SHEHROZ ZAKIR HUSAIN MALIK,MUMBAI vs. ITO - 26(3)(20, MUMBAI

PER MS. SUCHITRA KAMBLE, JM This appeal is filed by the assessee against the order dated 22.03.2019 passed by Commissioner of Income Tax (Appeals)-38[in short ‘CIT(A)’] by the assessee for assessment year 2015-16. 2. The assessee has raised following grounds of appeal is as under :

Late Sh. Shehroz Zakir Husain Malik 2 ITA No. 3243/M/2019 2. That the Ld. CIT (A) erred in law and on facts in upholding the addition made by the Ld. AO treating the long term capital gain of Rs. 85,32,583/- on sale of flat vide agreement dated 05.12.2014 as short term capital gain of Rs. 1,21,16,667/- without appreciating the facts of the case. Thus, the addition must be deleted, 3. That the Ld. CIT (A) erred in law and on facts in treating the gain on sale of the property as short term capital gain without appreciating that the original property, against which the assessee was allotted flat under the development agreement, was purchased on 03.10.2010 and the assessee sold the allotted flat on 05.12.2014 i.e. after three years from the date of purchase of original property. Thus, the addition made treating the long term capital gain as short term capital gain must be deleted. 4. That the Ld. CIT (A) erred in law and on facts in confirming the disallowance of exemption claimed by the assessee us 54 of the Act of Rs. 85,32,583/- ignoring the fact that the assessee purchased the new flat within the period prescribed u/s 54 of the Act. Thus, the exemption claimed must be allowed. 5. The appellant craves the leave to add, substitute, modify, alter, delete or amend all or any ground of appeal either before or at the time of hearing. 3. The assessee is an individual and partner in the firm M/s Empire Group. The assessee during the year under consideration declared income from salary, house property, capital gain and income from other sources. The assessee filed return of income on 15.03.2017 declaring total income at ₹11,26,500/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 and subsequently, the case was selected for limited scrutiny. The assessee filed details through its authorized representative before the Assessing Officer. The Assessing Officer observed that during the year under consideration, assessee has entered into an agreement on05.12.2014 for sale of his property i.e. Flat No. 101, Scarlett Heritage Building, Chapel Road,

Late Sh. Shehroz Zakir Husain Malik 3 ITA No. 3243/M/2019 Bandra (W), Mumbai - 400 050 for consideration of Rs.1,95,00,000/-. The assessee claimed exemption u/s. 54 of the I.T. Act and submitted the agreement entered on 05.10.2014 with M/s. United Mud-Chem Pvt. Ltd. for purchase of Flat No.2113, Kohinoor City Co-operative Housing Society Ltd. for consideration of 2113, Kohinoor City Co-operative Housing Society Ltd. for consideration R3.1,80,00,000/-. In response to the notice issued u/s. 133(6) of the IT. Act, M/S United Mud-Chem Pvt. Ltd vide its letter dated 20.12.2017 submitted the bank statement and ledger account of assessee and of Shri. Badshah Majid Malik. As per the ledger account, of Shri Badshah Majid Malik in the books of M/s. United Mud Chem Pvt. Ltd., the Assessing Officer noticed that an advance of Rs.60 Lakhs was paid during FY. 2012-13 by Shri. Badshah Majid Malik for purchase of the property, Flat No. 2113, Kohinoor City Cooperative Housing Society Ltd. Further, as per the ledger account of assessee in the books of M/s. United Mud-Chem Pvt. Ltd., the journal entry of Rs. 60 Lakhs to the property of Flat No. 2113, Kohinoor City Co-operative Housing Society bid passed on 04.10.2014 for which the assessee did not acquired the new property. In view of this, the Assessing Officer observed that the assessee was not entitled to claim the exemption u/s. 54 of the I.T. Act, 1961. The Assessing Officer further observed that, as per the submission, [assessee along with two co-purchasers namely Saeed H, Malik and Badshah Majid Malik had entered into an agreement on 03.07.2010 for purchase of land bearing CST No. B117 and B/118 admeasuring 151,31 Sq. Mtr. and 2.51 Sq. Mtr. respectively along with entire vacant ground floor admeasuring 830 Sq. Ft. and the tenant on the First Floor of the structure standing thereon situated at Chapel Road, Bandra West, Mumbai - 400 050 for consideration of Rs. 1 Crore on which stamp duty of Rs.5,30,000/- was paid. Subsequently, the

Late Sh. Shehroz Zakir Husain Malik 4 ITA No. 3243/M/2019 assessee along with the above two co-owners had entered into a development agreement with Mr. Yusuf Noor Mohammed Khan (Developer) on 07.04.2012 for the above stated land and structure thereon as per the development agreement, the assessee along with other co-owners had given exclusive right to the developer to develop the said property for consideration of Rs. 35 Lacs and one flat for each co-owner. The Assessing Officer observed that as per the said development agreement, Flat No, 101 admeasuring 562 sq. ft. carpet area was allotted to the assessee, as per the agreement, the assessee received ₹12 lacs as part consideration and the said development agreement was duly registered on 07.04.2012 and therefore the assessee transferred the property within the meaning of section 2(47) of the I.T. Act 1961. Since, the assessee vide agreement dated 05.12.2014 sold the Flat No. 101 for the consideration of Rs. 1.95 crores which is within 32 months from the date of allotment, therefore the sale consideration received by the assessee is Short Term Capital Cain. During the assessment proceedings, assessee claimed sale consideration of Re 1,33,33,333/- For the same, assessee submitted MOU executed between assessee and Mr. Badshah Majid Malik registered on 04.05.2012. As per the said MOU, assessee and Mr. Badshah Malik would equally share the sale proceeds for the Flats No. 101 and 301 as and when the respective flats are sold which was allotted to them as per the Development Agreement. Further, Mr. Badshah Majid Malik also sold the Flat No. 301 on 13.05.2014 for consideration of Rs.90,00,000/- which was allotted to him vide above said Development Agreement, which is within 3 years from the date of allotment. Therefore, the sale consideration received by Mr. Badshah Majid Malik was held as Short-Term Capital Gain by the Assessing Officer. In view of MOU executed between the assessee and Mr. Badshah Majid Malik, assessee's

Late Sh. Shehroz Zakir Husain Malik 5 ITA No. 3243/M/2019 total consideration from the sale of Flat No.101 and 301 was Rs.1,42,50,000/-. Accordingly, vide letter dated 11.12.2017 and16.12.2017 assessee was show caused by the Assessing Officer as to why the sale consideration received by the assessee should not be treated as Rs.1,42,50,000/- instead of Rs.1,33,33,333/-treating the same as consideration received on sale of Short- Term Capital Gain asset and Short Term Capital Gain of assessee which worked out as under: Sale Consideration received (As discussed above) in ₹ 1,42,50,000/- Less: Cost of new property i.e. Flat No. 101 Purchase Cost of original property (As per computation) 33,33,333/- Less: Amount received from Developer on 07.04.2012 12,00,000/- 1,21,16,667/- Thereafter, the Assessment order was passed on 28.12.2017 thereby assessing the total income of the assessee at Rs. 1,32,62,460/-.

Late Sh. Shehroz Zakir Husain Malik 6 ITA No. 3243/M/2019 to be allotted to them. The assessee and his brother sold flats received by them for Rs. 1,95,00,000/- and Rs.90,00,000/- respectively. The assessee in his return of income claimed that the land & structure thereupon purchased by him on 03/07/2010 was fully sold by him dung the year under consideration and thus, long term capital gain was derived thereupon. Accordingly, the capital gain accrued to him was long term capital gain. However, the Ld. AO opined that since the assessee had entered into development agreement in 2012; he had transferred his rights in property and as per said agreement he was entitled to receive constructed flats in new building. Thus, the nomenclature of the property was changed on the date of execution of said development agreement. He further opined that the constructed flats received by the assessee in 2014 were resultant of agreement executed in 2012, thus, the period of holding of new asset was less than 3 years and thus, the capital gain accrued to the assessee was short term capital gain. At the very outset the Ld. AR submitted that a development agreement is not a sale simpliciter because the consideration is executory and in kind. In development agreement, one cannot expect construction to be undertaken by the developer, once a breach has occurred. A development agreement is akin to an agreement to sale and the sale transaction is completed on specific performance as per the agreement. A development agreement grants rights of possession to the developer in the capacity of builder and not as buyer. Thus, entering into a development agreement cannot lead to a presumption that the assessee has sold the property. The main characteristics of such an agreement due to which it cannot be alleged that transfer of property has taken place are highlighted hereunder:

Late Sh. Shehroz Zakir Husain Malik 7 ITA No. 3243/M/2019  The Developer is not a Transferee/ Purchaser coming within the meaning of Section 53A of the Transfer of Property Act 1882.  The Developer does not buy any land or property from the Owners.  The right to develop the property granted to a Developer as provided in the Development agreement does not constitute a contract to transfer of any immovable property as between the Owner and the Developer, to attract the provisions of Section 53-A of the Transfer of Property Act 1882 between them  The Development agreement is a “contract for sale” and not" a contract of sale" and hence there is no interest created on the property per se in favour of the Developer.  The Developer only nominates the prospective buyers for his share  The Developer enters the property only for the purposes of development of the property and not as a purchaser/ transferee.  Only the prospective buyers are the purchasers / transferees in respect of the flats / apartments purchased by them together with the corresponding shares of undivided interests, rights and titles in the land.  The prospective buyers of flats / apartments are never put into possession of their apartments before the sale deeds are executed and registered in their favour and hence there is no scope for invoking the provisions of Section 2(47)(v) read with Section 45 of the Income tax Act 1961 and the provisions of Section 53-A of the Transfer of Property Act 1882. The Ld. AO for alleging that the property purchased by the assessee on 03/07/2010 was transferred on the date of entering into development agreement relied upon the judgment of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia vs. CIT (260 IT 491) wherein the Hon’ble Court has observed that for applicability of Sec. 2(47)(v) of the Act, the conditions prescribed under Section 53A of the Act needs to be fulfilled. The stated conditions as enumerated by the Hon’ble High Court are as under:-

Late Sh. Shehroz Zakir Husain Malik 8 ITA No. 3243/M/2019 a There should he contractor consideration b It should be in writing. c It should be signed by the transferor d It should pertain to the transfer of immovable property; e The transfree should have taken possession of property. f Lastly, transfree should be ready and willing to perform the contract. As evident from the facts of the case although all the conditions prescribed under the provisions of Section 53A of the Transfer of Property Act are fulfilled in the case of the assessee; however, the condition that "It should pertain to the transfer of immovable property" is not fulfilled in the case of the assessee. The assessee has only assigned conditional rights to the developer for development of property without any interference from any third party including himself. However, the assessee has not foregone his rights in the property till the date the newly constructed flats are allotted to him and co- owners, i.e. brothers of the assessee. The stated facts is evident from the perusal of point No. 2 of the development agreement which reads as under: “2. Upon execution of this development agreement, the developer shall be entitled to enter upon the said property for the purpose of demolition the existing structure and constructing a new building on the said property.” Thus, it is evident that the conditions specified in Sec. 53A of the Transfer of Property Act are not fulfilled in the case of the assessee and thus, facts of the case of the assessee are distinguishable from the facts of the case before the Hon’ble High Court of Bombay. It is pertinent to mention here that the Ld. AO has enumerated only part extracts of the development agreement in the assessment order so as to depict that the assessee has foregone all his rights. The extracts of the agreement depicting that the substantial rights were held

Late Sh. Shehroz Zakir Husain Malik 9 ITA No. 3243/M/2019 by the assessee even after the execution of development agreement enumerated hereunder : 4. The developer hereby confirms and agreed that the entire development work in respect of the building will be completed within eighteen months from the date or obtaining I.O.D, or till the Tenants/ owners handover vacant and peaceful possession of their respective tentaments to the developer. However, the developer shall been titled for a reasonable extension of the time without any liquidated damages beyond the aforesaid period of eighteen months due to delay on account of the following:- a War, Civil commotion, strike or act of God. b Any notice, Order, rule, notification of the Government and or other public competent authority. c Any other reasons beyond the control of the developer. 25. After completion of the development of the said property in all respect, the owners, shall execute necessary deeds of conveyance or any other vesting document in favour of a cooperative society or societies or association of person of other body corporate. 26. If for any reason whatsoever the developer is unable to complete the entire work of the development of the said property within a period of eighteen months from the date of the developer receiving vacant possession of the said property. The owner shall give the developer reasonable extension of time as per terms and conditions as mutual agreed between them. From the stated terms and conditions of the development agreement it is evident that the assessee has allowed rights of development of the property and till the date of completion of development they continue to be the owners of the property and in case of any default in terms and conditions of development agreement, the developer has to again seek permission and enter into fresh agreements with the owners as per new terms and conditions. Thus, by no stretch of imagination it can be concluded that the assessee has transferred the asset to developer upon the execution of said development

Late Sh. Shehroz Zakir Husain Malik 10 ITA No. 3243/M/2019 agreement. It is further not out of place to mention here that a development agreement means an agreement or arrangement between the landowner and the developer wherein the land owner contributes the land to the project and the developer undertakes the construction/development of the said land into a developed estate, at mutually agreeable terms and conditions. Depending on the facts and circumstances of the case, multiple variations of this structure can be seen in the real estate sector, with the broad contours of the arrangement remaining the same. Joint Development Agreements (JDAs) are a very common feature in the real estate sector and are beneficial to both the landowners and the developers. The developers are not required to make huge investments for the outright purchase of the land and thereby blocking their working capitals and the landowners can reap the benefits of the expertise of the developer in obtaining higher considerations for a developed estate rather than just the bare piece of land. The income arising to the developer under a JDA, in the form of sale consideration of his share in the developed estate is considered as his business income and is taxed as per the applicable provisions. The income arising to the landowner arising on transfer of title of land under a JDA, is considered as capital gain in his hands. The taxability of capital gains in the hands of the landowner, arising on transfer of title of land from the land owner to the developer in a JDA has always been a litigative issue. This contentious issue, was resolved and addressed by the Hon’ble Supreme Court in its landmark judgement in the case of "CIT v. Balbir Singh Maini" Civil Appeal No.15619 of 2017. The Hon’ble Apex Court in the said case have considered the following issues: The Hon'ble Apex Court considered whether the signing of the joint development agreement or giving of possession could be said to be a

Late Sh. Shehroz Zakir Husain Malik 11 ITA No. 3243/M/2019 transaction, which had the effect of transferring or enabling the enjoyment of the immovable property, which could also give rise to capital gains. According to the Apex Court, the purpose of this provision was to bring those transactions within the tax net, where, though title of the property was not transferred in law, there was, in substance, a transfer of title in fact. On a reading of the joint development agreement, the Hon'ble Court noted that the owner had continued to be the owner of the property throughout the development of the property and had at no stage sought to transfer rights similar to ownership to the developer. At the most, only possession was given under the agreement and that too, for the limited purpose of development. The Hon'ble Apex Court, therefore, held that this clause also did not apply to the transaction, and that there was no transfer giving rise to capital gains.

From the perusal of the commercial arrangements, legislative intent and judicial prudence cited above it is evident that the Ld. AO was not correct in presuming that the appellant has transferred the asset acquired by him in 2010 on the date of execution of development agreement in 2012. Thus, as evident the asset transferred by the appellant was a Long Term Capital Asset and the same is chargeable to tax as Long Term Capital Gain only.

Late Sh. Shehroz Zakir Husain Malik 12 ITA No. 3243/M/2019 seized the his rights in existing building/structure which was demolished and it is relevant that the land was very much in existence. Therefore, the Assessing Officer should have taken the value of land for long term capital gain which is permissible under the Act. Thus we direct the Assessing Officer to take proper quantification of the land and the structure/building which was demolished by calling upon valuation report and after taking into account the cost of both the structure and land quantify the long term capital gain to the assessee as per the valuation report. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice ground No. 2 & 3 are partly allowed for statistical purposes.

Late Sh. Shehroz Zakir Husain Malik 13 ITA No. 3243/M/2019 Flat No. 2113, Kohinoor City Coop Hsg Soc Ltd. from his brother, Sh. Badshah Majid Malik in April 2015 itself for a consideration of Rs. 70,00,000/-. Relevant extract of bank statement substantiating the stated fact was produced by the Ld. AR as additional evidence before the Tribunal. The Ld. AR further submitted that from the facts of the case enumerated above it is evident that the appellant has duly purchased residential property from his brother and was thus, eligible for exemption u/s 54.The exemption u/s 54 of the Act shall not be denied only because the property was transferred in records of developer at a later stage. 9. The Ld. DR relied upon the assessment order of the CIT(A). 10. As regards, the claim of exemption u/s 54, the same is co-related with the purchase of new flat within the period prescribed u/s 54 and the same needs to be verified at the stage of Assessing Officer, therefore, this issue also needs proper verification and we are remanding back this issue to the file of the assessee. Needless to say, the assessee was for allowing principles of natural justice. Hence, ground No. 4 is partly allowed for statistical purposes. 11. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 05/04/2022. Sd/- Sd/- (PRAMOD KUMAR) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICIAL MEMBER Mumbai; Dated: 05/04/2022 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to :

Late Sh. Shehroz Zakir Husain Malik 14 ITA No. 3243/M/2019 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Sr. Private Secretary) ITAT, Mumbai