M/S. HAATHEE VENTURES,,VADODARA vs. INCOME TAX OFFICER, WARD-3(1)(1),, VADODARA

आदेश/ORDER

PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-2, Vadodara in Appeal no. CAB/(A)-2/282/15-16, in proceeding u/s. 143(3) vide order dated 29/03/2017 passed for the assessment year 2012-13.

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“1. The order of learned Commissioner of Income Tax (Appeals)-2 is against law and facts of the case. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in not accepting the claim of the Appellant that the requisite permissions were not obtained till the end of financial year under consideration and the advances were received by merely issuing provisional allotment letter. Even, agreement for sale was not executed and consequently neither the risk and rewards were transferred nor the possession of the plots was handed over to the buyer which requires the appellant to recognise income from sale of plots. 3. On the facts and circumstances of the case, the sum paid as commission to nonresident agents was not in nature of fees for technical services requiring the appellant firm to deduct tax at source. The appellant craves leave to add, alter, amend, edit, modify, change or delete any of the grounds of appeal at the time of or before the hearing of the appeal.”

Ground number 2:

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assessee has to be taken at 15%. While passing the order, Ld. CIT(Appeals) made the following observations:

“4.2.1. On examination of complete details in respect of work executed, allotment letters issued, consideration received etc., it is noticed that the for 14 Villas 88 plots. The details of agreed sale price and sale consideration received are as under:-

Particulars Agreed sale price (Rs.) Sale consideration Percentage received (Rs.)

Plots 12,67,60,644/- 7,99,56,665/- 63.08%

Villas 7,76,64,156/- 3,01,13,763/- 38.77%

From the above details, it is clear that the appellant has received sale consideration to the extent of 63.08% of the agreed sale price o plots and 38.77% of agreed sale price of Villas. As per Guidance Note on computing profit from Real Estate Transaction issued by ICAI, copy of which is placed on record by the Ld, Authorized Representative, where of are similar to the in substance, the profit to be on the basis of Percentage Completion Method. Undisputedly, the duration of the project is beyond 12 months and the plots are being sold after complete development and villas are being sold after construction, there is no reasons as to why profit in the case of appellant be not assessed on the basis of Percentage Completion Method. The claim of appellant that there is dispute amongst partners, is of no significance so far as accrual of income is concerned and particularly when no refund is given either to the disputing partners or to any of the allottees. 4.2.2. It is also noted that in 34 cases of plot sale, the appellant has received full consideration and in all the cases allotment letters have been issued and accordingly with the signing of allotment letter by the appellant and the purchaser, all the "risks and rewards, are transferred to the purchaser. On perusal of the allotment letter, I find that the allotment was liable to be cancelled only when permission by the Government authorities was not allowed. Undisputedly, the appellant has been allowed permission to execute the project vide letter dated 02.04.2012. It is an established legal position that once the permission is allowed, it relates back to the date of application in substance. Moreover, the purchaser was fully aware about this factual position about the permission and having agreed to purchase the property, he had taken a calculated risk. It is also worthwhile to mention that from the date of allotment, the purchaser has become entitled to all sorts of appreciation in the property and

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hence the "rewards" will also go to him and appellant will not be entitled to any share in such appreciation. This view gets supports from the decision of Hon'ble ITAT, Bangalore in the case of Prestige Estate projects Ltd. Vs. DCIT (2011) 129 ITD 342 (Bang) wherein it is held that when the prospective buyers gave consent to the terms of the agreement, the assessee could naturally transferred "significant rewards" although land's ownership was to be transferred to the developer on completion of certain conditions I.e. on handing over of land owner's share in built up area. 4.2.3. The Ld. Authorized Representative has argued that the period of business commencement was very short in the year under consideration, but I find that the appellant had started receiving sale consideration from March, 2011 onwards as is evident from party wise details available on record. It is noticed that majority of the land under consideration was acquired in the month of December, 2011 after executing proper sale deeds and only a small portion of agricultural land costing Rs.49,00,000/- was yet to be converted into NA. This fact also goes to prove that the project of appellant was completed to a greater extent particularly when major part of it was a plotted scheme. To be more specific, the entire project consists of 40 villas and 324 plotted units. In the written submission dated 19.08.2016, the Ld. Authorized Representative has very clearly stated that no facility to be created for stay in the since the plots are to be sold after land development. As a matter of fact, the appellant has carried out land development such as land leveling, JOB work, gardening & plantation, road surfacing expenses etc. required for plotted scheme. However, I find that constructions of Villas have not yet started. Therefore, no profit is assessable on the sale consideration ' received against sale of Villas. However, in view of the above factual position, the after development, to be as per AS-7 on the basis of Percentage Completion Method. Since the total receipts from the entire project are not ascertainable at this stage, how much total profit the appellant is going to earn, is also not ascertainable. However, considering the normal rate of margins in the real estate business, I hold that at least 15% of net profit on the sale consideration received against sale of plots, has to be assessed in the year under consideration because the plotted scheme earn relatively more margin than the constructed one where 10% net profit is well accepted. Since the appellant has received sale consideration of Rs.7,99,56,665/- against the sale of plots, the net profit at 15% works out to Rs. 1,19,93,500/-. Accordingly, the addition to this extent is sustained and the Assessing Officer is directed to allow consequential relief. Thus, appellant succeeds partly in respect of 2.”

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the paper book and submitted that the final approval in connection with the aforesaid project was received on 10-06-2013 and accordingly, since the project was not approved during the assessment year under consideration, it was not in a position to transfer the title of the aforesaid properties with respect to whom the income has been assessed in the hands of the assessee. He further drew our attention to the allotment letter issue to two of the allottees and submitted that as per the terms of the allotment letter (refer page 76 of the paper book), it was specifically mentioned that the plans for the building have been submitted to the Government Authorities for their approval and till such time the formal sanction is obtained from the government, the amounts paid by the allottee shall be treated as interest free deposit with the assessee. He further drew our attention to page 83 of the paper book (balance sheet of the assessee as on 31st March 2012) and submitted that the entire amount received from the allottees has been reflected as “advance” in the balance sheet. Further, the counsel for the assessee submitted that during the year under consideration, effectively no construction has been done with respect to the aforesaid properties and the entire amount as mentioned was treated only as in interest free deposit/advance from the allottees by the assessee. The counsel for the assessee further submitted that the AO has incorrectly applied AS-7 since during the year under consideration no construction work had been carried out in the instant facts. In fact, in the instant of set of facts, the correct accounting standard was AS-9: which is in respect of sale of goods for a Real Estate Project- which provides that revenue in case of real estate project is required to be recognised when the seller has transferred to the buyer all significant financial risks and rewards of the ownership and the

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seller retains no effective control of the real estate to a degree usually associated with ownership. It was submitted that during the year under consideration, no ownership in connection with the plots/villas have been transferred to the allottees and the amounts so received have only been reflected as deposits. The counsel for the assessee relied upon various judicial precedents in transfer’s contention that income in respect of sale of properties recognised only when the title to the said property is transferred by way of registered deed. He further submitted that income in respect of the aforesaid plots/villas have been offered to income by the assessee in the subsequent years. Without prejudice to the above, he submitted that Ld. CIT(Appeals) had estimated net profit at a high rate of 15% without any basis and in case of real estate approximately 8% is the ideal/accepted rate of net profit in similar projects.

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letter is subject to approval being obtained from the Government Authorities and till such time such approval is obtained, the amount so received from the allottees shall be treated as interest free deposits in the hands of the assessee; thirdly, it has not been disputed by the Department that during the year under consideration the title in respect of such property i.e. plots/villas were not transferred in favour of the allottees and same was done only in the subsequent year; fourthly, the assessee has given table stating that income from sale of the aforesaid plots/villas have been offered to tax in the subsequent years when the title in respect of the aforesaid plots/villas or transferred in the name of the allottees. In the case of Jayanikumar V. Thakkar[1990] 35 ITD 298 (AHD.), the assessee executed a sale agreement for sale of his residential house on 13-2-1982. On same day, assessee received entire consideration and delivered possession of house in question. As required under bye-laws of society, which constructed and delivered possession of aforesaid house to assessee, assessee applied to transfer its shares and outstanding loan in favour of purchaser. The Society, however, declined to approve proposed transfer. However, this approval was subsequently given on 11-10-1986, the ITAT Ahmedabad held that since conveyance deed was not executed and registered during year in question, i.e., assessment year 1982-83, no capital gain was assessable in assessee’s hands in that year. In the case of Ashaland Corporation[1981] 7Taxman393 (Guj.), the assessee-firm was a dealer in land. On 14-11-1970, it executed an agreement to sell certain number of plots to a co-operative society who also took over their possession by paying Rs. 5,000 as an earnest money at the time of agreement and Rs. 2,08,772/- as advance towards sale price in December 1970. The assessee credited the above

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aggregate receipts of Rs. 2,13,772 in its trading account in the calendar year 1970 relevant for the assessment year 1972-73. All the formal sale deeds were, however, executed on different dates between 26-2-1971 and 26-6- 1972 for a total consideration of Rs. 4,40,939 but the sale transactions with the society were completed in the accounting year relevant to the assessment year 1972-73. For the assessment year 1971-72, the ITO practically accepted the assessee's declared profit from the aforesaid receipts of Rs. 2,13,772. This assessment was set aside under section 263 by the Commissioner who held that, since the sale deeds were executed in the next calendar year 1971, the entire profit arising from the sale transaction would probably be taxable in the assessment year 1972-73. The Gujarat High Court held that in the instant case, in the assessment year 1971-72, no sale transaction admittedly took place and the assessee only executed the aforesaid agreement dated 4- 11-1970 to sell certain plots of land to the society. Thus, the said land continued to be its stock-in-trade. It is axiomatic that an agreement to sell does not create any interest in favour of the purchaser. It is on completion of the transaction of purchase and sale culminating into an extinguishment of the title of the vendor and simultaneous creation of the title of the vendee that the assessee earns profit or suffers loss. Receipt of Rs. 2,13,772 would, therefore, assume the character of income or profit only when sale transaction was completed in accordance with law. Doctrine of “part performance” embodied in section 52A of the Transfer of Property Act could not also be brought into aid to treat the said receipt of Rs. 2,13,772 as trading receipt. The agreement in writing to sell, coupled with parting of possession, would not confer any legal title on the purchaser, i.e., the society and take the land out of the assessee's stock-in-trade. The assessee's method

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of accounting has no relevance in determining whether receipt of the above nature was trading receipt or income. The method of accounting, whether cash method or mercantile method, would have bearing only in respect of completed business transaction. Thus, the impugned receipt of Rs. 2,13,772 would not constitute the assessee's taxable business income in the assessment year 1971-72. In the case of Shah Doshi & Co.[1981] 6Taxman343 (Guj.), the Assessee firm, dealing in land, agreed to sale of land, which it agreed to purchase from original owner, to a third party though no sale deed had been executed in assessee's favour by original owner. The Gujarat High Court held that assessee could not treat part of profit arising from such transaction as value of its stock-in-trade in assessment year prior to execution of sale deed in favour of third party by original owner. Further, High Court held that profits arising from impugned transaction accrued to assessee only in assessment year in which sale deed was executed in favour of third party.

7.1 In view of the above facts of the case and the judicial precedents on the subject as discussed above, in our considered view, the amounts received as interest free deposits by the assessee from the allottees could not be subject to tax as income in its hands during the year under consideration.

Ground Number 3: disallowance of commission income:

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agents as well as the buyers of the properties to whom such property have been sold/marketed are based outside of India. Further, the Department has not been able to produce any evidence to prove that for the purpose of rendering said services such commission agents had visited India. Further, there is nothing on record to prove that the above agents had a permanent establishment in India. It may be noted that in the recent case of PCIT v. Puma Sports India (P.) Ltd. [2022] 134 taxmann.com 60 (SC), the Hon'ble Supreme Court dismissed Department’s SLP against impugned order of High Court holding that commission paid by assessee-company to its overseas Associated Enterprise (non-resident agent) for purchase orders outside India would not be liable to TDS under section 195 as services were rendered or utilized outside India and commission was also paid outside India. In view of the above discussion, we find no infirmity on the order of Ld. CIT(Appeals) and ground number 1 of the Department’s appeal is hereby dismissed. In the case of Nova Technocast (P.) Ltd[2018] 94 taxmann.com 322 (Gujarat)[09-04-2018] the assessee made commission payments to its foreign agents for rendering sales and marketing services abroad. The Assessing Officer disallowed such commission expenditure under section 40(a)(i) for failure of assessee to deduct tax at source. The Tribunal noted that foreign agents had rendered their services abroad and moreover, the said agents did not have fixed base in India and therefore, Tribunal thus concluded that amount paid to them was not taxable in India and, thus, there was no requirement to deduct tax at source. The Gujarat High Court held that since, in instant case, revenue did not seriously contend that payment to foreign commission agent was taxable in India, provisions of section 195(1) would not apply to assessee's case and

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therefore, Tribunal was justified in deleting impugned disallowance. In the case of Inox India (P.) Ltd [2021] 126 taxmann.com 163 (Ahmedabad - Trib.), the Ahmedabad ITAT held that where since services in respect of commission expenses were stated to be rendered outside India as well as utilized outside India, income arising by way of commission against rendition of agency services could not be deemed to accrue or arise in India in hands of recipients of such commission payments. Further ITAT held that where income arising to non-resident commission agents is not found to be chargeable in India under section 4 read with section 5(2), obligation under section 195 for deduction of tax at source cannot be fastened upon assessee and in absence of statutory obligation arising under section 195 for deduction of tax in absence of chargeability of remittances, corresponding disallowance under section 40(a)(i) is without any merit and, thus, uncalled for.

11.1 In view of the above discussion, in our considered view, there was no requirement for the assessee to deduct tax at source on such payments made to non-resident agents based out of UK, without anything to substantiate that such agents had a permanent establishment in India or that the services were rendered India or that the agents had visited India in connection with providing such services. Accordingly, in our view, the assessee was not required to deduct tax at source u/s 195 of the Act in respect of such payments.

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Order pronounced in the open court on 15-12-2022

Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 15/12/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद