SHRI PRAKASH GULABRAI CHAWLA,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 27(2), MUMBAI

As could be seen from the grounds raised, the first issue which arises for consideration is, whether the income earned from sale of development rights in respect of a partially constructed project should be assessed under the head “Capital Gain” or as “Business Income”. The other aspects of the issue are, in case the aforesaid income is treated as capital gain, whether provisions of section 50C of the Income Tax Act, 1961 (for short "the Act") are applicable and what should be the indexation benefit on account of cost of improvement.

Brief facts are, the assessee is an individual and carries on business in undertaking contract work relating to development of real estate project through his Proprietorship concern M/s. Mohini Engineering and Contractors. For the assessment year under dispute, the assessee filed his return of income on 23rd September 2012, declaring total income of ` 40,34,360. In the course of assessment proceedings, the Assessing Officer on verifying the material on record found that the assessee had purchased development rights of a project from N.N. Construction, vide development agreement dated 4th May 2007, for a sum of ` 25 lakh. The said development rights were sold by the assessee during the year to M/s. Crystal Buildtech, through Memorandum of Understanding (MOU) dated 29th November 2011. On sale of such development rights, the assessee received an amount of ` 2,28,45,628. However, the assessee has treated the aforesaid receipt as income from business and credited to the Profit & Loss account. Further, against such income, the assessee has also debited certain expenditure to the Profit & Loss account. On verifying the agreement, the Assessing Officer found that the stamp duty value of the property as per the agreement is fixed at ` 3,22,08,000.In view of the aforesaid facts, the Assessing Officer called upon the assessee to explain as to why the receipt from sale of development rights should not be assessed as capital gain in accordance with the provisions of section 4 Shri Prakash Gulabrai Chawla 50C of the Act. In response, it was submitted by the assessee that he is in the business of construction and the development rights were purchased for the purpose of construction of a multistoried building. In this regard, the assessee has also made layout plans, designs and obtained sanction from the Government Authorities. Further, the assessee also leveled the land, laid foundation and constructed up to plinth level and also boundary walls. Thus, it was submitted, the intention of the assessee was to construct the project. Therefore, the sale of development right would partake the character of business income. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, it is for the assessee to establish that income received by him was on account of adventure in the nature of trade. He observed, at the time of purchase of development rights of the subject property on 7th May 2007, the assessee had shown it as investment in the Balance Sheet and it was not routed through Profit & Loss account as stock–in–trade. Thus, he observed, the entry in the books of account makes assessee’s intention clear that the development right was purchased towards investment and not for business purpose. Thus, he observed, income received from the sale of development rights is a capital receipt and has to be assessed under the head “Capital Gain”. Accordingly, by applying the provisions of section 50C of the Act, he treated the stamp

After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) observed, while the assessee has routed the receipts and expenditure from the completed projects, such as, Annapurna Co–operative Housing Society Ltd., and Andheri Wader CHS Ltd., through Profit & Loss account and offered the income from such project in the assessment year 2011–12, the receipt and expenditure in case of this particular project was directly taken to the Balance Sheet instead of routing it through the Profit & Loss account. Learned Commissioner (Appeals) observed, what the assessee acquired in the year 2007 and transferred in the year 2011 is the development rights of the particular project. Any expenditure in respect of such development rights will only be in the nature of cost of improvement. In this context, he referred to Para–(viii) of the Development Agreement dated 4th May 2007, wherein the owner of the land while granting development right had allowed the assessee to execute conveyance deed in favour of the Co–operative Housing Society to be formed by the Purchasers of the premises of the building to be constructed. He observed, had the 6 Shri Prakash Gulabrai Chawla assessee executed the conveyance deed in favour of the Co–operative Society after getting the building constructed by himself, the proceeds could have been assessed as business income, which is not the case. He observed, assessee had simply acquired and sold development right and in the process has made substantial gain. He observed, whatever expenditure incurred by the assessee between the date of acquisition and date of transfer would only improve the value of the capital asset. Thus, he concurred with the Assessing Officer that the income from sale of development right has to be assessed under the head “Capital Gain”. In this context, he relied upon certain judicial precedents also. As regards objection of the assessee against applicability of section 50C of the Act, learned Commissioner (Appeals) observed, the provisions of section 50C of the Act would be applicable as the asset sold by the assessee is not business asset. As regards the contention of the assessee that the Assessing Officer has not referred the valuation of the property to the DVO as per section 50C(2) of the Act,learned Commissioner (Appeals) observed, the Assessing Officer does not have suo motu power to refer valuation of the property to the DVO. As regards assessee’s claim of addition of expenditure of ` 33 lakh in the assessment year 2011–12 to the cost of improvement for indexation purpose, learned Commissioner (Appeals) agreed with the Assessing Officer that such amount cannot be treated as cost of 7 Shri Prakash Gulabrai Chawla construction as they are mere advances to certain parties. Thus, ultimately, he sustained the addition made by the Assessing Officer.

Reiterating the submissions made before the Departmental Authorities the learned Authorised Representative submitted, the development rights of the project has been shown under the head “Current Assets” in the balance sheet. In this context, he drew our attention to the copy of the balance sheet as on 31st March 2012 is placed at Page–18 of the paper book. He submitted, similar accounting treatment was given in the assessment years 2010–11 and 2011–12. The learned Authorised Representative submitted, the assessee followed the aforesaid accounting method consistently. Drawing our attention to the copy of MoU dated 8th April 2011 placed at Page–26 of the paper book, the learned Authorised Representative submitted, as per the terms of the agreement, the assessee was required to complete construction up to plinth level. Further, he submitted, by agreement dated 29th November 2011, the assessee assigned the development rights of the property to M/s. Crystal Buildtech. He also took us through agreement executed in May 2007 under which the assessee acquired the development rights of the property. To impress upon the fact that the assessee is a developer and is developing many other projects the learned Authorised Representative drew our attention to various other materials on record. The learned Authorised

The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals) submitted, it was never the intention of the assessee to develop the project. He submitted, the MoU makes it clear that the assessee would develop up to the plinth level only. He submitted, the assessee has simply purchased development rights and sold it. He submitted, the intention of the assessee to acquire the development rights as investment is also revealed from accounting treatment given by the assessee at the time of purchase as the same was not routed through the Profit & Loss account. Thus, he submitted, the income from sale of development right was rightly assessed as income under the head “Capital Gain”. As regards applicability of section 50C of the Act, the learned Authorised Representative submitted, since the assessee did not object to the value determined by the stamp valuation authority and sought a reference to the DVO for determining the value of the property, the Assessing Officer was not under any obligation to refer the valuation of the property to the DVO. As regards claim of indexation benefit for cost of improvement, the learned Departmental Representative submitted, assessee’s claim may be verified and decided in accordance with law.

We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The first issue which needs to be decided is, whether the income from sale of development right is to be assessed under the head “Capital Gain” or “Business and Profession”. Undisputedly, vide development agreement executed in May 2007, the assessee had acquired development rights from N.N. Constructions, who was the owner of land admeasuring 1555.1 sq.mtrs. at Malavani, Malad (West), Mumbai. As per the terms of the development agreement, the assessee acquired the development rights of developing the building and further, right, title and interest to sell the newly constructed units to the intending purchasers. Thus, from the terms of the agreement, it is clear that the owner of the land had not sold the land to the assessee but has transferred the development rights to develop the property and sell the individual units. From the MoU dated 8th May 2011 between the assessee and Crystal Buildtech, it appears, the assessee has transferred all the rights and interest to the sub–developer towards development of the building. Only condition imposed in the MoU is, the assessee has to complete the following works:–

Subsequently, the assessee has entered into another agreement with Crystal Buildtech, on 29th November 2011, transferring all its rights relating to the development of the project. Thus, from the reading of all the agreements, prima facie it appears, what the assessee acquired from the owner of the land is the development rights for building the housing project and not the ownership right on the land. In turn, the assessee has transferred the right acquired by him to Crystal Buildtech through MoU and the subsequent development agreement. Thus, it is clear, though the assessee had acquired the development rights of the building for construction of the project, for whatever may be the reason, subsequently the assessee transferred the development right to the sub–developer after carrying out construction work till plinth level. Therefore, merely because at the time of purchase of development rights, the assessee had not routed it through the Profit & Loss account, it cannot be the sole determining factor in deciding whether it should be treated as investment or stock– in–trade. It is well settled that accounting treatment given in the books of account is not sacrosanct. Therefore, assessee’s claim of business income has to be considered after taking into account of other relevant facts and materials including the nature of business

Since, the applicability of section 50C and claim of indexation on cost of improvement is dependent upon the ultimate outcome of the nature and character of the income received by the assessee, whether

In the result, appeal is allowed for statistical purposes. Order pronounced in the open Court on 19.08.2019