GREEN HABITATS PRIVATE LIMITED ,MUMBAI vs. ACIT-3(1)(2), MUMBAI

Assessee appeal : Grounds of appeal

Revenue’s appeal : Grounds of appeal read as under :-

Brief facts of the case are as under :-

The assessing officer considered the submissions of the assessee and analysed the facts of the case and stated that the assessee acquired in pieces and parcels of land at Kanchipuram for a consideration of Rs. 20.38 lakhs in the year 2006. The assessee-company along with the assessee's holding company HPGPL were to have developed the said property under a facilitation agreement. In the year 2008, the assessee's holding company HPGPL availed Rs. 550 crores as construction loan from HDFC for which the assessee- company had mortgaged its land property. Thus, the assessee's property (inventors) of book value Rs. 8,89,47,109/- was mortgaged against the loan of Rs. 550 crores. The holding company HPGPL defaulted in the payment of the loan taken and consequently the lender -HDFC invoked the SAFAESI Act and appropriated the mortgaged property sold (E auction) the same to Evita

Further, the assessing officer observed that the landed property admeasuring 40 acres 76 cents shown as inventory in the balance sheet valued at Rs. 8,89,47,109/-as on 31/3/2013 was under mortgage with HDFC on behalf of holding company-HPGPL. The mortgage being security was provided for facilitating the holding company - HPGPL to avail of construction loan of Rs. 550 crores from HDFC for its own business purposes. HPGPL defaulted on the repayment of loan and interest to HDFC thereby caused HDFC to invoke the SARFAESI Act, 2002 and appropriated all that pieces and parcels of land belonging to the assessee company and e-auctioning the same

The assessing officer also stated that when the assessee company pledged (mortgaged) the property (land), then in the case of default the creditors HDFC of the holding company HPGPL shall have all the right to sell property to recover its dues. Moreover, the sale (e-auction) of the property (land) had resulted in gain. The consideration on transfer/sale of the property had ultimately benefited the debtor (HPGPL), on whose behalf, the assessee had mortgaged the property to HDFC. The debtor whose debts had been discharged by sale of the said property (land) was, in law, debtor to the assessee for the amount of consideration of sale. Therefore, the contention of the assessee that it did not receive any consideration directly on account of sale/transfer was without any logic and hence not acceptable to the assessing officer. In fact the assessee had created a forfeiture of its income in favour of the holding company HPGPL by repaying the holding company's debts. Thus, the arrangement of mortgage and sale thereon resulted in exchange of its property (land) for the amount of debt owned by the holding company HPGPL to HDFC on whose behalf the assessee company had stood guarantee. The assessing officer relied on various judicial pronouncements and rejected the contention of the assessee that the transaction shown by way of mortgage and that taxing provisions are not attracted. Moreover, the alternative argument of the assessee that even if the proceeds of e-auction are considered as income in the hands of the assessee, the same would have to be considered as bad debts or business loss on account of it being not realizable was not acceptable to the assessing officer in view of the decision of the Hon'ble Supreme Court in the case of Commissioner of income Tax vs. Sitaldas Tirathdas - 41 ITR 367. Thus, the amount of Rs. 296,29,01,000/- arising from e-auction of land was accordingly held as the sales receivables in the hands of the assessee in respect of the land i.e. trading asset sold. As the assessee had written off inventory of land of an amount of Rs. 8,88,47,107/-, the remaining amount of 8 Green Habitats Pvt. Ltd.

The Assessing Officer completed the assessment proceedings u/s. 143(3) of the Act and passed order dated 30/12/2016 computing the total income at Rs. 287,39,53,890/-.

Against the above order assessee appealed before learned CIT(A).

Learned CIT(A) noted that the assessee was engaged in the business of construction and development of real estate. The principal activity of assessee is to acquire land for developing residential townships in India. That the assessee company had entered into facilitation agreement granting development rights to Hiranandani Palace Gardens Private Limited (HPGPL), the project development company (PDC) and which is also its holding company. Assessee’s facilitation agreement with HPGPL was dated 1.4.2009 as amended on 1.4.2010. Learned CIT(A) also noted that seven landowning companies including the assessee entered into facilitation agreements with HPGPL for development of a township in Chennai. Thereafter learned CIT(A) referred to facilitation agreement which gave HPGPL rights to develop the impugned land and construct buildings and as per the amended facilitation agreement, assessee company was entitled to the total consideration payable towards the said land subject to maximum 5% of the total price at which the constructed property with the said is sold to the final customer. Thereafter, learned CIT(A) noted that HGPGL obtained project finance from HDFC in three tranches of Rs. 100 crores, Rs. 300 crores and Rs. 150 crores during 2008 to 2010 against collateral security of the impugned land owned by the assessee, structure built by HPGPL receivables from sale of units/land and other rights such as step-in rights. Subsequently, due to slowdown in realty sector, HPGPL was unable to meet repayment schedules of the loan from HDFC. Invoking provisions of SARFAESI Act, the HDFC made e-auction of the impugned property which had twenty one buildings standing as at that time. The said

Thereafter learned CIT(A) also rejected the Assessing Officer’s reference that purchaser M/s. Evita Constructions Pvt. Ltd. and the assessee were related party. Accordingly, he concluded by directing the Assessing Officer to restrict the addition on account of amount received through e-auction of impugned land and property by HDFC to only 5% of the receipt and recomputed income after giving benefit for amount of inventory of land written off.

Against this order the assessee and Revenue are in cross appeals before us.

We have heard both the counsel and perused the records. The Revenue in its grounds of appeal has raised ground that the amended facilitation agreement between the assessee and HPGPL on which learned CIT(A)’s decision is based has not been registered and same cannot be relied upon. It has also been urged that the assessee has failed to produce any evidence related to the construction on the property and cost of it on the date of the e- auction.

Learned Departmental Representative submitted that the land has not been valued. He further reiterated that the facilitation agreement is not registered and no detail cost of construction thereon was submitted. He further submitted that the cost of land was Rs. 8 crores and how the HPGPL could get loan of Rs. 550 crores on mortgage of said land.

Learned Counsel of the assessee on the other hand submitted that the facilitation agreement as well as amendment thereto both are not registered. The same were already before the Assessing Officer. He submitted that no adverse inference has been drawn by the Assessing Officer in this regard. He further submitted that the HDFC gave loan of Rs. 550 crores not on the basis of value of land. Rather he submitted that loans were disbursed in three tranches as under over the period of 2008 to 2010 :-

Referring to the terms of agreement of sanction of loan learned counsel submitted that the loans were linked to stage of construction of the said land and they were disbursed to them after the due diligence of the project development by the bank. He submitted that by no stretch of imagination it can be said that Rs. 550 crores loan was given on mortgage of land of Rs. 8 crores. He submitted that all the cost of construction was incurred by HPGPL and not by the assessee. Hence, learned counsel submitted that the Assessing Officer was totally wrong in taking adverse inference that cost of construction is not appearing in assessee’s book. Further learned counsel claimed that the project was being constructed by HPGPL. The project was e-auctioned by HDFC and sum was received amounting to Rs. 296 crores by HDFC against loan sanctioned to HPGPL on the basis of their project developed till that date. He claimed that the assessee has not received single paisa out of that. Hence he submitted that no income accrued to the assessee. He further claimed that the amount itself retained by the HDFC against loan sanctioned to HPGPL. Hence, learned counsel claimed that there cannot be any question of income arisen to the assessee. Learned counsel further referred to the decision of Hon'ble Apex Court for the proposition of diversion of income by overriding totally. In the alternative, learned counsel claimed that even part of the amount is treated as income of the assessee the same should be treated as loss as assessee has not received any amount whatsoever. He further claimed that land was assessee’s trading asset. The loan of trading asset should be allowed as trading loss. Hence, learned counsel claimed that no income is to be computed in the hands of the assessee.

Upon careful consideration, we note that the assessee is a company which is engaged in the business of construction and development of real estate. It had entered into facilitation agreement with its holding company

In the meanwhile holding company HPGPL got disbursal of the loan of Rs. 550 crores. The said disbursal was done on the basis of stage of construction as per the satisfaction of the banker/lender. Loan was disbursed in three tranches of Rs. 100 crores, Rs. 300 crores and Rs. 150 crores during 2008 to 2010 against collateral security of the inter alia impugned land owned by the assessee structure built by HPGPL receivables from sale of units/and and other rights such as step-in rights. Subsequently HPGPL was unable to meet repayment schedules of the loan from HDFC. The lender invoked provisions of SARFAESI Act and the property which included land mortgaged by the assessee and the standing construction thereon which comprised of twenty one buildings at that point of time were auctioned and HDFC got Rs. 296 crores against its loan. In this connection it is further noted that the other group companies of HPGPL also had agreements with it for development of projects on their land and same were also mortgaged. On this default of HPGPL, projects and the land belonging to other group companies were also auctioned by the HDFC and alongwith present amount total Rs. 551 crores were realized by HDFC against loan to HPGPL. The Assessing Officer noted that the assessee company has not accounted for any proceeds for disposal of its land by HDFC. The Assessing Officer observed that another group company i.e. M/s. Evita Construction Pvt. Ltd. had purchased the said property through e-auction. The Assessing Officer asked the assessee company to prove that the 13 Green Habitats Pvt. Ltd.

Assessee appealed before learned CIT(A). In its appeal the assessee claimed that it had not received any money whatsoever and the entire land of the assessee-company has been sold by HDFC in e-auction and sale proceeds of the property through e-auction were adjusted against the loan by HPGPL. As the assessee did not receive any amount and it claimed loss thereon learned CIT(A) examined the issue. He was of the opinion that sale comprised of land belonging to the assessee as well as construction thereon by HPGPL. In these circumstances, learned CIT(A) referred to assessee’s facilitation agreement with HPGPL. As per the terms of the facilitation agreement he opined that assessee- company was to receive 5% of the total price of the constructed property when sold to the final customer. So learned CIT(A) applied this ratio and held that 5% of the proceeds were belonging to the assessee. In this regard learned CIT(A) rejected the assessee’s contention that there was diversion of income by overriding title as per the decision Hon'ble Supreme Court in the case of CIT Vs. Sitaldas Dirathdas (41 ITR 367). He noted that the arrangement between the assessee and its holding company in the form of facilitation agreement is completely independent of the term of loan agreement between HDFC and HPGPL. Hence, he held that doctrine of diversion of income by overriding title would not take away 5% share of assessee in the proceeds from ambit of taxation. He was of the opinion that non-receipt of the said 5% cannot be said to be diversion of income by overriding title. Learned CIT(A) also accepted the 14 Green Habitats Pvt. Ltd.

Now before us the contention of the Revenue is that amended facilitation agreement is not registered. It has also been submitted that the assessee failed to produce evidence related to cost of construction of the property. Further learned Departmental Representative has submitted that the land has not been valued. In this connection we note that the facilitation agreement as well as amended facilitation agreement were all existing documents. Both of them were not registered. Both of them were acted upon by the parties in the earlier years. The Revenue has accepted the same. The Assessing Officer has not raised any doubt whatsoever about the facilitation agreement. Hence, this submission of the Revenue is not sustainable.

Furthermore, the Revenue’s submission that the assessee has not been able to produce evidence related to construction of the property and cost thereof is not at all relevant as the construction was being done by HPGPL. Nothing stopped the Assessing Officer from obtaining information from HPGPL if he so wanted. HPGPL is a corporate body. In its account it has duly recognized sale proceeds of e-auction against it dues to the lender. Nothing out of the sale proceeds has been given or credited to the assessee. Furthermore, as regards the submission that land has not been valued, it is noted that there is no whisper whatsoever that there was any issue of valuation of land. Moreover, nothing stopped the Assessing Officer from obtaining the value of land. Moreover, as it is clear in this case sale was not done by the assessee- company. Entire property was e-auctioned by the lender HPGPL and the entire proceeds were received by the lender against the loan to holding company i.e. HPGPL. It is also correct that disbursal of advance was upon the stage of construction and over a period it came to Rs. 550 crores. The said disbursal was dependent upon stage of construction. By no stretch of imagination it can be said that entire sum was received only against land belonging to the assessee. It is further clear from sale certificate wherein in the description of 15 Green Habitats Pvt. Ltd.

Now we come to the assessee’s claim that since it has not received any amount and its land has also been e-auctioned, the assessee’s case should be treated as business loss. That it should be treated that land being trading asset of the assessee has been lost so assessee has claimed business loss. Further limb of the assessee’s submission is that since land was mortgaged to the bank for loan to HPGPL and the bank has adjusted the sale proceeds against loan to HPGPL, there is diversion of income by overriding title. The income has been diverted to HDFC by HPGPL and the assessee has not received any amount. So nothing can be attributed to the assessee’s income. We find that this limb of the assessee’s submission is also not sustainable. It is undoubted that the assessee had facilitation agreement with its holding company for development of the project on its land. As per the said agreement the assessee was entitled to 5% of the sale proceeds of the constructed property. Since in the present case holding company’s loss was adjusted upon by e-auctioned of the property for an amount of Rs. 296 crores, the assessee- company’s share out of the same as per the facilitation agreement clearly accrued to the assessee-company. If the assessee-company did not press for or forwent its claim it cannot be diversion of income by overriding title. But it will be treated as application of income. Hence, firstly assessee’s share has to be considered as income of the assessee for which necessary consequences of taxation has to follow. In this view of the matter in our considered opinion

Accordingly, in the background of the aforesaid discussion and precedent in our considered opinion there is no infirmity in the order of learned CIT(A). Accordingly, we uphold the same.

In the result, these appeals stand dismissed. Order has been pronounced in the Court on 06.03.2020.