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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER
ITA No. 295, 296 & 297/Bang/2020 Assessment years: 2006-07 – 2008-09
M/s S.P.R Developers Pvt. Vs. The Dy. Commissioner of Ltd., Income Tax, F-113, 2C&D, Central Central Circle-1(3), Chambers, 2nd Floor, 2nd Bengaluru. Main, Gandhinagar, Bengaluru-560 009. PAN: AAFCS 6429 P APPELLANT RESPONDENT
Appellant by : Shri L Bharath, C.A Respondent by : Shri Pradeep Kumar, CIT (DR) Date of hearing : 07.12.2021 Date of Pronouncement : 09.02.2022 O R D E R Per Chandra Poojari, Accountant Member:
All these 3 appeals by the assessee are directed against the common order of CIT(A)-11, Bangalore dated 31/1/2019. The appeal in ITA Nos.295 & 296 are for the assessment years 2006-07 2007-08 and the appeal in ITA No.297/Bang/2019 pertains to asst. year 2008-09. 2. The issues in all these appeals are common, hence these are clubbed together, heard together and disposed off together by this order for the sake of convenience.
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First, we will consider the facts narrated in asst. year 2006- 07.
The first ground in all these 3 appeals in is with regard to additions of advance received by the assessee from two housing societies viz., Vijaya Bank Housing Cooperative Society (hereinafter referred as VBHCS) and Syndicate Bank Retired Employee Welfare Association (hereinafter referred as SBREWA).
The first common ground in the appeal is with regard to ground No.2 – Addition of Rs.1,02,87,579/- (AY 2006-07) & Rs.9,99,23,820/- (AY 2007-08).
The facts of the issue are that the assessee registered land to the extent of 118 acres through sale deed to the said societies. The lands are transferred during the financial year 2005-06 and 2006- 07. The lands were transferred from Shri Thimmegowda and family members to the society VBHCS and SBREWA. The assessee company received a total amount of Rs.85,45,62,306/- from the VBHCS and Rs.31.20 crores from SBREWA for transfer of land and formation of layouts. However, no income was shown or offered to tax for asst. year 2006-07 to 2011-2. It has been noted by the lower authorities that the present assessee M/s SPR Developers Pvt. Ltd., had not filed any return of income since its inception. The submission made by Shri Timmegowda to the department vide his letter dated 17/1/2012 shows gross profit of Rs.7.08 crores is to be divided between 2 financial years in the following manner:-
2011-12 25% 1.8 crores 2012-13 75% 5.2 crores
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However, during the asst. proceedings, the assessee retracted the admission and submitted that entire project has been abandoned and that MOU with housing cooperative societies have been cancelled, as the assessee also furnished a copy of the arbitration award dated 25/1/2013, wherein the assessee and M/s VBHCS are parties. As per the award, agreement to develop layouts was canceled. According to the AO, the assessee had already transferred 118 acres of land to M/s VBHCS during the financial year 2005-06 and 2006-07 i.e before the arbitration award. According to the AO, the total consideration received by the assessee was not only for development of sites but also for cost of land which was transferred to society. Therefore, there was an accrual of income. Similarly, assessee entered into agreement with M/s SBREWA, it was noted by the AO that the assessee company has transferred 39 acres and 4.5 guntas of land to this society. The assessee company received Rs.31.20 croers. However, the assessee company did not offer any amount for tax on thee receipts. Thus, the AO brought into tax the above transaction to taxation in this asst. years as follows:-
Asst. Year Rs. 2006-07 10287579/- 2007-08 99,23,815/- 2008-09 309,64,673/-
Against this, the assessee carried the appeal before the CIT(A) observed that the assessee has received the sale consideration from VBHCS and SBREWA in these asst. years. On transfer of properties by the assessee with these parties. The assessee received the consideration on transfer of land prior to the arbitration award. The assessee has not filed the return of income. The total consideration received by the assessee is not only for land but also
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for development of sites. Therefore, income was accrued to the assessee in this asst. year and was rightly brought to tax by the AO, which was confirmed by the CIT(A). Against this, the assessee is in appeal before us.
The notice u/s 153A dated 23.11.2012 was issued. The assessee filed return of income on 16.01.2013 declaring Nil income, in the assessment proceedings the AO held that the total consideration received by the assessee is not only for the development of sites, but also for the cost of the land transferred. Thus, there is an accrual of income. Therefore, the AO taxed the deemed income accrued on the alleged transfer of the land to M/s VBEHCS & M/s SBREWA. The said income was quantified at Rs.9,99,23,8151-. Further, the AO treating Mr. T. Ganesh as a benami of the assessee, added a further sum of Rs.2,43,15,520/- substantively. Similar sum of Rs.2,43,15,520/- is assessed protectively in the hands of Shri.T. Ganesh.
It is submitted with respect that the issues arising for consideration for the above mentioned assessment years are identical to the issues involved in appeal for the A.Y.2006-07. Therefore, we may be permitted to adopt the submissions made for AY 2006-07 mutatis mutandis for the above mentioned assessment year. The assessee company prayed that the sum of Rs.9;9923,815/and Rs.2,43,15,520/- be deleted.
Notice u/s 153A dated 23.11. 2012 was issued to the assessee and in turn assessee filed return of income on 16.01 2013 declaring an income of Rs.73,860. Here again, the AO taxed the deemed income accrued on the alleged transfer of the land to M/s VBEHCS and M/s SBREWA and the said income was quantified at Rs.3,09,64,673/-. Since the issues are identical to the A.Y 2006-
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07, therefore, it is prayed that the sum of Rs.3,09,64,673/be deleted.
On perusing the submissions made by the assessee, the AO observed that only the lands were transferred and no development work is undertaken by the assessee. Based on this observation, the AO held that neither the PCM or CCM is applicable since no part of the project is completed. Despite this, the AO without any basis proceeded to determine the income that is to be taxed to the extent of the land transferred even though the project is not completed.
In respect of the addition pertaining to transaction with Shri. T Ganesh, the LAO held that the amount required for the purchase of land is sourced by the assessee. The lands are transferred to the assessee subsequent to the purchase. Therefore, the assessee gained by escalating the cost of land. Hence, the LAO proceeded to protectively assess the income both in the hands of Shri. T. Ganesh and assessee.
The AO has not recognized any income in the hands of the assessee in light of principles of the IT Act. It is well known that as per section 145 of the Act it is the choice of the taxpayer to follow any of the two recognized method of accounting and once the choice is made by the taxpayer of a system that is recognized by ICAI or by taxpayer of same class, taxpayer cannot be taken away from that class just for the purpose of bringing some income to tax by arbitrarily making addition to disclosed income.
If the AO concludes that there is under-estimation of profits, he must give relevant facts and figures in that regard and demonstrate that the method of accounting adopted by the taxpayer results in under-estimation of profit. If there is no such
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allegation or such exercise being undertaken, the income from the sale of plots accrues to the taxpayer (such as the Appellant) only on the date of conveyance and not at the time of execution of tripartite agreement when the assessee receive consideration.
However, the AO has acknowledged that since the projects have not been completed in any manner, no income can be identified by the PCM or CCM. Thus, no income should be taxed unless there is progress in the project. The fact that one of the project is cancelled and there is no progress till date on the other project also goes to demonstrate that the amounts received by the assessee are only liabilities and not incomes.
In this regard, AR placed on the following judgments :- a. CIT v. Realest Builders & Services Ltd. (307 ITR 202) (SC) b. CIT v, Bilahari Investment (P.) Ltd. (299 LTR 1) (SC) ; c. Nandi Housing (P) Ltd. v. DCIT (2 SOT 395); (Bangalore) d. ITAT in HM Construction v, JCIT (84 LTD 429). (Bangalore) AS 9 principles not satisfied in the assessee’s case in the relevant years
The ld.AR submitted that - (a) It is well known that as per section 145 of the Income- tax Act, 1961 ('ITA') it is the choice of the taxpayer to follow any of the two recognized method of accounting and once the choice is made by the taxpayer of a system that is recognized by ICAI or by taxpayer of same class, taxpayer cannot be taken away from that class just for the purpose of bringing some income to tax by arbitrarily making addition to disclosed income.
(b) If the AO concludes that there is under-estimation of profits, he must give relevant facts and figures in that regard and
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demonstrate that the method of accounting adopted by the taxpayer results in under-estimation of profit. If there is no such allegation or such exercise being undertaken, the income from the sale of plots accrues to the taxpayer (such as the Appellant) only on the date of conveyance and not at the time of execution of tripartite agreement when the assessee receive consideration.
(c) However, the LAO has acknowledged that since the projects have not been completed in any manner, no income can be identified by the PCM or CCM. Thus, no income should be taxed unless there is progress in the project. The fact that one of the project is cancelled and there is no progress till date on the other project also goes to demonstrate that the amounts received by the Appellant are only liabilities and not incomes.
(d) In this regard, reliance is placed on the following rulings: Supreme Court in CIT v. Realest Builders & Services Ltd. (307 ITR 202) - this case squarely covers the issue at hand
The learned AR further submitted that as per AS-9, in a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: a. Seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and b. No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.
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As per AS 9, in a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.
In the assessee’s case, since there is no progress in the development of plots, and none of the conditions of the Sale Agreement and MOU have been met by the assessee, no income is recognizable as per AS 9.
As per 7 principles are not applicable in the assessee’s case in the relevant years and hence, assessee’s income cannot be measured under the same. Income recognition principles as per the Real Estate Guidance Note not satisfied in the Appellant's case
The 'Guidance Note on Accounting of Real Estate Transactions' requires satisfaction of all the below conditions for recognizing revenue under percentage completion method. a. All necessary approvals for commencement of the project have been obtained; b. The project has reached reasonable level of development; c. More than 25% of the construction and development cost is incurred; d. At least 25% of the saleable project area is secured by contracts with buyers and e. At least 10% of the project revenue is realized on the reporting date.
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In the assessee’s case none of the above conditions are satisfied. Hence, no income is recognisable as per Guidance Note and the assessee can not be treated as transferor of lands.
The AO has also stated that no tax has been paid on the sum of approx. Rs.85 crores received by the assessee from the VBEHCS for transfer of land and formation of layout; similarly sums were received from SBREWA. It is submitted that no sums can be taxed in the assessee’s hands on the 'transfer of lands'. This is for the following reasons: a. The assessee is only a consenting party/confirming party / developer under the agreements with the VBEHCS and SBREWA. It has no legal or constructive rights akin to that of an owner of the lands. As such, the assessee cannot undertake any transfer of the lands. b. The assessee is precluded under law from owning the lands in the first place to transfer the lands to the VBEHCS and SBREWA. c. Under the Sale Agreement, the transfer of the lands is from the individuals to the VBEHCS and SBREWA. The assessee as developer is required to develop the said lands by forming residential layouts therein. For this purpose, the individuals have entrusted the development and formation of layouts to the assessee d. The role of the assessee is also mentioned in the Sale Agreement and this has no connection with transferring title in the properties to the VBEHCS and SBREWA.
The ld.DR submitted that the assessee is a party to the sale deed executed with VBHCS/SBREWA along with Shri M Thimme Gowda and his family members by way of various sale deeds for the financial years 2005-06 and 2006-07. The assessee received Rs.85.45 crores during the asst. years 2006-07 and 2007-08 and the same was
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brought to tax in the hands of the assessee in respective asst. years. According to the ld.DR, the assessee has not shown any income from the transfer of land to above two societies in any asst. years. The total amount received by the assessee was not only for development of sites but also for cost of land transferred to the assessee. There was accrual of income and the assessee is liable to be taxed in respective asst. years.
We have heard both the parties and perused the materials on record. In this case, the assessee entered into an agreement for sale of land with VBHCS/SBREWA for development and formation of residential plots in this asst. year. As per this agreement, the assessee is responsible for following activities.
In this case, the assessee is a confirming party to an agreements for sale with Vijaya Bank Employees Housing Cooperative Society ('VBEHCS') and Syndicate Bank Retired Employees Welfare Association ('SBREWA') for development and formation of residential plots on the following terms and conditions. • The assessee company, being the developer, is required to develop the said lands by forming residential layout as per the detailed specification of the Bangalore Metropolitan Region Development Authority ('BMRDA') with 45:55 ratio including formation of sites with boundary stones. • The assessssee company would undertake development and formation of residential layout work to the Developers in respect of the said land like formation of roads, drains, laying soiling stones, metalling, construction of FD works, storm water drains, asphalting, minor bridges, if any and such other works, connected with the development and formation of the layout as may be directed by the BDA / BMRDA and formation sites with boundary
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stones for the purpose of development of 33.8 lakh sq. ft., i.e., 130 acres of the aforesaid property. • The assessee company was required to make necessary arrangements for providing Cauvery water supply and draining facility to the layout. • The assessee company was also required to provide electricity and power supply to the layout. • Developers were also required to provide 2 approach roads of 80 Feet width butting the Bangalore-Mysore highway.
The assessee received advances from VBEHCS (of approx. Rs. 90.5 crores) and SBREWA (of approx. Rs.25 crores) as per the instruction of the individual land owners (comprising of Shri M Thimme Gowda and his family members). Against such advances, the lands were registered by Thimme Gowda and his family members in favour of the VBEHCS as a security against the advances received. Similar agreements to the lands were also entered into with SBREWA. However, no possession or risks rewards of ownership were transferred to the VBEHCS or SBREWA.
The AO sought to tax the proceeds received by the assessee from the VBEHCS and SBREWA. The assessee had objected to this and submitted as follows: a. That its taxable income ought to be computed by following the Completed Contract Method ('CCM'). b. That the assessee has not undertaken any activities in pursuance of its obligations under the Memorandum of Understanding or Sale Agreement, (such as plot development, application for the same with the relevant authorities, development of the area by marking sites and laying roads, etc.). This was also accepted by the AO.
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c. No income is taxable in the AYs 2006-07, 2007-08 and 2008- 09 since no part of the project obligation was fulfilled or completed. d. Without prejudice to the above, Project Completion Method ('PCM') cannot be adopted.
There was litigation with regard to lands to be developed (both for the lands to be ultimately sold to VBEHCS and SBREWA) had caused delay in completing the project. As such, the sums received from the buyers were a liability. In fact, the landowners and the assessee has been engaged in litigation with VBEHCS, which resulted in an Arbitration Agreement copy of which is placed on record at paper book page no. 118. As per this, no further development is to be undertaken and the assessee is required to return monies to the VBEHCS. In fact, till this day, the litigation subsists and there is no development of the projects with both VBEHCS and SBREWA.
The AO undertook the following additions to the assessee’s income:
According to the AO, the income accrued to the assessee is to be taxed in the respective asst. years under consideration. On the other hand, the contention of the ld.AR is that there is no accrual of income since the assessee is only consenting party received consideration in advance and it also shown liability in its balance sheet and cannot amount to performance of the contracts by assessee. Being so, no income could be recognized in certainty. The recognition of the revenue is not possible as the ultimate performance of the contract is doubtful. According to ld.AR, project was not materialized and it was mutually settled out of the court by
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arbitration. When the sale deed itself was subject matter of litigation and assessee being consenting party, no income accrued to the assessee. The assessee company cannot be said to have accrued any income from the above projects, which was disputed at various levels.
In our opinion, the transaction entered by the assessee with VBHCS/SBREWA not resulted in accrual of income on the following reasons:- - The assessee is only confirming party to the sale agreement with VBHCS/SBREWA. - The assessee has no legal enforceable right over the property. Being so, the assessee cannot transfer the above property to anybody.
- The assessee has not developed the said land so as to form a residential plots and no developmental activities have been taken place for the asst. years under consideration.
- The assessee has not obtained approval for commencement of the project. The assessee has not incurred any cost on the development of the project and no salable project area is ready to transfer and no revenue realized from the project.
Considering the above facts, in our opinion, it is too early to assess income out of this project in the hands of the assessee. The assessee neither received any revenue nor transferred the said project. Being so, till such time, it cannot be said that the party involved herein are ready to perform the contract. In the present case, neither the assessee is owner of the property to transfer to VBHCS/SBREWA nor it has undertaken any activities of forming
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residential plots and the assessee has not been given any part of the developed portion of land to the ultimate buyer in the properties to be sold is not readily available or plotted. The assessee cannot recognize income with certainty. The agreement entered is only to determine the sale price of the property and sale takes place only after completion of the project and assessee’s share of sale consideration is identified. The proposed sale agreement cannot be put into action due to various litigations pending with various levels. Nobody can transfer the title of the property when assessee itself is owing the landed property. Being so, no project can be anticipated when the party to the agreement itself is not owing the property and it is not possible to bring the same to tax. We have to see all surrounding circumstances to decide accrual of income to the assessee.
When consideration related to assessee is not determinable with certainty, the assessee is justified in postponing the recognition of income and it is appropriate to recognize the income only when it is reasonably certain that ultimate realization is possible. Hence, income cannot be recognized at the time of sale agreement where the assessee specifically consenting party and not the owner of the property. The department cannot thrust upon to the assessee so as to tax future income.
In our opinion, the assessee has to recognize the income in accordance with the true terms of the agreement and if there is any inconsistency in recognizing the income then only revenue authorities can disturb the same. Once the assessee recognizes the income in accordance with applicable accounting standards and provision of the Act, the AO cannot substitute the assessment to say that the assessee has postpone the tax liability. There is no basic deviation in the method followed by the assessee regarding
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recognition of income. However, the AO was of the opinion that there is basic flaw in the method followed by the assessee to recognize the income. When there is no deviation in recognizing the income by the assessee, the AO cannot recompute the profit of the assessee by observing that there is basic flaw in the method followed by the assessee.
In our opinion, there was no income arising out of sale agreement entered by the assessee as a consenting party so as to transfer the property owned by Thimme Gowda and family members to VBHCS/SBREWA. This view of ours is fortified by following judgments:
(i) R Gopinath (HUF) Vs. ACIT, 5 taxmann.com 80 (Chennai - Trib.), [133 TTJ 595] wherein the Tribunal held as under:-
“In the present case, the business profit arises to the assessee on the sale of the stock-in-trade only when the constructed apartments were sold and not at the time when the development agreement was entered into. Moreover, in the development agreement, the assessee has not agreed for sale of the entire constructed property on the land, the assessee has agreed only to a portion of the constructed property for sale for the purpose of recovery of the cost of construction and margin of the developer. The assessee has 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 has retained the portion of the land being proportionate to the constructed area to be retained by the assessee, then there is no question of transfer of the entire land to the developer. In view of the above discussion, orders of the lower authorities are set aside, qua this issue and the AO is directed to tax the capital gain arising from the conversion of the land and building into stock-in-trade proportionately into the previous years in which the constructed property was sold by the assessee or retained for self-use and corresponding business income was offered .-Vania Silk Mills (P) Ltd. vs. CIT (1991) 98 CTR (SC) 153 : (1991) 191 ITR 647 (SC),Ghanshyamdas Kishan Chander vs. CIT (1980) 121 ITR 121 (AP), Alapati Venkataramiah vs. CIT (1965) 57 ITR 185 (SC), Octavius Steel & Co. Ltd. vs. Asstt. CIT (2003) 78 TTJ 170 (Kol)(SB) : (2002) 83 ITD 87 (Kol)(SB) and Dy. CIT vs. Crest Hotels Ltd. (2002) 75 TTJ (Mumbai) 771 : (2001) 78 ITD 213 (Mumbai) relied on.”
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(ii) B.L Subbaraya Vs. DCIT, 9 SOT 297 (Bang. – Trib.), wherein the Tribunal held as under:-
“The fact which is undisputed is that the entire settlement is still a subject-matter of dispute being sub judice and there is no finality attained even during the year under consideration. This is clear from the following facts. Subsequent to the deed of settlement between the assessee and Smt. S on 9th Aug., 1997, the disputes arose on its implementation. The assessee filed a company petition against E under s. 433 of the Companies Act, 1956, seeking winding up for its failure to pay the dues to the assessee. Incidentally, subsequent to the deed of settlement dt. 9th Aug., 1997, the business of the partnership firm E was taken over by a private limited company, E Ltd. The said winding up petition came to be dismissed by the High Court of Karnataka on 2nd March, 2000 on the plea that there was no sum due from the company inasmuch as the settlement was between the assessee and the individual, Smt. S. Subsequently, the assessee instituted a suit or recovery for the amount in terms of the settlement before the Civil Court. Therefore, undisputedly the entire settlement agreement dt. 9th Aug., 1997 is in jeopardy. Of course, the assessee has withdrawn a sum of Rs. 23 lakhs from the firm. Therefore, where an amount was in dispute, it could not be treated as income, there is no infirmity in the conclusion of the CIT(A) that a sum of Rs. 77 lakhs cannot be brought to tax during the year under consideration as the matter had not attained finality. However, the CIT(A) went wrong in not applying the same principle to the amount of Rs. 23 lakhs received by the assessee. Even this amount of Rs. 23 lakhs is disputed and the right of the assessee in the said amount is inchoate and therefore, the same also cannot be brought to tax during the year under consideration.-CIT vs. Hindustan Housing &. Land Development Trust Ltd. (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC) relied on. Conclusion Where the entire amount payable under the agreement was in dispute, no part of it could be brought to tax in the hands of assessee, even if the part payment is actually received.”
(iii) Bhavesh Estates (India) Pvt. Ltd., Vs. ITO, 1 DTR 366 (Mum. – Trib.), wherein the Tribunal held as under:-
“Assessee had entered into the development agreement with AB (SC). The FSI on the said plot was revised, but the project could not be completed. Therefore, no interest was paid by the owner to the assessee company on its deposit at the rate of 12 per cent per annum. It is undisputed fact that the assessee had paid the amount of Rs. 99.90 lakhs as on 31st March, 2003, but no interest was paid to the assessee because the project was legally not feasible and due to legal restriction the whole amount invested might not
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have been realized in the said project. Accordingly, the owner did not make any payment to the assessee. Under the facts and circumstances, the assessee cannot be subjected to be taxed on notional income. There is nothing on record to suggest that any such interest income was materialized. The assessee has pointed out that because of non-availability of FSI on the said plot of land for which the assessee had entered into development agreement with AB (SC), the assessee company could not develop the said property in view of the statutory restrictions and, therefore, the whole project has become unviable to continue. Hence, no interest had accrued to the assessee in the year under consideration. Accordingly, the addition of Rs. 4,99,260 is directed to be deleted. Conclusions: Because of non-availability of FSI on the plot of land for which assessee had entered into development agreement, assessee could not develop the said property in view of statutory restrictions and thus, the whole project having become unviable, no interest accrued to the assessee on its deposit with the owner, hence the addition of notional interest was liable to be deleted.”
In the present case, the assessee is only confirming party to various agreement entered into by Shri Thimmegowda and his family members with VBEHCS and SBREWA and in that transaction, the assessee received an amount and treated that amount as liability in its books of account. The said amount said to be accrued to the assessee or arise to the assessee if the assessee acquires a legal right to receive the amount or conversely, the said amount has become legally due to the assessee from the parties concerned. The mere receiving of amount does not create any legal enforceable right to receive the same. Hence without any right to receive the amount it cannot be treated as the income of the assessee. Such an right accrues only when the other party either agree to pay the amount or there is a verdict by an appropriate court of law or arbitration or the claim is settled. When the assessee received a payment without right to receive the same it would not be correct to treat the said amount as the income of the assessee. Where an assessee does not have any legally enforceable claim on the amount so received, and basis of taxability cannot be on receipt basis. Even if assessee treated it as income in its books
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of account, it is not material where the income had not accrued to tax the same to treat as taxable.
The conduct of the assessee in treating an income in a particular manner is a material fact whether income had accrued or not. Although the conduct of the assessee is relevant whether income had accrued or not, yet the ipse dixit of the assessee cannot be the last word. What had accrued must be considered from the point of view of the probability of improbability of accrual in realistic manner. The amount if it is received without entitlement to receive the same, it has to be held that there was no accrual of income to the assessee as the necessary events for accrual of income has not materialized. In the present case in our opinion it is to be held that the income will accrue to the assessee only when the assessee acquires right to receive that income by completion of project undertaken by the assessee and by simply receiving the amount from the parties itself cannot be treated as income of the assessee. It is only advance received by assessee which is nothing but liability and cannot be treated as income of the assessee in these asst. years.
In view of the above, we are inclined to hold that lower authorities have not justified in making additions with regard to sale agreement entered by Thimme Gowda with VBHCS/SBREWA wherein in the present, assessee is a confirming party. Accordingly, we delete the addition on this count and allow the grounds taken by the assessee.
The next common ground in asst. year 2006-07 and 2007-08 is with regard to addition on purchase of land by the assessee from Shri T Ganesh at Rs.5,82,42,731/- for the asst. year 2006-07 and Rs.243,15,520/- for the asst. year 2007-08 on the reason that the
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Shri T Ganesh is the benami of the assessee. The facts of the issue are that the assessee acquired and sold several lands to VBHCS SBREWA. As the assessee is being a company unable to acquire agricultural lands. Therefore Shri T Ganesh, MD of the company and his family members have acquired various lands in and around Manchanayakanahalli, which was in turn handed over to M/s SPR Developers Pvt. Ltd. Shri T Ganesh helped the assessee company to acquire lands but the money transactions were done by assessee company. Subsequently, the land were transferred to Assessee Company by Shri T Ganesh. Hence, the income generated from these transactions were taxed in the hands of the assessee company substantially and protectively in the hands of Shri T Ganesh. Against this, assessee is in appeal before us.
The ld.AR submitted that in respect of the transaction involving Shri T Ganesh, the following should be noted : a. As per the tripartite agreement, Shri M Thimme Gowda and Shri T Ganesh were responsible for transferring residential sites to the members of VBEHCS. b. The assessee is only a consenting party to the transaction responsible for developing and forming of residential layouts. c. In lieu of advance received, lands were transferred by Shri Thimme Gowda and T Ganesh to VBEHCS and SBREWA as security against such advances. d. No land was transferred by Shri T Ganesh to the assessee as alleged by the AO. e. The assessee is neither the owner of the land nor acted as a transferor. It is precluded from owning the lands as per the extant law. Here, reliance is placed on the decision in the assessee’s own in ITA Nos.1464 and 1465 / Bang 2008, ITA 177 and 178 /Bang/2009, ITA No.262/Bang/2009 and ITA No.305/Bang/2009 dated 30.12.2009.
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f. In essence, the land transfers were effected between T Ganesh and VBHCS and SBREWA. g. The assessee being a developer has in no way benefitted from the transaction involving Shri T Ganesh. h. Without prejudice, no development has taken place on the proposed lands to be transferred due to dispute on titles to the land; the land that was to be converted has not been converted. Hence, the terms of the MOU have not been complied with for the transfer to be regarded as complete.
The ld.AR contended that, for the above reasons, it would not be appropriate to consider that income has arisen to the assessee on account of the transfer of lands. The following propositions are relevant here: a. No real income 'arises' in the present facts on the assumption that there is transfer of a capital asset. b. Income from capital gain on a transaction which never materialized is, at best, a hypothetical income. c. Where for want of statutory permissions, the entire transaction of development of land falls through, there will be no profit or gain which arises from the transfer of a capital asset. d. The assessee or land owners did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. e. This being the case, in the circumstances, there was no debt owed to the assessee or land owners. Hence, the assessee or land owners have not acquired any right to receive income under the JDA. As such, no profits or gains 'arose' from the transfer of a capital asset.
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The above principles are squarely covered by the ruling of the SC in Balbir Singh Maini (398 ITR 531). The following rulings also support this proposition:
a. CIT v. City Lubricants Ltd. (129 taxmann.com 267); Madras HC, wherein it was held as under:-
“Section 56, read with section 147, of the Income-tax Act, 1961 - Income from other sources - Chargeable as (Joint development agreement - Reassessment) - Assessment year 2007-08 - During assessment proceedings for A.Y. 2010-11, AO noticed that assessee had entered into development agreement in A.Y. 2007-08 for development of its land and since as per said agreement physical possession of property was given to developer and assessee received certain advance, capital gain was eligible on transfer of property under section 2(47) - As for A.Y. 2007-08 assessee in its return of income had not admitted capital gains, assessment for that year, i.e., relevant assessment year was reopened - During reassessment proceedings Assessing Officer after considering stand taken by assessee held that since original development agreement and power of attorney were cancelled, it could not be treated as transfer under section 2(47) - However, AO treated advance received by assessee as windfall gain assessable as income from other sources - Whether since reopening of assessment was by invoking section 2(47)(v) and issue pertaining to advance received by assessee was never a reason for reopening assessment, order of AO treating amount of advance as windfall gain in assessee's hands was a nullity - Held, yes - Whether even otherwise since even on date when Assessing Officer completed assessment under section 147 joint development agreement was not rescinded and Power of Attorney. was not cancelled, AO could not have treated advance received by assessee from developer as windfall gain to be brought to tax under head 'Income from other sources' - Held, yes [Paras 7 and 8][ln favour of assessee].”
b. Seshasayee Steels (P.) Ltd. v. CIT (421 ITR 46); SC; wherein it was held as under:-
“In order that the provisions of section 53A of the Transfer of Property Act be attracted, first and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof. Secondly, the transferee must have performed or be willing to perform his part of the agreement. It is only if these two important conditions, among others, are satisfied that the provisions of section 53A can be said to be attracted on the facts of a given case. [Para 11] On a reading of the agreement to sell dated 15-5-1998, what is clear is that both the parties are entitled to specific performance. [Para 12] Clause 16 is crucial, and the expression used in clause 16 is that the party of the first part hereby gives 'permission' to the party of the second part to start construction on the land. [Para 13]
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Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be 'possession' within the meaning of section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone. [Para 14]
This Court in Commissioner of Income-tax v. Balbir Singh Maini [2017] 86 taxmann.com 94/251 Taxman 202/398 ITR 531 adverted to the provisions of this section 2(47)(vl) and held that the object of section 2(47)(vl) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression 'enabling the enjoyment of takes colour from the earlier expression 'transferring', so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact. [Para 16]
Given the test stated in paragraph 25 of the aforesaid judgment, it is clear that the expression 'enabling the enjoyment of must take colour from the earlier expression 'transferring', so that it can be stated on the facts of a case, that a de facto transfer of immovable property has, in fact, taken place making it clear that the de facto owner's rights stand extinguished. It is clear that as on the date of the agreement to sell, the owner's rights were completely intact both as to ownership and to possession even de facto, so that this Section equally, cannot be said to be attracted. [Para 17]
Coming to the third argument of the appellant, what has to be seen is the compromise deed and as to which pigeonhole such deed can possibly be said to fall under section 2(47). A perusal of the compromise deed shows that the agreement to sell and the Power of Attorney are confirmed, and a sum of Rs. 50 lakhs is reduced from the total consideration of Rs. 6.10 crores. Clause 3 of the said compromise deed confirms that the party of the first part, this is the appellant, has received a sum of Rs. 4.68 crores out of the agreed sale consideration. Clause 4 records that the balance Rs. 1.05 crores towards full and final settlement in respect of the agreement entered into would then be paid by 7 post-dated cheques. Clause 5 then states that the last two cheques will be presented only upon due receipt of the discharge certificate from one Pioneer Homes. [Para 18]
In this context, it is important to advert to a finding of the Tribunal, which was that all the cheques mentioned in the compromise deed have, in fact, been encashed. [Para 19]
This being the case, it is clear that the assessee's rights in the said immovable property were extinguished on the receipt of the last cheque, as also that the compromise deed could be stated to be a transaction which had the effect of transferring the immovable property in question. [Para 20]
The pigeonhole, therefore, that would support the orders under appeal would be section 2(4 7)(il) and (VI) in the facts of the instant case. [Para 21] This being the case, this appeal is dismissed but for the reasons stated by this judgment. [Para 22]
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c. Pr. CIT v. Fardeen Khan (411 ITR 533); Bombay HC; wherein it was held as under:-
“In terms of section 2(47)(v), transfer of any immovable property in part performance of a contract of the nature referred in section 53A of the Transfer of Property Act will be completed only when the agreement under section 53A of the Transfer of Property Act is registered under the Indian Registration Act; Admittedly, the agreement has not been registered. Consequently, there is no transfer in terms of section 2(4 7)(v). [Para 11] The revenue submits that there has been a transfer of land within the meaning of Section 2(47) (vi). In fact, the clause of the agreement in the assessment order makes it clear that GPL, has been granted license to enter upon and develop the property. However, the possession of the said land continues to be with the assessee. Further, the proviso to clause (6) of the development agreement clearly provides that nothing contained in the agreement shall be construed as grant of possession in part performance of the agreement under sections 2(47)(v) and 2(47) (vi). [Para 12] As no transfer of the said land had taken place under the development agreement, the occasion to compute capital gains as proposed, would not arise. [Para 13] In the above view, no occasion arises to consider the submissions on behalf of the revenue. However, at this, chhotaray, the revenue states that Rs.13.75 crores which was paid to the respondent should be brought to tax in the subject assessment year. The agreement itself records an amount of Rs.13. 75 crores is received as a deposit from GPL. Therefore, it is not an income. In any event, it is a settled position in law that every receipt is not necessarily income. It is for the revenue to establish that the receipts constitutes the income. This is so, as no transfer of land has taken place under the development agreement. Therefore, the revenue must make out a case that the receipt is an income and under what head would it fall. In the absence of any such an exercise, this submission does not assist the revenue. [Para 13] The issue of the value and the date on which the capital assets was converted into stock-in-trade, arises for consideration only when stock-in-trade is transferred/ sold by the assessee. This is as provided under section 45(2). [Para 14] It is already held that no transfer of land has taken place under the development agreement. Consequently, the occasion to arrive at the value at which the capital assets was converted into stock-in-trade and the date when it was so done, becomes academic. [Para 14] In the present case, on facts, there is no transfer of the stock-in-trade i.e. land that has taken place in the previous year relevant to the subject assessment year. Therefore, the issue of determining the date of conversion of capital asset into stock-in-trade for the purposes of bringing it to tax under section 45(2) would become academic in this assessment year. [Para 14]
d. ACIT v. jiyaraj Singh (183 lTD 237): Jaipur ITAT, wherein it was held as under:-
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“I. Section 2(47), read with section 45, of the Income-tax Act, 1961 - Capital gains - Transfer (Land) - Assessment year 2013-14 - Assessee entered into two sale deeds for sale of its land whereby sale consideration had been discharged by issue of post dated cheques - However, sale transaction could not be materialized as few cheques had been dishonored and returned unpaid to assessee - Whether therefore, there was no transfer of land in terms of section 2(47)(v) and no real income which had accrued or arisen to assessee as there was no receipt of full sale consideration and in absence thereof, assessee would not be exigible to capital gains tax - Held, yes [Paras 24 and 26][ln favour of assessee] II. Section 48 of the Income-Tax Act, 1961 - Capital gains - Computation of (Cost of improvement) - Assessment year 2013-14 - Assessee submitted details regarding development expenses which includes levelling, stone supply charges, machine charges, repairs of boundary walls and wells etc. incurred on land before its sale which was required to put property in saleable condition - Commissioner (Appeals) appreciated nature of expenses and allowed proportionate claim of Rs. 4.56 lakhs while computing long term capital Gain - Whether there being no infirmity in findings of Commissioner (Appeals) in allowing these expenses towards cost of improvement, findings of Commissioner (Appeals) were to be confirmed - Held, yes [Para 35] [In favour of assessee] III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Expenditure incurred on earning business income) - Assessment year 2013-14 - Whether assessee having received interest and remuneration receipts from various firms in which he was a partner, business expenditure incurred under various heads such as salary and wages to staff, postage, Travel and conveyance and legal fees etc. for earning such business income as claimed by assessee would be allowable - Held, yes [Para 42][ln favour of assessee] IV. Section 57 of the Income-tax Act, 1961 - Income from other sources - Deductions (Condition precedent) - Assessment year 2013-14 - Whether to bring a case within purview of section 57(iii), it is necessary that expenditure must be laid out or expended wholly and exclusively for purpose of making or earning income - Held, yes - Assessee had offered interest income from his savings and fixed deposits maintained with various banks under head 'Income from other sources' and claimed expenses in nature of salary and allowances, postage, telephone, travel, car and conveyance, bank charges, other business expenses, legal expenses, depreciation, and other misc. expenses, however, question whether these staff, office and other related expenses had been incurred wholly and exclusively for purpose of making or earning such interest income had not been examined - Whether therefore, matter was to be remanded back for adjudication afresh - Held, yes [Para 49][Matter remanded] V. Section 48 of the Income-tax Act, 1961 - Capital gains - Computation of (Indexed cost of acquisition) - Assessment year 2013-14 - Assessee transferred land vide sale deed and claimed cost of acquisition on basis of registered valuer's report wherein value of property so estimated by registered valuer includes market value of two baories, three wells and other structures said to have existed on land which was transferred - Assessing Officer held that assessee transferred bare land without any construction work as per registered sale deed and thus full value of consideration was only for transfer of land, hence, full value of consideration was only for bare land transferred, hence, indexed cost of acquisition of land only was deductible under section 48 - However, DVO had acknowledged existence of roads, wells, Baories and boundary walls on impugned land - Further, assessee had also submitted an affidavit that these structures had been transferred along with sale-of land as part of sale deed and land area so
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reflected in sale deed included area occupied by these structures. Whether therefore, proportionate cost of these structures (after indexation) against full value of consideration in terms of sale deed so executed would be allowable to assessee - Held, yes .[para 57][ln favour of assessee] VI. Section 48 of the Income-Tax Act, 1961 - Capital gains - Computation of (Legal expenses) - Assessment year 2013-14 - Whether legal expenses incurred for court, consultancy and advice, and other expenses for filing of two court cases in respect of invalid sale deeds would not be allowable as said sale deeds were not subject to capital gains tax and therefore expenses incurred for same could not have been allowed while computing capital gains in respect of other sale transaction which had been brought to tax - Held, yes [Para 63] [In favour of revenue].” 45. The ld.DR relied on the order of the lower authorities. The learned DR further submitted that Shri Thimme Gowda and family members acquired land, which was in turn handed over to M/s SPR Developers, the appellant. The AD has also brought out the fact that Shri T.Ganesh had aided the appellant's business. In the appellant's ledger, amounts required for purchase of land was sourced from the appellant company. Subsequently, the same lands were transferred to the appellant by T.Ganesh. By indulging in such method, the appellant gained by escalating cost of land. No detail of the said T.Ganesh was furnished before AO. Therefore, protective addition made in the hands of Shri T.Ganesh and substantive addition made in the hands of the appellant are confirmed. I agree with the decision of the Ld.CIT(A) and the same may be upheld.
We have heard rival submission and perused the material on record. In this case there was a triparty sale deed between Sri.Thimme Gowde @ Ganesha, M/s.SPR Developers and VBEHS wherein the assessee was only a confirming party through which the assessee and parties herein responsible for transferring the residential site to the members of VBEHS. This is placed on record at paper book page 133 to 146. The assessee was only a confirming party to the transaction responsible for developing and forming or residential layout. No land was transferred by Sri.T.Ganesha to present assessee. The assessee is only the financer to the transaction. Even if there is escalation in the value of the land transferred to VBEHS that gain cannot be brought into tax in the
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hands of the assessee. The escalation of income is only hypothecation which never reached the hands of the assessee. As discussed earlier with regard to the first ground, we are of the opinion that the same ratio is applicable herein also. Similar is the position in transaction with SEREWA. Accordingly, we are inclined to delete the addition made by the A.O. in this count. This ground of the assessee in both the assessment years are allowed.
In the result, all the appeals filed by the assessee are allowed.
Order pronounced in court on 09th February, 2022. Sd/- Sd/- (BEENA PILLAI) ( CHANDRA POOJARI) Judicial Member Accountant Member Bangalore, Dated, 09th February, 2022 / vms /Devadas G Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.