THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-5(2),, AHMEDABAD vs. M/S. SHREE AMI OFFICE OWNER'S ASSOCIATION,, AHMEDABAD

This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals), Ahmedabad-5 in Appeal no. CIT(A)-5/DCIT Circle-5(3)/53/2015-16 vide order dated 05/12/2016 passed for the assessment year 2007-08.

The Department has taken the following grounds of appeal:-

The brief facts of the case are that the assessee, an association of persons (AOP) registered under the provisions of the Bombay Non-Trading Corporation Act, purchased a property in an auction carried out by the office of the Chief Commissioner of income tax, Gujarat, Ahmedabad for a total consideration of 57 lakhs. The assessee had taken the possession of the said property on 19-01-1994 and was issued allotment letter dated 21-06-1999 in the name of Shri Narendra M Patel allotting 40% of the property and further Page No. 3 ACIT vs. M/s. Shree Ami Office Owner’s Association allotment letters were issued on 27-10-1999 in the names of Dhirubhai Patel, Krutiben Patel, Anilaben Patel, Shruti Patel, Meeraben Patel and Rajendrabhai Patel, allotting 10% of the premises to each according to their contribution. The final conveyance deed was executed by the Income Tax Department on 14-09-2005. After that, the assessee started construction on the said property for which it got permission from AMC vide letter dated 05- 06-2006. The assessee entered into an agreement for construction with Shri Ami infrastructure for the construction of the office building on 31-10-2006. Thereafter, an agreement of sale dated 10-01-2007 was executed between the members of the assessee AOP as vendors and M/s CMS Computer Ltd as buyer for the sale of the property for a total consideration of � 5.87 crores. The assessee AOP acted as a confirming party in this agreement to sale dated 10-01-2007. The final conveyance deed in this regard was entered into on 22-05-2007 between the members of the assessee AOP as vendors, the assessee as confirming party and M/s CMS computer Ltd as buyers. The respective members offered the sale of property as capital gains in their respective hands, in proportion to their holding, in the return of income for financial year 2007-08, relevant assessment year 2008-09.

During the course of assessment, the AO observed that since the assessee AOP was restrained from carrying out any commercial activity which rendered profit, the above activity was done by assessee AOP through its members by allotting shares to its members, entering into construction agreement and after having got the construction completed, sell the constructed property to buyers. The assessing Officer held that the assessee AOP was the “real owner” of the aforesaid property and its members were Page No. 4 ACIT vs. M/s. Shree Ami Office Owner’s Association not owners in reality and have no legally sustainable identity. The AO held that the members of the assessee AOP had merely acted on behalf of the assessee AOP and the actual title in the property was in the name of the assessee AOP only. The AO also held that the assessee AOP had complete control over the entire endeavour and actual day-to-day conduct of the business and the allotment of shares between its members had no sanctity in law. Accordingly, the taxability of the sale of the property arises in the hands of the assessee AOP. Further, the AO held that the entire chain of events showed that there was no intention of holding the property as investment from the very beginning, but it was an adventure in the form of business activity. Accordingly, in view of section 2(13) of the Act, the income from sale of such property is a “business income”, taxable in the hands of the assessee AOP (and not capital gains in the hands of members of the assessee AOP, in proportion to their shareholding in the assessee AOP). Further, the AO held that the transaction was taxable in financial year 2006- 07, relevant assessment year 2007-08 since the purchaser had entered into the sale agreement on 10th January, 2007 with the assessee and its members to acquire the property and made the payments to all the co-owners in the proportion of the share in the property. Accordingly, CMS computer Ltd had become the absolute owner of the property in financial year 2006-07 itself relevant to assessment year 2008-09.

In appeal, on the question of whether the taxability lies in the hands of assessee AOP or the members of the assessee AOP, Ld. CIT(Appeals) allowed assessee’s appeal and held that taxability lies in the hands of the Page No. 5 ACIT vs. M/s. Shree Ami Office Owner’s Association members of assessee AOP and not with the assessee, with the following observations: “With regard to the question of taxability in the hands of NTC or the members of the NTC, the AO is of the opinion that as the entire transaction is done by the NTC, the real owner of the property is NTC only. On the other hand the case of the appellant is that all the funds for the purchase of land and construction of building are given by the members and the NTC has issued shares as well allotment certificate to the members, -therefore the members are the real owner of the property. The appellant NTC was fully funded by the members of the NTC and the NTC has allowed the rights in the land and issued an allotment certificate on 27th October, 1999. By this allotment certificate the members of the NTC got rights in the land to the extent of their share in the funds. On 10/1/2007 the allotee members entered into the sale agreement with the proposed purchaser to sale the land and building apparent thereto and the appellant NTC was confirming party to it because the appellant NTC had already allotted their rights on the sub-plot and in the construction of the commercial house. In the development permission issued by AMC, the members have been shown as the owner of the property and. the BU permission is also issued in the name of members of the NTC. The members of the appellant NTC are also shown as owners of the property by the Registrar of stamps, Gujarat. Considering all these facts and evidences, I am of the opinion that the ownership of the property is with the members of the NTC and not with the appellant NTC as held by the A.O. The view of the A.O. is based simply on the fact that entire transaction is done by the NTC and no further evidences were brought out by the A.O. to show that the actual owner is NTC not the members of the NTC.”

With regard to the question of taxability of the income as business income or capital gain, the Ld. CIT(Appeals) held that from the events of buying land to the construction of property and finally sale of property, there is nothing which establishes that the intention of the assessee was not holding up the property as investment. Purchasing of land and construction of property by itself would not establish that the person concerned was indulging in trading activity. The ld. CIT(A) held that the AO has failed to establish by any positive evidence that the purchase and sale of property was with a view to make profits through trading transaction. The assessee is not in the activity of regularly purchasing and selling the properties and it is not Page No. 6 ACIT vs. M/s. Shree Ami Office Owner’s Association organized business activity of the assessee. Accordingly, Ld. CIT(Appeals) held that income from sale of property should be taxed as capital gain and not business income.

With regard to the question of year of taxability, Ld. CIT(Appeals) observed that from a perusal of facts it is seen that the assessee had entered into sale deed on 22-05-2007 and at that time full sale consideration was received and the possession was also given to the buyer. The transfer has taken place with the execution of sale deed and handing over of possession for which the relevant date is 22-05-2007, relevant to assessment year 2008- 09. Accordingly, Ld. CIT(Appeals) held that since the transfer took place in financial year 2007-08 relevant to assessment year 2008-09, the capital gain is taxable in assessment year 2008-09 only.

The Department is in appeal against the aforesaid order passed by Ld. CIT(Appeals). The DR primarily relied upon the observations made by the AO in the assessment order. He reiterated that the year of taxability is assessment year 2007-08 itself since on receipt and distribution of initial amount received by the assessee AOP between the members, effectively the property is sold/transferred during the year under consideration itself. In response, the counsel for the assessee primarily relied upon the observations made by CIT in the appellate order.

We have heard the rival contentions and perused the material on record. The first issue for consideration before us is whether the property is taxable in the hands of the assessee AOP or in the respective hands of the Page No. 7 ACIT vs. M/s. Shree Ami Office Owner’s Association members of AOP. From the facts placed before us, we observe that all the funds for the purchase of land and construction of building are given by the members and the assessee AOP has accordingly issued shares to the members, in proportion to their contribution. The assessee AOP was fully funded by its members and the assessee allowed the right in the land and issued allotment certificate on 27th October, 1999 in favour of its members. By this allotment certificate, the members of the assessee AOP got rights in the land to the extent of their share in the funds contributed by them. It was further observed that on 10-01-2007, the respective allottee members entered into sale agreement with the proposed purchaser to sell the land and building appurtenant thereto, as owners of the said property. It is further observed that in the development permission issued by AMC, the respective members of assessee have been shown as “owners” of the property. It is also observed that the BU (building use) permission is also issued in the name of the members of the assessee AOP. It was further observed that members of the assessee AOP are also shown as “owners” of the property by the Registrar of Stamps, Gujarat. In the case of Monarch Citadel (P.) Ltd.[2014] 45 taxmann.com 477 (Karnataka), the Karnataka High Court held that where assessee-company owned a landed property and it had constructed a commercial building on said land and later on it allotted specific portion of building to shareholders and thereafter it leased entire building to a tenant and distributed rental amount/monthly rent after deducting tax and maintenance to shareholders proportionately, in given situation shareholders were owners of specific portion of building allotted to them and it could not be said that assessee deemed to have derived income from rental. In the case of Ranka Construction (P.) Ltd.[1995] 52 ITD 122 (Cochin)[19-09- Page No. 8 ACIT vs. M/s. Shree Ami Office Owner’s Association 1994]the assessee-company constructed apartments on land purchased by it, receiving money for construction thereof from its members to whom apartments were allotted. The Members were in possession and enjoyment of flats and paid no rent to company. The ITAT held that assessee company could not be held to be owner of flats on ground that title to land remained with assessee and, hence, it could be assessed on notional annual letting value of flats. While holding so, the ITAT made the following observations:

The second issue for consideration before us is whether in the instant set of facts, it can be held that the above sale of property was capital gains or adventure in the nature of trade and hence taxable as business income. We are in agreement with the order of Ld. CIT(Appeals), wherein he has held that the mere fact that the assessee AOP purchased the land and made construction thereon itself would not be sufficient to hold that income earned on such sale of property would qualify as “business income”. We note that it was on 19-01-1994 that initially the assessee taken possession of the aforesaid property. It was finally sold in financial year 2007-08. Thus, there is a long holding duration between which the assessee took possession of the property and the date when the land was finally sold after making construction thereon. The entire purchase was funded by the members of the AOP. No interest-bearing loan was taken for the purpose of purchase of said property and construction thereon. No change in land user of the property was affected in order sell the aforementioned property. It is not the case of the Department that when initially the assessee AOP purchased the land and took possession thereof on 19-01-1994, the buyers were identifiable and thus the whole purpose of purchase and subsequent construction was for the purpose of selling the same and not earning any rental income. Accordingly, Page No. 10 ACIT vs. M/s. Shree Ami Office Owner’s Association in view of the facts and circumstances cited above, in our considered view, the said sale of property would be taxable as capital gains and not business income, and we find no infirmity in the order of ld. CIT(A).

The third issue for consideration is the year of taxability of the aforementioned property. We observe that in the instant case, both the registered sale deed as well as the possession of the property was transferred in the subsequent financial year i.e. financial year 2007-08. The complete payment was also made in the subsequent year. During the year under consideration, only the agreement to sell was entered into and part consideration was paid. In the case of Ratna Trayi Reality Services (P.) Ltd.[2013] 34 taxmann.com 122 (Gujarat), the Gujarat High Court held that an agreement to sell cannot be equated with transfer of property without there being anything more. In the case of Ushaben Jayantilal Sodhan[2018] 93 taxmann.com 453 (Gujarat), the Gujarat High Court held that transfer of immovable property takes place on execution of sale deed and, therefore, to hold that upon mere execution of agreement to sell, immovable property gets transferred to purchaser, even within extended definition of section 2(47), would be incorrect. In the case of Godha Realtors (P.) Ltd.[2022] 135 taxmann.com 24 (Bangalore - Trib.), ITAT held that where assessee merely entered into an agreement to sell immovable property without giving possession to buyer, there was no extinguishment of rights in capital asset by assessee, and thus, agreement to sell would not result in transfer of asset, under section 2(47). In the case of Abdul Wahab[2015] 57 taxmann.com 27 (Bangalore - Trib.), the ITAT held that where there was nothing to show that possession was ever delivered by Page No. 11 ACIT vs. M/s. Shree Ami Office Owner’s Association assessee to purchaser in part performance of agreement for sale, there was no transfer within meaning of section 2(47)(v) of the Act.

In the result, all the grounds of appeal of the Department are dismissed.