2 of development agreement consideration of Rs.1 Crore is to be paid as and when the work is progressed. Appellant refereed to the clause 5 of development agreement and argued that sale deed is to be executed by the Appellant in favour of proposed members and hence the contention of the AO that the property has been transferred by the Appellant on execution of development agreement is not justified. Further the consideration of Rs.2.86 Crore as per Jantri Value is to be received in future and not on execution of agreement and accordingly there is no justification for taxing sale consideration of Rs.2.86 crore as made in the assessment order. Appellant submitted that as per development agreement the Appellant has booked sale value of land in the profit and loss account as and when the units are booked in favour of proposed purchaser and accordingly it has shown the total sale value of Rs.3,22,83,698/- in different year which is more than Jantri rate of Rs.2,86,02,600/- as adopted by AO on the basis of development agreement.”
The CIT(A) on consideration of submissions made adjudicated the issue in favour of the assessee as under:
“5.3 I have carefully considered argument of the Appellant and observation of AO made in the assessment order. The AO has while passing Assessment order made addition as profit on sale of land applying provisions of section 2(47) r.w.s 53A of Transfer of Properties Act, 1882 on the ground that the Appellant has transferred possession of land by making development agreement Appellant has during the course of appellate proceeding explained the terms of development agreement in details and submitted that there is no transfer of possession of land as held in the Assessment order and further emphasis on the argument that the land being held as stock in trade the provisions of section 2(47) of the Act are not applicable as the same are related to the capital asset. On careful consideration of facts of the case and submission of the Appellant it is observed as under:
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(i) The contention of the AO while passing assessment order was that that the possession of the land was transferred to the developer as per the development agreement as all the rights towards construction of land were transferred to the developer and further the developer was given the right to decide the prospective buyers. All the rights to decide terms and conditions with the prospective buyers and also right to decide the final sale price of flats sold was transferred to the appellant and based on that the AO contended that the appellant has transferred the capital asset. The Appellant has during the course of Appellate Proceeding explained the terms and conditions of development agreement in detail and the copy of which was available with AO while passing Assessment Order. On consideration of entire facts it is observed that the developer is given authority to construct the flats on the land and finalize the buyers for the such flat as well as authority to decide terms of sale price with the buyers. However it is pertinent to note that clause 5 of the development agreement clearly state that the sale deed is to be executed by the Appellant in favour of proposed members. Thus from this conditioned it is clear that the Appellant has merely transferred the development rights in land to Balaji Associates and not the possession of land as the final authority to sign the sale deed made with prospective buyers remains with the appellant which proves that the ownership is still remains with appellant.
(ii) The AO has while passing assessment order applied provisions of section 2(47)(v) of the Income Tax Act and accordingly contended that as the land in question is transferred to the developer the entire consideration is required to be offered to tax in view of provisions of section 2(47) r.w.s 53A of Transfer of Properties Act, 1882. On consideration of entire facts of the case of the appellant it is observed that the appellant has treated the land as stock in trade from the beginning. The land was acquired by the Appellant from Baiaji Gnevision (India) Pvt Ltd in view of the scheme of amalgamation and the same was treated as stock in trade by the appellant. Thus the land in question being part of stock in trade the argument of the appellant is found to be acceptable. The provisions of section 2(47) are applicable only to the capital asset. In the present case of the appellant land for development agreement is held as stock in trade by the appellant and hence the provisions of section 2(47) of the Act becomes irrelevant.
(iii) The AO has while passing assessment order erred in considering sale value of Rs.3,86,02,600/- as per development agreement as full value of consideration received and accordingly observed that the Appellant is required to tax entire profit on sale of land as the possession of land is transferred to developer. On consideration of entire facts it is observed that as per clause (f) of the development agreement the Appellant is required to collect price of land from developer as per Jantri Rate from time to
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time as and when the construction is completed. Further as per condition 2 of development agreement consideration of Rs.1 Crore is to be paid as and when the work is progressed. Thus the Appellant was authorized to collect the consideration from time to time as and when the construction is completed by the developer. Further it is pertinent to consider here Schedule: 22 Notes forming part of Accounts wherein recognition of Real Estate development income is specified to be recognized on the basis of terms and conditions as laid down in agreement between the seller and developer and accordingly the Appellant has correctly postponed recognition of revenue on the basis of completion of work by the developer as the same was not determinable with reasonable certainty till the construction of flat by the developer. The case of the Appellant is squarely covered by the decision of Hyderabad Tribunal in case of DCIT Vs. S.P. Real Estate Developers (P.) Ltd [2014] 47 taxmann.com 281 I. Section 5 of the Income-tax Act, 1961 - Income - Accrual of (Concept of real income) - Assessment year 2008-09 - Assessee-company engaged in business of development and sale of real estate had taken up a real estate development project - Assessing Officer treated development agreement as a transaction giving rise to accrued income of sale of future property - Commissioner (Appeals) deleted addition made by Assessing Officer on ground that there was a dispute with regard to right over land and construction and that no real income had accrued to assessee - It was observed that neither possession of property had been given to ultimate buyer, nor assesses had received any, substantial consideration • Agreement entered into by assessee herein was only for sale of piece of property and sale would take place only after completion of construction and after assessee's share of property was identified - Whether, looking at prevailing circumstances in instant case, it was not possible to hold that income had actually accrued to assessee - Held, yes - Whether when consideration was not determinable with reasonable certainty, assessee was justified in postponing recognition of income and it was appropriate to recognise income only when it was reasonably certain that ultimate realisation was possible - Held, yes - Whether thus, there was. no infirmity in order of Commissioner (Appeals) and same was to be confirmed - Held, yes [Paras 43 & 46] [In favour of assessee] (iv) As per the clause (f) of development agreement the Appellant was authorized to collect price of land as per Jantri Rate and hand over the same to the Appellant from time to time. Thus in view of terms of agreement the appellant has correctly taxed consideration of development agreement on
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proportionate basis as and when the sale deed is executed in favour of proposed buyers as the transfer of proportionate land took place only when the appellant transfers the constructed property/ flat by way of sale deed. The argument of the appellant is squarely covered by the decision of Hon'ble Chennai Tribunal In case of R. Gopinath (HUF) v. Assistant Commissioner of Income-tax [2010] 133 TTJ 595(CHENNAI)
"Held that the possession was handed over for carrying out the; construction work by the developer and there was no other document except the development agreement which transferred the title of the-property to the developer. In the absence of the transfer of the title of the property and any consideration at the time of development agreement, the handing over of the possession was merely a temporary measure (or carrying out the construction work by the developer and the exclusive possession of the property in legal sense remained with the assessee which was finally handed over at the time of execution of the sale deed of the constructed flats by the assesses, The assessee had executed all the sale deeds for transfer of the constructed apartments in favour of the end user/purchaser, Therefore, the transfer of the proportionate land took place only when the assessee transferred the constructed property by way of sale deeds and offered the business income which was accepted by the department. In any case, when the assessee had retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there was no question of transfer of the entire land to the developer.
Therefore, capital gain arising from the conversion of the land and building into stock-in-trade would be taxed proportionately in the previous years in which the constructed properly was sold by the assessee or retained for self-use and corresponding business income was offered.
(v) Thus, in view of above it is held that the Appellant has correctly recognized revenue on year to year. On perusal of details submitted by the appellant it is appreciated that appellant has duly offered the income from profit on sale land to tax which is more than the income as specified in the development agreement:
Ass.Year Land Sale Profit Total Sale 2009-10 27,58,377 30,25,755 57,84,132 2010-11 6,90,060 75,69,580 14,47,010 2011-12 89,48,903 98,16,349 1,87,65,252 2012-13 12,42,866 50,44,438 62,87,304
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1,36,40,206 1,86,43,492 3,22,83,698 Land 1,00,00,000 Development 2,86,43,492
Thus from the above it is appreciated that appellant has duly offered sale value of land in the profit and loss account as and when the units are booked in favour of proposed buyers in view of terms of development agreement and accordingly addition of Rs.3,13,18,468/-made in the assessment order towards unaccounted profit on sale of land applying the provisions of section 2(47)(v) of-the Act are directed to be deleted and thereby this ground of appeal of the Appellant is allowed.”
Aggrieved, the Revenue preferred appeal before the Tribunal.
The learned DR for the Revenue relied upon the order of the AO whereas the learned AR for the assessee referred to salient features submitted that a bare reading of the various clauses would show that there was no intention of any transfer of land nor has the assessee transferred the land in favour of the developer. It was submitted that the transfer of the land will take place in favour of the ultimate flat purchasers at a later date on fulfillment of various conditions and on receipt of aggregate consideration as per the agreements executed in this regard. The learned AR for the assessee submitted that the developer could not part with the land without the concurrence and approval of the assessee.
We have carefully considered the rival submissions. We find that the CIT(A) has correctly applied the law in the facts of the case. As per the terms of the development agreement, there is no transfer of possession of land as noted by the CIT(A). Secondly, the land was held as stock and trade and therefore provisions of Section 2(47) of the Act relating to capital asset would not apply at all. It is seen from the order of the CIT(A) that as per the development agreement, the assessee was required to collect price of land from the developer from time-to-time when the construction is completed. The CIT(A) has also
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observed that assessee has recorded income as per accounting standard concerning real estate development. We do not see any infirmity in the process of reasoning arrived at by the CIT(A) and consequently, endorse it in entirety without repeating the same.
In the result, Ground No.1 of the Revenue’s appeal is dismissed.
Ground No.2 of the Revenue’s appeal concerns disallowance of consultancy charges amounting to Rs.4,50,000/- paid by the assessee. The relevant operative para of the order of the CIT(A) dealing with the issue reads as under:
“8.3 I have carefully considered argument of the appellant and observation of AO made. AO while passing the assessment order made addition of Rs.4,50,000/- on the ground that the appellant has not explained the nature of service provided by the appellant with supporting documents. On consideration of entire facts, it is observed that the Appellant has paid the amount of Rs.4,50,000/- as consultancy fees to S.S Baid for providing production and technical consultancy. Even during the course of assessment proceeding, appellant has provided copy of bill based on which the consultancy fees is paid to S.S Baid. Further, it Is appreciated that the payment being made through banking channel after duty complying with the provisions of TDS, no adverse inference can be drawn particularly when AO has not pointed out any instances of payment being made for other than business purpose. Thus, on consideration of entire facts of the case of the Appellant, addition of Rs.4,50,000/- made towards consultancy charges are hereby deleted and thereby this ground of appeal of the Appellant is allowed.”
On consideration of the rival submissions, we are unable to see any merit in the appeal of the Revenue. The CIT(A) has noted that assessee has provided copy of bills for consultancy charges paid to the Consultant S. S. Baid. The assessee has deducted TDS thereon when the payments have been made through banking channel. The CIT(A) has also noted the submissions of the assessee towards nature of services. The CIT(A) in our view has taken a holistic view of the
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matter and accepted the claim of the assessee as bonafide. We do not see any reason to depart from the view taken by the CIT(A).
In the result, Ground NO.2 of the Revenue’s appeal is dismissed.
In the result, appeal of the Revenue is dismissed.
This Order pronounced in Open Court on 26/04/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 26/04/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।