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Before: Shri V. Durga Rao & Shri G. Manjunatha
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
Both the appeals filed by the Revenue as well as assessee are directed against the order of the ld. Commissioner of Income Tax (Appeals) 2, Chennai dated 04.02.2016 relevant to the assessment year 2014-15. The assessee has raised the following grounds: “
1. The Ld. CIT(A) has erred in coming to the conclusion that the Assessee has acquired a right in the nature of a Capital Asset by virtue of the Agreement / Letter dated 01.07.2006.
2. The Ld. CIT(A) has erred in concluding that Rs. 7.00 Crores, which is a part of the refundable Security Deposit of Rs. 15.00 Crores was forfeited by the Assessee, simply on the basis of the assumption held out by the Developer vide its letter dated 24.01.2014, since the Assessee has not actually forfeited the said amount.
3. The Ld.CIT(A) has erred in NOT accepting the Assessee's contention that the amount of Rs. 7.00 Crores is a Capital Receipt in the nature of liquidated damages not exigible to tax.
4. The Ld.CIT (A) is not correct while basing her conclusion on the relationship of the Assessee with the Chairman of the Developer Company. Though the Chairman is the brother of the Assessee, there are other major shareholder in the developer company namely Reliance Group, Mr. Shanmugam and Mr. Gigi George, the Managing Director of the developer company, who are NOT related to the Assessee.
5. The Ld.CIT (A) erred in NOT accepting the Assessee's contention that the amount of Rs.15.00, of which Rs. 7 Crore is a part, is being a refundable security deposit is only a liability and NOT an income in the hands of the Assessee.
6. The Ld.CIT (A) erred in NOT considering the judgment of Supreme Court in the case of Excel Industries, relief upon by the Assessee, for the proposition that income can be said to have accrued to an Assessee, only when the other party accepts it as such, in their books.
7. The Ld.CIT (A) has conveniently ignored the categorical assertion of the M.D. of the Developer Company in his answers to Question Nos. 5 & 6 of the sworn statement dated 7.01.2014, till the date of recording the sworn statement i.e 07.01.2014, that they were classifying the Assessee as a debtor and the said amount as recoverable as advance deposit.
8. The Ld.CIT (A) erred in NOT accepting the alternative contention of the Assessee that if at all it were to be assessed as an income, it could be done only in the year when the Developer squares up the transaction in its books, which MD of the Developer company has stated in his letter dated 24.01.2014, that the refundable security deposit of Rs. 15.00 crores, would be accounted in their books, as return of advance of Rs.8.00 crores paid by the Assessee and balance of Rs.7.00 crores as "compensation", only during FY ending on 31.03.2014, relevant to AY 2014-15.
9. The assessee prays that the entire addition of RS.7.00 Crores may kindly be deleted from the assessed Total Income for the AY 2011-12.
The Assessee reserves her right to add any ground of Appeal
, or delete or modify any of the grounds of appeal at any time before the disposal of Appeal.”
2. The Revenue has raised the following grounds: “1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. 2.1 The learned CIT(A) erred in not acknowledging that the said income constitutes income from other sources. 2.2 The learned CIT(A) erred in directing the Assessing Officer to treat the compensation money received by the assessee as LTCG by treating RS.15 Crores as sale consideration and Rs.8 Crores as 'Cost of Acquisition' as against the Assessing Officer's stand that it has to be taxed under the head 'Income from Other Sources'. 2.3 The learned CIT(A) has not appreciated the fact that the said transaction was purely forfeited security deposit in the nature of revenue receipt and did not come under the extinguishment or relinquishment envisaged by Sec.2( 47) of the Act. 2.4 The learned CIT(A) has not appreciated the fact that in the absence of any capital asset in the first place, there can be no capital gains that have accrued. 2.5 The learned CIT(A) has erred in not acknowledging the fact that for tax to be chargeable u/s.45 on capital gains, there should have first bene a capital asset u/s.2(14) and there should have been transfer u/s.2(47) of the I.T. Act. In the instant case, the capital asset did not come into existence at all in the first place. 2.6 The learned CIT(A) has erred in not appreciating that when the said income is not chargeable under capital gains, the same is to be chargeable u/s.56 as 'Other Sources'.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.” 2. Brief facts of the case are that the assessee filed her return of income for the assessment year 2011-12 on 16.12.2011 admitting a total income of ₹.87,57,270/- and the same was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short]. Subsequently, the case was taken up for scrutiny under CASS and notice under section 143(2) of the Act was issued and after following due procedure, the Assessing Officer has completed the assessment u under section 143(3) of the Act dated 13.03.2014. In the assessment order, the Assessing Officer has noted that the assessee has paid a sum of ₹.8,00,00,000/- (Rupees Eight Crores only) during the financial year 2006-07 to M/s. Kgeyes Nelsun Projects Pvt. Ltd. (hereinafter referred to as the 'Developer'), as an advance payment for her proposed purchase of constructed property/floor area of 6th floor. The project conceived/ proposed was to build an IT Park called "ANIKSHA" at Kottivakkam, Chennai. The property was proposed to be built and handed over by the company on or before 31.12.2007 to the assessee as conceived/agreed of, vide agreement dated 01.07.2006. However, the same could not materialise as proposed/planned. On failure to deliver the aforementioned constructed area, the company has provided the assessee with a forfeitable and/or refundable security deposit of a sum of ₹.15,00,00,000/- to the assessee on 01.04.2010 with further terms and conditions, to complete the same by 31.03.2011. The Assessing Officer show caused the assessee as to why the difference amount of ₹.7,00,00,000/- should not be treated as income for the assessment year 2011-12.
2.1. In reply, the assessee has contended before the Assessing Officer that the same may not be taxable under the Act, as the same is attributable to compensation which was not a taxable revenue receipt. Thereafter, the Assessing Officer summoned Shri Gigi George, the Managing Director of M/s K.G.S. Developers Ltd. (M/s Kgeyes Nelsun Projects Pvt. Ltd. was subsequently, re-named as K.G.S. Developers Ltd.) on 07.01.2014. In his statement recorded, Shri Gigi George has categorically confirmed the facts of transaction, investment, forfeiture clause, return of deposit with additional amount of ₹.7,00,00,000/- and consequent classification of the same as compensation paid to the assessee in their books. Shri Gigi George, vide his letter dated 24.01.2014 has clearly confirmed the same as compensation paid in lieu of forfeiture clause on the investments made by the assessee.
2.2. The Assessing Officer communicated the submissions made by Shri Gigi George to the assessee and summoned the assessee and recorded a statement from the assessee. The Assessing Officer, during the proceedings, requested the assessee to explain the transaction with M/s KGS Developers Ltd. (also hereinafter referred to as the 'Developer) in detail with all supportive evidences. From the reply of the assessee, the Assessing Officer has observed as under: i. Assessee contends that the investment has been made keeping in view of her association with her brother (being the Chairman of the developer- company) and on keeping in view of this only the vendor had committed to deliver a property that could fetch ₹.12.5 lakhs as Rental Income that too with a tenant of her choice. Accordingly, the assessee was directly or indirectly in full know-how of the builder and stated investment is being in lump sum in lieu of the purchase of the entire floor on its completion. ii. In the absence of builder's failure to complete the construction, apparently the assessee had not taken any further legal steps to enforce/secure her interest for the investment made in the company. In view of this assessee's contention that she was not able to contact neither her brother (being the chairman of M/s KGS Developers Ltd.) nor the company to secure her interest is devoid of merits and is apparently a false stretched co-relation of subsequent facts. iii. Further assessee's presumption to extend similar time still further is not based on any verifiable submissions. Similarly assessee's presumption of intrinsic value and consequent presumption of holding it as deposit to an uncertainable conditions/probabilities is not based on any commercial prudency. iv. When further returns are neither ascertainable nor promised by the builder in concrete terms, the assessee's contentions of probabilities do not fit into the prudent accounting principles r. w. provisions of the IT Act. 2.3. After analysing the facts and circumstances and the correspondences made by the assessee, the Assessing Officer has observed that the assessee had initially held the amount as compensation in view of forfeiture. When it was pointed out by the department of its categorization as "Refundable deposit", the assessee had started to claim that there had been no forfeiture and she has not exercised the right to forfeit. The assessee had also stepped up to claim that there has been no loss to the revenue since the receipt was a compensation for their capital investment. Further, on perusal by the department, the assessee argues about a new date of 30.6.2014 which was never discussed/pressed upon till the department's perusal. On 06.02.2014, the assessee claimed that the same can be "Capital Gains" at the best and the same cannot be taxed earlier to 24.01.2014. From the above narration it is evident that the assessee holds no intention to pay tax for the additional sum of ₹.7,00,00,000/- which is explicit from their communication which itself speaks the intention, as it is used to be said as “Res Ipsa Loquitur”.
2.4. The Assessing Officer has further observed that the forfeiture clause of the agreement has resulted in earning "other income" by the assessee in the form of compensation for the original investment made with the company. Also, the Assessing Officer has observed that the assessee's contention to consider it as capital receipt/advance as against the forfeiture clause is not based on any provision of the Act and there has been neither any capital asset nor any transfer of such asset. Since, the payment made by the assessee was having a mere character of a deposit/advance (a current asset), in return of which the assessee got ₹.7,00,00,000/- in addition and hence it cannot be considered for taxation under the head "Income from Capital Gains" and therefore, the Assessing Officer has treated the same as revenue receipt and assessed to tax under the head “Income from Other Sources” and ₹.7,00,00,000/- was added to the returned income. On appeal, after considering the submissions of the assessee, various case law, the ld. CIT(A) has directed the Assessing Officer to bring to tax, the long term capital gains computed by treating ₹.15 crores as ‘Sale Consideration and ₹.8 crores as ‘Cost of acquisition’ [modified vide corrigendum dated 18.02.2016].
Against the appellate order, both the Revenue and the assessee are in appeal before the Tribunal. By referring to the grounds of appeal, the ld. DR has submitted that the said transaction of the assessee was purely forfeited security deposit in the nature of revenue receipt and did not come under the extinguishment or relinquishment envisaged by section 2( 47) of the Act. It was also submitted that for tax to be chargeable under section 45 of the Act on capital gains, there should have been first a capital asset under section 2(14) of the Act and there should have been transfer under section 2(47) of the Act. In the instant case, the capital asset did not come into existence at all in the first place and therefore, there can be no capital gains that have accrued. When the said income is not chargeable under capital gains, the same is to be chargeable under section 56 of the Act as 'Other Sources'.
On the other hand, by referring to the grounds of appeal as reproduced hereinabove, the ld. Counsel for the assessee has prayed for deleting the entire addition in the assessment year 2011-12.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The assessee and the Developer have entered into an agreement/letter dated 01.07.2006 [purchase agreement] as per which the price of the property was mutually agreed at ₹.8 crores, subject to the purchaser paying 100% of the price of the property in advance and upon signing of the purchase agreement. Further, that the Developer shall deliver the property fully constructed on or before 31.12.2007. Also, that the developer will also fix a tenant acceptable to the purchaser/assessee, fetching a monthly rental of ₹.12.5 lakhs. Accordingly, the assessee made an advance of ₹.8 crores in two instalments [₹.5 crores on 15.07.2006 & ₹.3 crores on 30.09.2006] to the Developer as per the said agreement/letter dated 01.07.2006. Since the Developer could nto fulfil their commitment of delivery of property along with a tenant fetching ₹.12.5 lakhs monthly rent on 31.12.2007, both the assessee as well as the Developer have agreed to settle the issue vide agreement/letter dated 01.4.2010, wherein, the Developer agreed to pay ₹.15 crores to the assessee as “Refundable Interest Free Security Deposit” on 15.04.2010, in addition to other mutually agreed terms, especially regarding their right on the Refundable Security Deposit and its forfeiture. In the above factual back drop, the Assessing Officer has came to the conclusion that the assessee has acquired the right to forfeit the Refundable Security Deposit in February, 2011 and that the income has been accrued to the assessee in February, 2011 and thus the entire refundable security deposit of ₹.15 crores less the amount of ₹. 8 crores paid by the assessee i.e., ₹.7 crores was assessable to tax in the assessment year 2011-12. The Assessing Officer has also concluded that this ₹.7 crores received from the Developer over and above ₹.8 crores paid by the assessee, was nothing but incremental addition on the original advance money of ₹.8 crores and hence was to be assessed under the head ‘Income from other sources’. Accordingly, the amount of ₹.7 crores was brought to tax in the assessment year 2011-12. For the sake of convenience, the conclusions of the Assessing Officer are reproduced as under: “17.0 In the instant case the assessee received Rs.7,00,00,000/- (Rupees Seven Crores only) as compensation against the investment on a proposed project. Accordingly the same is akin to income under the head "Other Sources" as per the provisions of the I. T. Act. 17.1 The forfeiture clause of the agreement has resulted in earning other income by the assessee in the form of compensation for the original investment made with the company as discussed supra, in detail. The assessee's contention to consider it as capital receipt/advance as against the forfeiture clause is not based on any provision of I. T. Act. Moreover there has been neither any capital asset nor any transfer of such asset. 17.2 The payment made by the assessee is having a mere character of a deposit / an advance (a current asset), in return of which the assessee got Rs. 7,00,00,000/- (Rupees Seven Crores only) in addition hence it cannot be considered for taxation under the head "income from Capital Gains" as therefore the same is held as revenue receipt and assessed under head “Income from Other Sources”. 5.1 Upon the assessment order passed by the Assessing Officer, the ld. CIT(A) has noted the following salient points: (i) There was an offer on 01.07.2006 for the proposed construction of IT Park called “KGEYES ANIKSHA” at Kottivakkam, Chennai by the company M/s. KGEYES NELSUN PROJECTS PRIVATE LIMITED, Chennai. (ii) The assessee accepted the offer and made full payment of ₹.8,00,00,000/- (Rupees Eight Crores only) towards the purchase of proposed 6th floor, in the proposed IT Park, admeasuring to 35,000 Sq. Ft. (iii) It was also mentioned that the rate was a special price for buyers who pay 100% of cost upfront even before the plan approval by the appropriate authorities. (iv) The property was proposed to be delivered on or before 31.12.2007. (v) The company undertook to fix a tenant fetching a minimum rent of ₹.12,50,000/- (Rupees Twelve Lakhs Fifty Thousand only) per month (approx. ₹.36/Sq.Ft.) acceptable by the assessee. (vi) There was a compensation clause which had stated that due to non approval of the plans or any person including but not limited to shelving of the proposed project by the company, it was committed by the company that they would acquire and/or offer another property from other projects of the company which was subject to approval by the assessee. (vii) The proposed project did not start off. (The company even till the date of recording of statement from them on 07.01.2014 did not get the approval
from the competent Authorities to start the project. Hence the proposed property was not delivered to the assessee). (viii) Later on vide the communication letter dated 01.04.2010, it was stated that the company would pay the assessee ₹.15,00,00,000/- (Rupees Fifteen Crores only) upon acceptance of the terms by the assessee, that if the assessee accept the offer of the sum of ₹.15,00,00,000/- (Rupees Fifteen Crores only) which would be provided to the assessee as "Refundable security deposit" and it was proposed with a conditional clauses. A property which could fetch a minimum rent of ₹.12,50,000/- (Rupees Twelve Lakhs Fifty Thousand only) per month shall be chosen by the assessee on her own self or by the company as offered/acquired/assured, upon acceptance by the assessee. The same was proposed to be registered by the company on or before 31.3.2011 and upon failure to deliver/register the same the said security deposit shall stand forfeited by the company and all their liabilities shall end with that. It was also stated that “Upon completion of either of the transactions detailed above, it is mutually agreed between us that our company has discharged our commitment in full and either party shall have NO claim whatsoever.” 5.2 Based on the above facts on record, the Assessing Officer found that it was evident that the offer vide letter dated 01.04.2010 (termed by the company itself as 'our final offer for amicable and full & final settlement') was made to the assessee. Only upon the acceptance of the said offer by the assessee, the payment was made. It is also evident that since neither the proposed/similar property was identified by the company nor had the assessee has identified/chosen a property of similar nature, the security deposit as on 31.03.2011, the last date mentioned therein, stands 'forfeited'(SIC) and as on 31.03.2011, since there was no further alteration/modification/communication of the terms clearly agreed upon by both parties, (vide agreement dated 01.04.2010), until the same was scrutinized by the department. Thus, the clear and unequivocal terms of the proposal was respected by accepting the offer, and the amount of ₹. 15 crores was paid to the assessee, during assessment year 2011-12. However, even thereafter, the assessee claims that she continued to classify the same as 'refundable security deposit' and the company continue to claim the same as 'recoverable advance'. On perusal of the hard copies of the Returns of Income of the assessee for subsequent years i.e. assessment years 2012-13 to 2015-16, the ld. CIT(A) noticed that even upto assessment year 2015-16, the amount in question has not been offered to tax by the assessee. This also completely contradicts the stand taken by the assessee in this regard.
5.3 The response of the assessee to question No. 3 of her statement of oath recorded on 03.02.2014 before the Assessing Officer brings out the aforementioned facts in the best possible details and the same are reproduced hereunder: “Q. NO. 3) Kindly explain your transaction details with all supportive evidences between you and M/s KGS Developers Ltd. Ans: I had invested Rs. 8 crores towards 100% value of/for 6th floor in IT Park called ANIKSHA, during July 2006 (Rs. 5 crores) and Sep.2006 (Rs. 3 crores) to M/s Kgeyes Nelsun Projects P. Ltd. The payments were made by crass cheques of HDFC Bank Ltd., R.A. Puram and bank statement is already filed. The Chairman (M/s Kgeyes ) Mr. K. Kumaran, is my Blood Brother and therefore, I had not collected information regarding financial standing of the company, except the said IT Park ANIKSHA will be constructed in R.S. No. 311/3 and 312/1, 14th Link Street, Venkateswara Colony, Nehru Nagar, Kottivakkam, Chennai-41. It is believed with my advance of Rs. 8 crores, they concluded settlement for the purchase of the above mentioned land. It is seen from their offer 01/07/2006, a special offer has been made to me together with committing to get a tenant acceptable to me and fetching Rs. 12.5 lakhs per month. As per the stated special offer, Kgyes, we are obligated to deliver the property on or before 31.12.2007. Whereas, neither the property was delivered as agreed nor my only contact in Kgeyes and my brother Mr. Kumaran, was also not available near about 2 years despite communications and follow-up through known people. Finally, during 2010 first quarter Mr. K. Kumaran was supposed to come for negotiating table. To my surprise, I was informed Kgeyes transformed into KGS Developers Ltd.(KGS) and that change in constitution, share-holding including 100 per cent subsidiary of Mr. Anil Ambani group called Adlabs, Mumbai. Till date, I don't have or provided with supporting AoA and Balance Sheet; statutory details confirming the shareholding details by KGS. Therefore, in view of the change in the management, as informed to me, I was more concerned to document to secure my investment and more so, to get the property for which I paid 100 per cent in advance. Further follow-up resulted in they making a settlement letter dt. 01.04.2010 offering to place Rs. 15 crores as "Refundable Security Deposit" and agreeing on specific performance of delivering the property booked for or similar property together with a tenant acceptable to me and fetching Rs.12.5 lakhs per month. It was agreed to complete the above specific performance on or before 30.6.2014 and failing which the said Refundable Deposit will be forfeited by KGS in my favour. It is to be noted on the date of special offer, i.e. 01.04.2010, they have not even started the foundation in the above mentioned land and statutory permissions are awaited. It is because of this condition it was agreed that over a period of 4 years, they will complete the project and deliver me the 6th floor in IT Park ANIKSHA. Whereas in the afore-said offer letter dt. 1.4.2010 the date for specific performance has been stated as 31.2.2011, which was clarified as typographical error and would be replaced subsequently. In my own anxiety to secure my investment, I believed KGS, wherein my brother Mr. K. Kumaran continue to be a Chairman, signed letter in good faith that they would send amendment to replacement of the appropriate portion and took the Rs. 15 crores. The revenue generated out of this Rs. 15 crores are offered in my IT return and tax paid. To my surprise again, my brother and Chairman of KGS and whoever is working for him was not responding to repeated reminder for amending to correct/accepted date for delivery of property or forfeiture being confirmed by KGS. Subsequently, I started communicating with my brother and KGS thru acknowledged correspondence ending with e-mail communication received from KGS regards to their intention to forfeit the refundable security deposit of Rs. 15 crores post their interview with ACIT, Business Circle 1, not being satisfied to close the deal by accepting it as compensation, as my interest is not only 'to get a rent of Rs. 12.5 lakhs per. month, but also intrinsic appreciation of the property. The property of 35000 Sq. Ft. for which full value paid by me in advance, would cost Rs.45 crores if I have to acquire on my own. Therefore I also requested them of my willingness to wait for delivery of similar property upto 31.3.2015. I have sent an letter with acknowledgement on 27.1.2014 to KGS on the above ground.” 5.4 From her above statement, the ld. CIT(A) has observed that the assessee has detailed the efforts she has undertaken, to bring the Developer-Company to the 'negotiating table', her concern to 'secure my investment', further follow-up resulting in' 'they making a settlement letter dated 1.4.2010' and so on. In between, she mentions "It was agreed to complete the above specific performance on or before 30.6.2014 and failing which, the said Refundable Deposit will be forfeited by KGS in my favour'. In fact, there was never any formal 'agreement' in this regard. Further, the assessee also mentions that the date for 'specific performance' has been stated as 31.2.2011, which was clarified as typographical error and would be replaced subsequently "In my own anxiety to secure my investment, I believed KGS, wherein my brother Mr. K. Kumaran continue to be a Chairman, signed letter in good faith that they would send amendment to replacement of the appropriate portion and took the ₹. 15 crores. The revenue generated out of this ₹. 15 crores are offered in my IT return and tax paid." This action of the assessee, in actually 'receiving' the Rs.15 crores and offering the revenue there from to tax in her IT return, has brought the whole matter to a final conclusion.
5.5 After carefully going through the appellate order, on merits, considering the entire facts and circumstances of the case, prima facie, the assessee has advanced 100% of the cost price of the property of construction of 35,000 sq.ft. IT park project, we find that the ld. CIT(A) has correctly held that the amount of ₹.7 crores (the receipt of ₹.15 crores Less ₹.8 crores paid by the assessee to the developer) was liable to tax as Long Term Capital Gains in the hands of the assessee, subject to indexation for the relevant years and rightly directed the Assessing Officer to bring to tax the Long Term Capital Gains computed by treating ₹.15 crores as 'Sale consideration' and ₹.8 crores as 'Cost of acquisition'. Thus, the ground raised by the assessee is dismissed.
5.6 So far as the rejection of alternative plea raised before the ld. CIT(A) that if at all it were to be assessed as an income, it could be done only in the year when the Developer squares up the transaction in its books, the ld. CIT(A) has clearly mentioned in the appellate order at page 49 that the ld. CIT(A) has called for and perused the hard copies of the returns of income of the assessee for subsequent years i.e., assessment years 2012-13 to 2015-16, the ld. CIT(A) noticed that even upto assessment year 2015-16, the amount in question has not been offered to tax by the assessee. In view of the above facts, we are of the opinion that the ld. CIT(A) has rightly rejected the alternative plea of the assessee and the thus, the ground raised by the assessee is dismissed.
So far as ground raised by the Revenue that the income has to be taxed under the head “income from other sources”, considering the detailed speaking order of the ld. CIT(A), at para 5.5 hereinabove, we have held that the ld. CIT(A) has rightly directed the Assessing Officer to bring to tax the Long Term Capital Gains computed by treating ₹.15 crores as 'Sale consideration' and ₹.8 crores as 'Cost of acquisition' considering the fact that the assessee has advanced 100% of the cost price of the property of construction of 35,000 sq.ft. IT park project, the ground raised by the Revenue is dismissed.
In the result, both the appeals filed by the Revenue and the assessee are dismissed.
Order pronounced on 12th April, 2022 at Chennai.