COMMISSIONER OF INCOME TAX 8 MUMBAI vs GLOWSHINE BUILDERS AND DEVELOPERS PVT. LTD. MANAGING DIRECTOR

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION CIVIL APPEAL NO. 2565 OF 2022 Commissioner of Income ...Appellant(s) Tax 8 Mumbai Versus Glowshine Builders &

…Respondent(s) Developers Pvt. Ltd. J U D G M E N T M.R. SHAH, J.

Feeling aggrieved and dissatisfied with the impugned judgment and order dated 04.09.2017 passed by the High Court of Judicature at Bombay in Income Tax Appeal No. 1756 of 2014, by which, the High Court has dismissed the said appeal preferred by Page 1 of 44 Digitally signed by R Natarajan Date: 2023.05.04 16:38:34 IST Reason: Signature Not Verified

the Revenue, thereby confirming the order passed by the Income Tax Appellate Tribunal, “G” Bench, Mumbai (hereinafter referred to as the ITAT) by which the addition made by the Assessing Officer (AO) of Rs. 15,94,06,500/ was deleted, the Revenue has preferred the present appeal.

The dispute pertains to the Assessment Year (AY) 200910 i.e., Financial Year (FY) 2008

09.

The assessee entered into an agreement dated 06.05.2008 with one M/s Kirit City Homes Pvt. Ltd. The development rights in a property at Vasai were sold for a total consideration of Rs. 15,94,06,500/. It appears that as per paragraph 6 of the development agreement and as per the receipt of the deed, consideration of Rs. 15,94,06,500/ was agreed and received by Page 2 of 44

the assessee. During assessment, it was noticed by the AO that the aforesaid was not disclosed while filing the return of income. The assessee did not enter the aforesaid income into his profit and loss account. The assessee was asked to explain the transaction as it was not appearing in its profit and loss account. The agreement dated 06.05.2008 was also furnished to the assessee along with the notice. In response, the assessee vide letter dated 04.10.2011 stated that the transaction was duly offered to tax in AY 200809 reflecting a consideration of Rs. 5,24,27,354/. The assessee also stated that it had entered into a “rectification deed” with the said party on 30.05.2008. By the said ratification, it was claimed that the value of the development rights was reduced from Rs. Page 3 of 44

15,94,06,500/ to Rs. 5,24,27,354/. As the transaction was pertaining to AY 200910, the assessee was served a further notice dated 10.10.2011 under Section 142(1). The assessee was requested to explain as under: (i) “You are aware that perusal of AIR information, copy of 'Development Agreement' dt. 06.05.2008 revealed that you

had entered

into "Development Agreement" with M/s. Kirit City Homes Mau, Pvt. Ltd in respect of various properties as detailed in the said agreement. It is also seen that you

had received

Rs. 13,94,06,500/

on account

of granting/allowing development rights assigned. (ii) As per the agreement, the transaction is dt. 06.05.2008, so this transaction falls under the A.Y. 200910 whereas you had offered this transaction in the A.Y. 200809. Please explain the logic and basis thereof (iii) Perusal of the 'Development Agreement' dt. 06.05.2008, you had claimed to had received the entire sale proceeds of Rs. 15,94,06,500/ . In this regard, you are requested to furnish the details of sale proceeds received mode there details of proceeds realized, etc in respect of sale proceeds of Rs. 15,94,06,500/. Please also furnish the copy of 'Bank Book' / 'Cash Book' reflecting the receipts and Page 4 of 44

narrations thereof alongwith copy of the bank account statement reflecting credits thereof. (iv) Vide 'Deed of rectification' dt. 30.05.2008, you had claimed to have revised

the value

from Rs. 15,94,06,500/ to Rs. 5,24,27,354/. In this regard, please explain whether you had refunded the differential amount. If yes, please furnish the mode and details thereof with supporting documentary evidences. (v) Vide 'Deed of rectification' dt. 30.05.2008, you had claimed to have revised

the value

from Rs. 15,94,06,500/ to Rs. 5,24,27,354/. In this regard please furnish the basis thereof with supporting documentary evidences. (vi) Considering the above, I am of the view that for the above transaction, provisions of section 50C of the I.T. Act 1961 are clearly applicable despite the reduction in your agreement value. In this regard, you are requested to explain as to why the provisions of section 50C of the I.T. Act should not be initiated as well as please explain as to why the sale proceeds should not be treated at Rs. 15,94,06,500/. (vii) Perusal of all the documents furnished by you in respect of above transactions, I am of the view that the transaction definitely belongs to this year and market value u/s. 50C should be considered as the sale consideration. In Page 5 of 44

this regard, please explain as to why the treatment as mentioned above does not be made applicable in your case. In view of the above, it is proposed to treat the transaction for this year and to add the sale proceeds of Rs. 15,94,06,500/ in your hands. You are requested to furnish your explanation, if any, with supporting documentary evidences.”

1 The assessee replied to the same and with regard to the applicability of provision of Section 50C, the assessee stated that the assessee had sold its stock in trade and not the assets. The AO made the addition of Rs. 15,94,06,500/ by treating the same as short term capital gains and consequently, added the same to the income for the year under consideration. The Commissioner, IT (Appeals), Mumbai dismissed the appeal and confirmed the addition made by the AO and upheld the view of the AO to treat the transaction as income for capital gains for the Page 6 of 44

AY 200910. The CIT (A) also discarded the submissions made by the assessee that transfer of development rights were made in FY 200809 pursuant to the MOU dated 27.12.2007. In the absence of proof to buttress such claim, the CIT (A) also discarded the claim of the assessee that value of the transfer of development rights was reduced from Rs. 15,94,06,500/ to Rs. 5,24,27,354/

2 The assessee filed an appeal before the ITAT. The ITAT, after examining the chart submitted by the assessee pertaining to opening balance and closing balance for the assessment years 199697 to 200708 held that the assessee in all these years showed inventory and expenses. Consequently, ITAT Page 7 of 44

held that the assessee is engaged in the business of building and development. The ITAT further noted that the assessee showed the cost of land along with related expenditure as work in progress/inventory since 19992000 and the assessment orders were subsequently made under Section 143(3) of the IT Act, wherein the AO accepted the nature of business of the assessee. Therefore, ITAT concluded that what was sold by the assessee was part of its inventory and not a capital asset. The ITAT also held that the assessee has reduced the sale consideration from Rs. 15,94,06,500/ to Rs. 5,24,27,354/ during FY 200708 on the basis of MOU dated 27.12.2007 and the said amount of the income has already been declared in the AY 200809 i.e., FY 200708 Page 8 of 44

and therefore, such income cannot be declared in AY 200910 i.e., FY 200809. The ITAT also confirmed and/or agreed with the assessee that the sale consideration was Rs. 5,24,27,354/ only. Based on these findings, the ITAT reversed the findings of the AO as well as the CIT (A) and allowed the appeal by deleting the addition made by the AO of Rs. 15,94,06,500/.

3 The Revenue preferred an income tax appeal before the High Court by way of ITA No. 1756/2014. By the impugned judgment and order, the High Court has dismissed the said appeal filed by the Revenue by holding that none of the questions proposed by the Revenue are substantial questions of law. Page 9 of 44

4 Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court dismissing the appeal, the Revenue has preferred the present appeal.

Shri Balbir Singh, learned ASG has appeared on behalf of the Revenue and Shri S.K. Bagaria, learned Senior Advocate has appeared on behalf of the assessee.

Shri Balbir Singh, learned ASG appearing on behalf of the Revenue has vehemently submitted that the High Court has failed to appreciate that the order of the ITAT was perverse and contrary to facts on record. It is submitted that the ITAT failed to appreciate that the assessee has taken contrary stands before the assessing authority and the Tribunal, on account of sale of development Page 10 of 44

rights. It is submitted that firstly, the assessee vide its letter dated 25.11.2011 submitted the Ledger Account in respect of development agreement. The perusal of the said Ledger Account revealed that the assessee claimed to have received income of Rs. 15,94,06,500/ from a development agreement on 31.03.2008 and the said entry was reversed on the same day by passing a rectification entry on 31.03.2008 itself. Therefore, it was reflected that the aforesaid payment was paid by the purchasing party on 31.03.2008 to an entity SICCL and all these entries were reflected on the same date. Based on the Ledger furnished by the assessee, pertinent questions were raised by the Assessing Officer which included reason Page 11 of 44

of rectification and confirmation of the fact that the differential amount of Rs 10,69,79,146/ was refunded to the purchaser. However, perusal of the order passed by the ITAT reflects that the fact of receipt of money on 31.03.2008 was not even discussed. On the contrary, a reference was made to the MOU dated 27.12.2007 for a total consideration of Rs. 5,24,27,354/. It is submitted that the ITAT without examining the true nature of transaction and entry made in the books of accounts of the assessee simpliciter confirmed that the transactions pertained to earlier years i.e., Assessment Year 200809 and the reduction of amount arising out of the Development Agreement dated 06.05.2008 and Rectification dated 30.05.2008 was due to mistake. Page 12 of 44

1 It is further submitted by Shri Balbir Singh, learned ASG, that the ITAT failed to take into account the fact that the entry made and reflected in the Ledger Account of the assessee as on 31.03.2008 was on account of a third party i.e., SICCL and that too for a total of Rs. 15,94,06,500/. Further, the ITAT did not even question the factum of refund of differential amount of Rs. 10,69,79,146/ to the purchaser on account of Rectification Deed dated 30.05.2008. That the ITAT has failed to appreciate that the moment the receipt of amount is received and recorded in the books of accounts of the assessee, unless shown to be refunded/returned, is to be treated as income in the hands of the recipient. Page 13 of 44

2 Secondly, balance sheets for the Assessment Years 200607 to 200910 were examined by the Assessing Officer and it was recorded that there was not even a single sale during all these years and there were negligible expenses and the transaction in question was the only transaction i.e., transfer of development rights in respect of land and consequently, it was held that the transaction was that of transfer of capital asset and not that of transfer of stock in trade. However, the ITAT in its order, after examining the opening and closing balance for the year 199697 upto 200708 held that in multiple years there was inventory shown in the Balance Sheet and since subsequent assessment orders were made under Section 143(3) of the Income Tax Act, without Page 14 of 44

disputing the claim of assessee, held that the transaction in question is sale of stock in trade. It is contended that the ITAT neither dealt with the findings given by the Assessing Officer nor verified/examined the total sales made by the assessee during the relevant year and during the previous years. Therefore, the ITAT as well as the High Court have materially erred in holding that, merely because the entry made in the books of accounts involved recording of inventory, the transaction in question becomes sale of stock in trade. That, it is well settled that in order to examine whether a particular transaction is sale of capital asset or business transaction, multiple factors like frequency of trade, volume of trade, nature of transaction over the years etc. are required to be Page 15 of 44

examined. However, in the present case, the ITAT without examining any of the relevant factors confirmed that the transaction was transfer of stock in trade.

3 It is further submitted that the ITAT without any basis and solely on the basis of claim made by the assessee, contrary to the accounts produced before the Assessing Officer, agreed that the transaction was reflected as sale in the tax return for the Assessment

Year

200809. That, interestingly, the ITAT did not even question as to what happened to the differential amount of Rs. 10,69,79,146/ on account of reduction of sale value of development rights.

4 It is further submitted by Shri Balbir Singh, learned ASG, that the High Court has failed to examine the inherent contradiction in the Page 16 of 44

order of the ITAT and that the claim was allowed by the Tribunal, contrary to the records produced before the Assessing Officer. Therefore, the order of the High Court holding that there was no substantial question of law involves is illegal and perverse.

5 It is further submitted that the High Court has failed to appreciate that, even in the event of acceptance of claim made by the assessee, including the assertion that Rs. 5,24,27,354/ was shown in the tax return for the earlier Assessment Year i.e., 200809, the differential amount of Rs. 10,69,79,146/ on account of reduction in the sale consideration of development rights is to be assessed in the current year as either as capital gain or business income. This is Page 17 of 44

without prejudice to the submission that the Assessing Officer has correctly assessed the income in his Assessment Order dated 29.11.2011. 4.6 Making the above submissions, it is prayed that the present appeal be allowed and the order passed by the ITAT as well as the High Court be set aside and the order of the Assessing Officer be restored.

Shri S.K. Bagaria, learned Senior Advocate appearing on behalf of the assessee has taken us to the findings recorded by the High Court as well as the ITAT. It is submitted that the assessee is engaged in the business of building and development of properties since the year 19992000. That the assessee's balance sheets show that it had workin progress/inventories year after year, since Page 18 of 44

19992000. The same has been accepted by the department all these years; even after scrutiny assessments under Section 143(3) of the Income Tax Act, 1961.

1 It is submitted that the assessee had entered into an MOU dated 27.12.2007 with M/s Kirit City Homes Private Limited, whereby, Development Rights in a property at Vasai were sold for a total consideration of Rs. 5,24,27,354/. That the said MOU was on record before the lower authorities and has been referred in the Assessment Order as well as in the order passed by the CIT (A). In connection with the said transaction, detailed findings were given by the Income Tax Appellate Tribunal (Tribunal/ITAT) and these were also duly considered by the High Court. The findings given by the Tribunal were pure Page 19 of 44

findings of facts and therefore, the High Court has rightly dismissed the appeal after considering the facts and the tribunal’s order and by holding that no substantial question of law arises in the matter.

2 Shri S.K. Bagaria, learned Senior Advocate has taken us to the following facts recorded by the High Court in the impugned judgment and order: a) It is a common ground that the assessee is in the business of building and development of properties. There was no change in the activities of the assessee during the year under consideration. b) For the year ending 31/03/2006 the assessee disclosed inventories at Rs 8.66 crores Page 20 of 44

c) For the year ending 31/03/2007 there was no change and the same figure of Rs 8.66 crores was disclosed. d) For the year ending 31/03/2008 (assessment year 200809), the assessee showed sale of land development

rights

at Rs 5,24,27,354/ and the cost of land was shown at Rs 5,21,37,454/.

3 It is submitted that in connection with the aforesaid transaction during financial year 200708, the High Court has further considered the following facts in the impugned judgment and order: i. In MOU dated 27/12/2007 with KCH transfer of development rights was for the said total consideration of Rs 5,24,27,354/. Page 21 of 44

ii. The assessee was holding 50.16 acres of land, out of which 27.44 acres of land was the subject matter of the aforesaid MOU dated 27/12/2007. Total cost of the land was determined proportionately. iii. On 02/01/2008 necessary entries were passed debiting the account of KCH but crediting the account of one M/s SICCL. The assessee owed SICCL a sum of Rs 8.10 crores and it therefore directed KCH to pay the consideration directly to SICCL. iv. Corresponding entries relating to the aforesaid transaction were also made in the accounts of SICCL. v. On 02/01/2008 possession of the land was also handed over. vi. The aforesaid events took place during the financial year 2007 08 Page 22 of 44

relating to assessment year 2008

09.

In that assessment year, the assessee offered to tax the income arising out of the aforesaid transaction under the head "business income". vii. In the development agreement dated 06/05/2008 the sale consideration was incorrectly mentioned as Rs 15,94,06,500/ and on realising the mistake, a Deed of Rectification of executed on 30/05/2008. This deed of rectification was registered with the office of the Sub

COMMISSIONER OF INCOME TAX 8 MUMBAI vs. GLOWSHINE BUILDERS AND DEVELOPERS PVT. LTD. MANAGING DIRECTOR