DCIT 4(2)(2), MUMBAI vs. KHANNA RAYON INDUSTRIES P.LTD, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the fact that how an item which was converted into stock-in-trade by the assessee, has lost its character, after a gap of several years, only because the construction activity in respect of the said stock-in-trade had not been taken up by the original contractor, which has now been handed over to a new contractor".

3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the fact that the assessee has brought nothing on record, neither in the books of accounts nor in the return of income/details filed during the course of assessment proceedings that the stock-in-trade of the assessee changed its character and has become an investment or capital asset. Any compensation received in respect of such a stock-in-trade can only be the business income of the assessee".

4. "The appellant craves leave to amend or alter any ground or add new ground which may be necessary."

3. The brief facts of the case are that the assessee filed its return of income on 26.09.2021 declaring total income to the tune of Rs. Nil. The return was processed u/s 143(1) of the I. T. Act, 1961. Thereafter, the case was selected for scrutiny. Notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee is a sick company within the meaning of Sick Industrial Companies (Special Provisions) Act, 1985 and is engaged in the trading of cloth. On verification, it was found that the assessee company has directly credited 17 crores received from New Developer as non-taxable capital receipt. This was on account of transfer of TDR which was acquired by the company on account of change in TDR Rules of Maharashtra Government which has resulted in the company acquiring sub-developmental rights as a windfall. They have also stated that the company has been advised that such receipts was treated as capital receipt and non-liable to be taxed. The said amount has not been routed through the Profit & Loss Account. The notice was given and after the reply, the said amount was added to the income of the assessee. Thereafter, some disallowance made u/s 14A r.w. Rule 8D and the income of the assessee was assessed to the tune of Rs.16,13,61,888/- and income was also calculated u/s 115JB to the tune of Rs.16,17,21,355/-. Feeling aggrieved, the assessee filed an appeal before the CIT(Appeals) who allowed the claim in connection with the 17 crores but the revenue was not satisfied, therefore, the revenue has filed the present appeal before us.

5.3.1. Before dealing with the issues raised in the grounds of appeal, it is important to note the relevant facts which are as under:-

The Appellant was incorporated on 6L May, 1949 and was carrying out its business activity of processing, crimping and dyeing synthetic yarn at its industrial unit located at Ghatkopar (West), Mumbai. The industrial unit was situated at land parcel admeasuring 9,771 sq. yard. In the late 1980's and early 90's, the Appellant suffered huge losses and was identified as a sick unit by Board of Industrial Finance and Reconstruction (hereinafter called as I3IFR). A revival scheme was sanctioned in May 1994 by the Appellate Authority of Industrial & Financial Reconstruction (AAIFR) and granted permission to develop 86,000 sq. ft. saleable area out of the above mentioned parcel of land on which the industrial unit was situated as scheme of rehabilitation. ii. Pursuant to the above, the Appellant entered into an agreement with a firm which was engaged in the construction activity known as Siddhi Vinayak Construction Company. The construction activity was carried out in a manner such that the Appellant jointly develops the property. The modalities 'were worked out by carrying out the development activity through the above mentioned partnership firm. The Appellant, alongwith its promoter director became partner in the said firm. Out of the total 86000 sq.ft. saleable area, 65000 sq.ft. was to be developed by Siddhi Vinayak Construction Company (SVCC) the remaining 21,000 sq.ft. saleable area was to be constructed by SVCC the Appellant and handed over to the Appellant. The Appellant, on an agreement with SVCC with respect to the 65000 sq sale gains arising out of the same to tax as long term capital gains in the A.Y. 1995-96. The developer SVCC developed four wings viz "A", "B", "C" and "D" wings consuming 65,000 sq.ft. and sold the units in the market. The owners of the units formed a co-

Kailas Esplanade premises Co-op Soc. Ltd. However, the developer SVCC failed to develop and complete the remaining 21,000 sq. ft. called as "E" Wing due to several reasons. The dispute between the Appellant and the developer was referred to arbitration. In the year 2002, arbitration award was given. However, the litigation persisted and the same was not implemented.

Ultimately, in the year 2011, the disputes were resolved vide consent terms filed before the Court on 41h May, 2011 certain important aspects of the consent terms which are relevant for the present appeal are as under:- a. In para 1 of the consent terms, it was unequivocally agreed by all the parties that award dated 03.07.2002 is valid and binding on the claimants and respondents. b. In para 3.1, it was agreed that the Patel Group who had the controlling effect in SVCC will accept Rs.12 Crore as compensation and discharge the Appellant of all the dues towards them and revoke all the injunctions, attachments on the land and other assets of the Appellant. Even there is a reference to the fact that the said amount will be paid by the developers i.e. Swastik Developers.

The Appellant approached the Kailas Esplanade premises Co-op Soc. Ltd and requested them to grant NOC to transfer the development rights in favor of Appellation payment of Rs.3 Crores. The same was granted by the said co-operative society.

The Appellant remained owner of the land beneath the constructed area. The conveyance in favor of the society could not take place due to disputes and attachment of the title of the land. With the passage of time, the development control rules of the Britian Mumbai Municipal

Corporation had undergone a substantial change which made the owner of the land eligible for transferable development rights which consists of additional PSI which can be consumed and further construction can be done on the same land.

In view of the above, the Appellant discharged all the liabilities and removed all encumbrances on the land which had the potential of exploitation of TDR by approaching a developer known as Swastik Developers. There was a tripartite agreement executed between the Appellant, Swastik Developers and Kailas Esplanade Co-operative Society Ltd. As per the agreement, the builder was to complete the construction of own cost and take away 4661 Sq.f t. as a consideration towards the whichever agreed that the eligibility for additional consumption of FSI will be utilized for the development of Wing “F” (Goldcrest). vii. The Appellant entered into an agreement with Kailas Esplanade Premises Cooperative Society Ltd., M/s. Siddhivinayak Construction Company dated 20th May, 2011 and Swastik Developers. At page 54 of the paper book, part of the agreement records the fact that clause (1) please refer to clause 4 which mentions the fact that Kailas Esplanade Premises Co-op Society manages the wings A to D. viii. Clause 6 at page 55 - The society had claims against the Appellant. ix. At page 57 of the Paper Book which is part of the agreement provides for consideration to be paid to the society for granting NOC for Swastik Developers to carry on development work by consuming additional FSA through TDR. x. The clause 5 at page 58 of the paper book provides that the Appellant or the incoming developers are entitled to complete the construction of incomplete wing E. It further provides that the Appellant and the incoming developers shall be entitled to construct the Wing/s and/or separate and independent building/s on the open space admeasuring 2400 sq. meters or there about as per the plans sanctioned or amended from time to time subject to FSI/TDR restriction to Capital Account. xi. The clause 6 lays down the terms and conditions with respect to the existing entitlement of 'FDR/FSI. The agreement provided that the Appellant or the incoming developer is permitted to construct the Wing E and/or any new wings or building by consuming existing 2 FSI's. The clause 7 specifically provided that any increase in TDR/FSI or otherwise in addition to 2 FSI i.e. 16,016 sq. mtrs shall be shared on pro- rata basis of the area of wings A,B, C and D of the existing society and area of the wings E and F between owners of units in wings A, B, C and D (through the society or otherwise as the society's present members or the society or otherwise as the society's present members or their heirs, executors, administrators and/or assigns may decide at relevant time) and the promoters respectively i.e. if up for sale of units in E & F wings purchasers of units therein are made members of the society, the society shall also be entitled to additional FSI, if any, in relation to the said Wings &F. xii. The clause 8 at page 59 of the paper book provided that the incoming developers will incur all the costs towards acquiring '[DR for completion of Wing E and the new building.

5.3.2. The assessee while filing the return of income has not included the computation of Rs.17,00,00,000 in the computation of income nor the is credited to the profit & loss account. The entire amount received is collation has been directly taken to the Balance-sheet. Thus, the Assessing Officer of the assessment sought explanation of the assessee on this issue. The ..eiepee4b,Oorat'ict Assessing Officer filed letter dated March 15, 2015 has made his detailed submission which is compiled at pages 176 to 184 in the paper book filed before you in this submission made before the Assessing Officer. Apart from bringing out the above mentioned facts, the assessee contended that the compensation received on account of giving consent to use the transfer of development rights is not exigible to tax and relied on the decisions of the Appellate Tribunal and Jurisdictional Court in the Case of Sambhaji Nagar housing Society Ltd decided on December 11, 2014. The details of amounts disbursed as compensation by the assessee to discharge the liabilities and exploit the PSI available on the land is provided at page 184 of the Paper Book. For the sake of convenience, the same is reproduced one again hereunder:

Details of disbursement of Rs. 17,00,00,00 Rs.4,83,97,850 Principal Amount of D.K. Patel Groups Rs. 7,16,02,150 interest paid to ak. patch Groups as per the consent Terms - Capitalized in the Year of settlement Total Rs. 12,00,00,000 Paid to Patel Group as per the Consent Terms by M/s. Swastik Developers Rs. 3,00,00,000 Paid to The Kailas Esplanade Co-op. Society Ltd., Rs.27,09,290 Paid to Creditors M/s. Anil Fabrics-Delhi, suit filed andieference made in BIFR Rs.27,40,796 Rs.27,40,796 Paid to Creditors M/s. Bonion Traders - Delhi filed and reference made in BIER Rs.5,49,914 Rs.25,00,000 Paid to Creditors M/s. A.K. jainwollen Industries. Suit filed and reference made in BIER Paid to Creditors M/s. Prem Enterprises. Suit filed and reference made in BHT

Rs.45,00,000 paid to M/s. Skyline Millars Ltd. D.K. Patel Group Paid to Other Credits and for expenses Rs.70,00,000 Total Rs 17,00,00,000 5.3.3. Here it may be mentioned that while issuing the treatment of receipt of Rs.17,00,00,000/-, the AO has missed out on certain very important facts relevant to the issue at hand. For the sake of clarity, the following needs to be seen and appreciated:

A. The Assessing Officer has proceeded to assess Rs.17,00,00,000 received as consideration for giving account of transferable development rights available to the assessee being of the land as mentioned in the earlier paragraphs. Without mentioning anything about the method of accounting adopted and accepted by the Assessing Officer i.e. Project Completion Method.

B. The AO has discussed the facts in para 4.3 of the assessment order and has concluded that the TDR accrued to the appellant emanates out of the PSI held as stock-in-trade. Thus, the entire consideration received on account of the transfer of TDR is also a revenue receipt.

The observations made in para 4.4.1 of the assessment order "As per their own admission, the dispute was regarding only the portion of property owned by themselves, which was to be constructed by the partnership firm. It is not known how an item to/it was converted into stock in trade by the Assessee company, have lost its character, after a gap of several years, only because the construction activity in respect of the said stock in trade had not been taken up by the original contractor, which has now been handed over to a new contractor, Mis. Swastik Developers."

The Assessing Officer has failed to appreciate that the Appellant had repeatedly submitted that it had treated the area to be constructed by using 21000 sq.ft. being Wing Ii only as stock in trade. The eligibility to additional PSI accrued in the hands of the Appellant as Owner of the entire parcel of land cannot be treated as stock-in-trade. Especially when the Appellant has not increased any cost the asset in the shape of TDR's is an asset which is sui generis. Thus, the conclusion that as the Wing E is shown as stock-in-trade additional PSI which can be developed by loading 'IDR also is stock-in-trade is not correct. The Appellant has treated the land as investment, hence, the eligibility to additional PSI being all asset has generated out of the investment and the same is a sui generis asset. The observation of the Ld. A. 0. is not consistent with the facts and the conclusion that the eligibility to additional PSI is also stock- in-trade is not justified.

Thus the receipt of Rs. 17,00,00,000/-receipt for which reference is made and reliance is placed on the latest decision of the Hon’ble Jurisdictional High Court of Bombay in the case of CIT vs. Sambhaji Nagar Co.op Hsg. Soc. of 2012.

C. The Assessing Officer has observed that there is no indication anywhere in the books of accounts or in the return of income or in the details filed during the course of assessment that the stock in trade of the Assessee Company has changed its character and has become an investment or capital asset. So any compensation received in respect of such a stock-in-trade can only be the business income of the Assessee Company.

The Assessing Officer has misconstrued the facts. The eligibility to additional PSI as land owner has occurred in the hands of the Appellant which has no cost of acquisition. The sui generis asset which was Appellant. Thus, the observation that the Ld. Assessing Officer is not correct and justified. The land was always treated by the Appellant as an investment. The eligibility to consume additional PSI by loading TDR is an asset generated in the hands of the Appellant due to change in D.C. rules. Thus, the compensation received on account of transfer of such rights to a third party is a capital receipt and the same is not taxable in the hands of the Appellant.

D. The Assessing Officer has relied on various case laws after going through the submissions filed by the appellant's counsel which have been reproduced in the earlier paragraph's shows that the case laws relied by him are distinguishable and they are not of any help to the issue on hand. Thus, they don't support the case of the Assessing Officer.

E. I tend to agree with the appellant's counsel that the entire Rs.17,00,00,000 received on account of transfer of TDR emanating due to the land owned by it cannot be brought to tax in the impugned assessment year even if one agrees with the Assessing Officer that the same is not a capital receipt but a revenue receipt. I have come to this conclusion for two reasons.

Firstly, the method of accounting followed by the assessee with respect to the development of the land is 'Project Completion Method' and the Assessing Officer has not disturbed the same. Thus on account of the same will be taxable only on the completion of the Method’ and the Officer himself has mentioned that the TDR also has to be treated as stock-in-trade only.

The second reason is the Assessing Officer has completely missed out on the aspect of disbursement of the receipt of Rs.17,00,00,000. The receipt

Rs.17,00,00,000 is completely revenue neutral in the hands of the appellant. The entire amount was borne by the third party which had agreed to carry out the development activity of the stalled project. The amount received Rs. 17,00,00,000 was used for discharging the liabilities as mentioned in this order in the earlier 1 paragraphs. If both these figures are to be brought to the profit & loss account, the result will be a revenue neutral one. Hence, the Assessing Officer's treatment of bringing the receipt to tax and not considering the payments made towards discharging the liabilities is not correct. Hence, on this reasoning also, the addition has to be deleted.

Thus, Ground nos. 1 and 2 are Allowed and the addition of Rs.17,00,00,000/- made by the Assessing Officer is deleted. In result, these grounds of appeal of the appellant are Allowed.”

5. On appraisal of the above mentioned finding, we noticed that the issue has duly been covered by the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Sambhaji Nagar Co-op. Hsg. Soc. of 2012. Moreover, its seems to revenue neutral as discussed by CIT(A) in its order which need not to be required to repeat again. The facts are not distinguishable at this stage. We nowhere found any ground to deviate the finding of the CIT(A) in question. Taking into account all the facts and circumstances, we are of the view that the finding of the CIT(A) is quite justifiable which is not liable to be interfere with at this appellate stage. Accordingly, we decide these issues in favour of the assessee against the revenue.