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Income Tax Appellate Tribunal, ‘B’BENCH, MUMBAI
Before: SH. SANJAY ARORA & SH. VIKAS AWASTHY
ORDER
Per Sanjay Arora, AM:
This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-34, Mumbai (‘CIT(A)’ for short) dated 07.05.2013, dismissing the assessee’s appeal contesting its’ assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 20.03.2013 for Assessment Year (AY) 2010-11, which in fact stands enhanced. 2.1 The facts in brief, i.e., to the extent relevant, are that the assessee, a Mumbai based partnership firm in the business of development of real-estate, purchased, vide indenture dated 06.8.1985, non-agricultural land admeasuring 1517.4 sq. mtrs. at Village Kole Kalyan, Kalina, Santacruz (East), Mumbai (together with building consisting of ground and two upper floors, called ‘Serovilla’ building) for a consideration of Rs. 175 lakhs. The assessee constructed a new building comprising Ground and seven floors, selling the (AY 2010-11) 2 Diamond Enterprises v. Asst. CIT same, being residential flats (around the year 1992) to buyers, who formed a Society called ‘Diamond Deck Co-operative Housing Society’ (DDS)), to which (Society) the assessee was obliged to execute a lease, i.e., in respect of the land beneath the said building, @ Rs. 10 per month. The assessee also filed suits (in the Court of Small Causes) for eviction of the twelve occupants of the Serovilla Building (SB). Vide consent decree dated 01.12.2006 (in R.A.E. Suit No. 285/667 of 2003/PB pages 138-156), each of the twelve occupants of the Serovilla flats agreed to vacate their flats (suit premises) by 31.01.2007 to enable the assessee to demolish the Serovilla building and construct a new building in its place, to be completed within a period of twenty-four months, i.e., by 31.01.2009, and latest with a grace period extending up to 30.7.2009. The assessee was required to, and did indeed pay, Rs. 4.50 lakhs to each of the occupants as refundable security deposit, refundable on the assessee handing over the possession of the new flats (admeasuring 480 sq. ft. each) at the site of the SB (proposed to be constructed as stilt plus seven upper floors) by way of permanent alternate accommodation on ownership basis, free-of-cost, i.e., in lieu of the suit premises. Failure to do so would oblige the assessee to pay a monthly sum of Rs. 5,000/- as rent/lease charges toward acquiring temporary accommodation, which obligation would continue up to the date of grant of vacant possession of the permanent alternate accommodation, only upon which was the assessee entitled to receive back the security deposit of Rs. 4.50 lakhs. Till such time, the existing relationship of landlord and tenant would continue between the assessee and the 12 occupants qua the Serovilla flats (suit premises). Though the assessee obtained vacant possession of the Serovilla building (from the occupants), it did not construct any building nor, as it appears, even demolish the Serovilla building. The assessee, vide conveyance deed dated 28.7.2010, sold its’ rights in the 1517.4 sq. mtrs. of land to M/s. RSB Developers Pvt. Ltd. (‘RSB’) for a consideration of Rs. 175 lakhs. However, as the entire sum was received by it during the financial year (f.y.) 2009-10, i.e., (AY 2010-11) 3 Diamond Enterprises v. Asst. CIT the previous year relevant to AY 2010-11, the same was offered to tax for that year. 2.2 Three, albeit inter-related, issues have arisen in the assessment of the income arising to the assessee on the said sale, and which are the subject matter of dispute between the assessee and Revenue in the present case. The first is the deduction of the cost of transferrable development rights (TDRs), claimed at Rs. 14,41,900 (through debit to the Profit & Loss (P&L) Account for the year ending 31.3.2010). These were acquired for 130 sq. mtrs. (1399.32 sq.ft.) from one, M/s. Shah Construction Co., Bandra, vide Agreement dated 06.7.2006 (PB pgs. 112-120) for Rs. 13,99,320 (i.e., @ Rs. 1,000 per sq. ft.), to be utilized on the proposed building at the site of SB. The same were accordingly loaded to the building plan for proposed construction, duly approved by the Municipal Corporation, Mumbai on 30.9.2006, which plan also formed part of the conveyance deed dated 28.7.2010 furnished to the Joint Registrar, Andheri, Mumbai (for registration thereof). There was, however, no mention or reference to the TDRs (or of sale/transfer thereof) in the conveyance deed. RSB, with whom the Assessing Officer (AO) therefore communicated in the matter, while acknowledging the purchase of property from the assessee vide conveyance deed dated 28.7.2010, declined, i.e., on enquiry by the AO, to have purchased any TDRs in respect of the said property, i.e., purchased from the assessee-firm. The AO, accordingly, disallowed same. The TDRs being a valuable right, being admittedly divested by the assessee as on 31.3.2010, he inferred their sale during the year, at Rs. 82.94 lakhs, on the basis of the sale rate applicable to a residential building at Mankhurd area, i.e., one of the two areas from which the TDRs arose. Allowing deduction for the purchase cost of TDRs (Rs. 14.42 lacs), the difference of Rs. 68.52 lakhs was brought to tax. In appeal, the ld. CIT(A) confirmed both, the disallowance (for Rs. 14.42 lacs) and the addition (for Rs. 68.52 lacs). He was further of the view that the tenants were not a party (AY 2010-11) 4 Diamond Enterprises v. Asst. CIT to the conveyance deed, which was executed without any reference to them. The period for the construction of a building at the site of Serovilla flats expired in July, 2009, after which the assessee was to pay the occupants Rs. 5,000 per month each. There was nothing in the conveyance deed to show that RSB acknowledged its’ liability to the tenants, i.e., of having assumed the liability toward the monthly compensation. There was equally nothing to show that the tenants were obliged to refund the purchaser (RSB) the security deposit received from the assessee (at an aggregate of Rs. 54 lakhs). In fact, the assessee had not received back the security deposit (of Rs. 54 lakhs) as it had failed to comply with the terms of the consent decree dated 01/12/2006. The assessee was, therefore, not entitled to the deduction of Rs. 54 lakhs in computing the business income arising to it on the sale of its’ rights in the land and, accordingly, directed the AO to disallow the same, which is the thus third issue being agitated per the instant appeal.
We have heard the parties, and perused the material on record. We shall proceed in seriatim. 3.1 Qua the first disallowance, i.e., of the cost of TDRs (Rs. 14.42 lacs), we observe no adjustment to the assessee’s returned income in the assessment order, computing the taxable income at Rs. 1,71,81,040. Neither party brought this to our notice. Rather, both the parties proceeded on the basis of the said disallowance having been made, with both the AO and the ld. CIT(A) having in fact issued specific adjudication qua the same. We, accordingly, proceed on this basis, as, given the fact of the said specific adjudication, which is the subject matter of dispute between the parties, an adjustment in its respect, consistent with our adjudication, could always be made. The AO shall though, needless to add, have regard to our afore-said observation, i.e., of no apparent adjustment qua this disallowance having been made while computing the assessee’s income (AY 2010-11) 5 Diamond Enterprises v. Asst. CIT as per the assessment order, i.e., while giving appeal effect to this order, also seeking the assessee’s comments/reply on the limited aspect of the adjustment in its respect. The assessee’s claim before us was that it was an incorrect question by the AO to RSB that led to the answer given by the latter thereto, resulting in an incorrect inference being drawn by him. We, even as observed during hearing, can hardly agree; the relevant query and answer, reproduced hereunder (refer pg. 4 of the assessment order), being explicitly clear: ‘You have purchased a property from M/s. Diamond Properties vide deed of conveyance dated 28-07- 2010. Please confirm. With relation to the above property, you are hereby requested to confirm whether you have purchased the TDR (copy enclosed) or not. If yes, then provide the documentary evidences establishing the transaction, i.e., Copy of ITR, Bank A/c statement reflecting the transaction.’ RSB replied through its’ counsel, as under: ‘Our client, RSB Developers Private Limited has purchased a property from M/s. Diamond Enterprises vide conveyance deed dated 28-07-2010. Our client, RSB Developers Private Limited has not purchased any TDR in relation to the above mentioned property from M/s. Diamond Enterprises.’ The ld. counsel for the assessee, Sh. Sathe, also could not, as also before the ld. CIT(A) earlier, answer as to why, in case of sale of TDRs equivalent to 130 sq. mtrs. to RSB, as claimed, does it not find mention in the conveyance dated 28.7.2010, which has rightly been regarded by the ld. CIT(A) as the agreement governing the transaction. Further, even granting so, what, one may ask, prevented the assessee from obtaining a clarification in respect thereof from RSB, the stated purchaser of TDRs. The assessee’s claim, made before us, of non-reversion of floor space index (FSI) credit in respect of TDR’s, once obtained, made with reference to the approved plan dated 30.9.2006 for the proposed building at the relevant site, is also wholly unsubstantiated. There is even no reference to any rule/regulation or even policy in this regard. Why, we wonder, the FSI credit, on being unable to be utilized qua a particular project (at (AY 2010-11) 6 Diamond Enterprises v. Asst. CIT a particular place), cannot be, similarly, utilized on another project at another site – which is normally north of the land from which TDRs arose, being at Mankhurd and Deonar areas of Mumbai in the instant case? Sh. Sathe was unable to answer this query posed by the Bench during hearing. Why, again, it could not be sold, as was purchased (on being sold by Shah Construction Co. (P.) Ltd.) by the assessee? In fact, Shah Construction Co. had in turn purchased it from M/s. Rehab Housing (P.) Ltd. pursuant to a slum rehabilitation scheme of the Municipal Corporation of Greater Mumbai. Further, the same would require either an endorsement on the relevant Development Right Certificate (DRC), i.e., in favour of the purchaser of the rights, or an issue of fresh DRC in its favour upon tendering and cancellation of the original certificate. Why, as it appears to us, the same (transfer) also attracts charges inasmuch as while the TDRs were purchased by the assessee for Rs.13,99,320, its’ cost to the assessee is admittedly at Rs. 14,41,900, the impugned sum. That is, their sale to RSB, where so, would also have attracted transfer charges, which, as apparent, have not been paid by RSB. The assessee’s claim of having already utilized the FSI credit, is, again, a misrepresentation. Including it within the area proposed to be constructed is only a, or toward its, proposed utilization, which may or may not materialize in future. It is only on actual construction, as per the approved plan, that there would be an actual utilization of the FSI credit. There has admittedly been no construction by the assessee at the proposed site (i.e., that of the SB). Further, as afore-stated, it should always be permissible for the purchaser (as the assessee) to, in the event of change, make suitable application for reallocation of the FSI credit (against any other eligible project). Why should, one may ask, when the TDRs are allowed to be transferred from one person to another, should they be restricted (for transfer) from one site to another, as long as it is an eligible site? Rather, their name itself clarifies the same to be transferable rights, being in fact the very basis for their arising and allocation, i.e., to regularize and monetize the right to develop real estate, and at the same time (AY 2010-11) 7 Diamond Enterprises v. Asst. CIT causing its movement/shift from more congested (high density) to less congested areas. The same, i.e., transfer, may entail cost, including transfer charges, but that is another matter/aspect altogether. We, therefore, find no infirmity in the disallowance of the TDR cost in computing the assessee’s (business) income; its’ claim being wholly unsubstantiated.
3.2 The TDRs having been admittedly sold, the Revenue has estimated their sale value, bringing it to tax after deducting its cost, and which represents the second issue in this appeal. The assessee refutes this as without basis and, in any case, excessive inasmuch as the rate applied is qua a residential building, while the TDR is a right in respect of land, so as to increase its’ development potential to that extent. In fact, if the obtaining land rate was to be applied, it shall result in a loss of Rs. 9,99,900; the rate for open land at Mankhurd area being Rs. 3,400 per sq. mtr. (refer para 6.4/pgs. 18-19 of the impugned order). In our considered opinion neither the assessee nor the Revenue has advanced its’ case properly. Sh. Sathe would claim before us that the FSI credit is, on the record of the Municipal Corporation – which is stated to be the authority which allows credit (against different projects at different sites), still loaded on to the proposed project at the Kole Kalyan site, and which would exhibit that the same has not been sold as yet. Toward this, an appropriate certificate from the Municipal Corporation (or the authority granting and registering purchase/sale of TDRs), he would add, could be produced by the assessee to substantiate its’ stand. Wonder why it was not done at any stage, more so considering that there are serious fetters on the production of additional evidence at the second appellate stage. We may here also clarify that such a certificate, even if adduced, would not by itself prove the transfer of TDRs, as contended, to RSB, denied by it, and which only would entitle the assessee to claim cost thereof on transfer of its’ rights in the subject land, thereto. Why, for all we know, RSB, having sufficient TDRs of its’ own, may not be interested to (AY 2010-11) 8 Diamond Enterprises v. Asst. CIT purchase them from the assessee. In fact, RSB is not bound to construct the building as per the plan proposed by the assessee. The Revenue has also proceeded without any definite basis. Sure, there is nothing to show or exhibit the sale of TDRs to RSB, for the assessee to claim the cost thereof, but that does not by itself demonstrate their sale to any other person. The Revenue should have insisted on the assessee producing some authentic document/material with regard to the obtaining status of those rights, which could then be verified, before imputing their sale by the assessee during the relevant year. Why, it could itself make enquiry with the registering authority. Non-reflection of the said TDRs in the assessee’s balance-sheet (as on 31.3.2010), on which it relies for the purpose, is of little consequence in view of the admitted position of the assessee having charged their cost to the P&L account for the year, claiming it as a deductible expense. The matter, therefore, is indeterminate, and is accordingly restored back to the file of the AO for consideration afresh. The matter being old, he shall decide the same within a reasonable time, even as a longer time may be available to him under the substituted sec. 153, and after allowing fair opportunity of hearing to the assessee, including for meeting the evidence that the AO may gather in support of his claim/s. As regards valuation, i.e., where held to be a case of sale, valuation of TDRs shall be with reference to the rate of open land, and not of residential building, inasmuch as these are development rights of land. The land location, in case of estimation, shall not be, as also observed during hearing, where the TDRs arose, but where these are (or would be) utilized and, further, with reference to a land with similar development potential therein. This is as only like can be compared with like. Further, the issue of deduction of the TDR cost (Rs. 14.42 lacs), i.e., the first issue, being inter-related, we consider it proper to remit the same along with. We may though make it clear that it is not that we entertain any doubt qua the disallowance of TDR cost (Rs. 14.42 lakhs) on the basis of the material on (AY 2010-11) 9 Diamond Enterprises v. Asst. CIT record as not valid. The remission in its respect is only by way of an abundant caution so as to avoid any possible contradiction and, thus, any prejudice or injustice in view of our remission qua a related aspect. The onus to substantiate its’ case, needless to add, would though be on the assessee.
3.3 Issues one and two are accordingly decided in terms of paras 3.1 and 3.2. 3.4.1 We next consider the third issue, i.e., of the disallowance of the refundable security deposit of Rs. 54 lakhs in computing the assessee’s business income for the year. The basis of the Revenues’ case in this regard, as we see it, is that the consent decree dated 01.12.2006 is no longer in force, i.e., neither is the assessee obliged to construct new flats nor, consequently, the tenants liable to refund it the security deposit, which could in fact only be latest by July, 2009. The assessee is also not paying them the monthly compensation, as obliged to after the expiry of the construction period, which was to be latest by 30.7.2009. That being the case, how could the assessee, in July, 2010 – the conveyance deed being dated 28.7.2010, or even in March, 2010 (by which time the full consideration stands received by the assessee), transfer the obligation to provide permanent alternate accommodation free-of-cost to the tenants, for it to claim non-refund of the security deposit by them as a loss in computing its’ business income? Sure, the same has been forfeited by the tenants, so that the assessee has indeed suffered a loss to that extent, but the same is, under the circumstances, a capital loss. Even if regarded as a revenue loss, it shall be of the year of payment, i.e., AY 2007-08 (going by the specimen consent decree exhibiting payment in January, 2007). Finally, even if, going by the different clauses of the conveyance deed, whereby the purchaser (RSB) agrees to provide permanent accommodation to the tenants, the same could be set off as cost in the subsequent year, i.e., AY 2011-12, inasmuch as the contract in its respect comes into effect only on 28.7.2010. (refer pages 27-29 of the impugned order)
(AY 2010-11) 10 Diamond Enterprises v. Asst. CIT 3.4.2 We have given our careful consideration to the matter. The assessee’s case is that it having transferred the obligation to construct and provide permanent alternate accommodation to the tenants, as well as, therefore, the right to receive the refund (of security deposit) there-from, to RSB, the said amount gets factored into the consideration (Rs. 175 lakhs) received; the conveyance deed clearly mentioning of the same being inclusive of Rs. 54 lakhs receivable from the tenants. In other words, the amount received, net of Rs. 54 lakhs recoverable from the tenants, is only Rs. 121 lacs, which therefore has been offered to tax. Looked at from the another angle/stand-point, the amount of Rs. 54 lakhs, now no longer receivable, i.e., consequent to the conveyance deed with RSB, is a cost borne by the assessee toward the transfer of its’ rights in 1517.4 sq. mtrs. of Kole Kalyan land thereto and, thus, accordingly, deductible in computing the income arising to it on the said transfer. The argument is unexceptional. So, however, it does not address the concerns expressed by the Revenue, which forms the basis of the direction for disallowance of the said sum by the ld. CIT(A), discussed as follows. Taking a practical stance, the consent decree is no longer operative in July, 2010, when the conveyance deed was executed, or even in March, 2010, which signifies the receipt of the sale consideration of Rs. 175 lakhs from RSB. That is, the assessee had, by not fulfilling the consent terms, already suffered a loss of Rs. 54 lacs, i.e., prior to and independent of the transaction/agreement with RSB. Put differently, even in the absence of an agreement with RSB, as where it had not occurred, the assessee had lost the right to the refund from the tenants and, consequently, the obligation to provide them alternate accommodation, which was therefore no more than a paper obligation, against (or in lieu of) which the assessee is claiming the impugned loss. True, as stated, there was a remote possibility of the tenants, who were also not being paid the monthly compensation – payable latest since August, 2009, by the assessee, seeking the Court’s intervention for construction, which was in fact to (AY 2010-11) 11 Diamond Enterprises v. Asst. CIT commence in February/March, 2007, and which had admittedly not been so even in July, 2010, when the conveyance deed with RSB was executed. The tenants may not have approached the Court as they had already received the tentative cost of their right in the form of an interest-free deposit, which would also be required to be, in that case, repaid. Nobody could be expected to wait endlessly for an accommodation, which would have been secured by them. At the same time, it cannot be said that the assessee’s obligation to them had extinguished, or was only notional. The assessee’s rights in the land were encumbered inasmuch as the tenants had first right to any construction at the said site, whether by demolishing the existing structure or otherwise. Rather, they could even claim a set-off of their liability to repay Rs. 4.5 lakhs to the assessee (builder) against the monthly compensation, which would get squared up in 90 months (seven-and-a-half years), while there was no provision for interest on the security deposit after January/July, 2009 in the consent decree. A tenant approaching the assessee (or any other builder in its’ place, as RSB) for accommodation in the construction, if any, at the site would, thus, subject to the repayment of the security deposit, or whatever was left of it, obliged to so provide. In other words, the same cannot be overlooked or dismissed as non- existent. In fact, the rising cost of construction over time – while the obligation of repayment is fixed at Rs. 4.50 lacs, makes it a distinct possibility, which may practically translate into a tenant being paid an agreed monetary compensation, i.e., in lieu of accommodation. That is, represents a real possibility/obligation and, thus, stands rightly provided for in the conveyance deed, together with the liability toward monthly compensation. It cannot, accordingly, be regarded as a make-believe, as done by the ld. CIT(A). His other objections to be non- admissibility of the claim of Rs. 54 lakhs by the assessee are, equally, not well founded. The assessee has disposed its’ rights in land, encumbered by the obligation to re-compense the displaced occupants/ tenants, so that the cost suffered toward the same, by way of its forfeiture or transfer of the right to (AY 2010-11) 12 Diamond Enterprises v. Asst. CIT receive in favour of the purchaser, whichever way one may look at the transaction, is an associated cost, integral to the said transfer. It cannot, therefore, be regarded as the capital cost. The third objection is of the same arising in the following year. In fact, this is in contradiction of the claim of the loss having already arisen, i.e., independent of, and prior to, the transaction of transfer in March/July, 2010. That apart, when the income arising from the transfer is being subject to tax for AY 2010-11, how could a related cost possibly arise for being claimed/allowed in a subsequent year? The same militates against the concept of income (or income computation), which is (to be) at net of all expenditure incurred in relation thereto. Reference to the decision in Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC) may be apposite here. The income arising to the assessee-developer was assessed without allowing development expenses to be incurred qua the relevant project in future, on the ground that the same had not been incurred/ accrued. The Apex Court clarified that when the income had arisen, the corresponding expenditure, even if is to be incurred subsequently, is to be allowed there-against, making a best possible estimate thereof. This would also explain the basis for bringing the income arising on the transfer to tax for the current year in the instant case. The assessee having received the consideration in toto (Rs. 175 lakhs) by March, 2010, on its’ own account, and with no further obligation to incur in its respect, the income in respect of the transfer can only be regarded as having arisen. Section 5 of the Act in any case makes it clear that income can be brought to tax either in the year of its receipt or its accrual. The objections by the ld. CIT(A) to the disallowance of the cost of Rs. 54 lakhs are, therefore, not valid.
3.4.3 The disallowance is accordingly, i.e., in view of the discussion at paras 3.4.1 & 3.4.2 above, directed to be deleted. We decide accordingly.
(AY 2010-11) 13 Diamond Enterprises v. Asst. CIT 4. This appeal was heard on 25/02/2020. As per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963 (ITAT Rules), the order is required to be “ordinarily” pronounced within a period of 90 days from the date of conclusion of the hearing of appeal. The instant appeal was heard prior to the lockdown declared by the Hon’ble Prime Minister on 24-03-2020 in view of COVID-19 pandemic. The lockdown was forced due to extra ordinary circumstances caused by world wide spread of COVID-19. Thereafter, the lockdown is being extended from time to time. Therefore, the pronouncement of order beyond a period of 90 days from the date of hearing is in the instant case not under “ordinary” circumstances. The co-ordinate Bench of the Tribunal in the case of DCIT vs. JSW Ltd. (in for A.Y 2013-14), decided on 14/05/2020, under identical circumstances, after considering the provision of Rule 34(5) of the ITAT Rules, 1963, judgements rendered by the Hon’ble Apex Court and the Hon’ble Bombay High Court on the issue of time limit for pronouncement of orders by the Tribunal, as well the factual circumstances leading to lockdown, held as under:- “10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to be interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5), but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club v. DIT [2017] 392 ITR 244 (Bom), Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that “while calculating the time for disposal of matters made time-bound by this