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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI LALIET KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER
ITA Nos. 264 to 271/Bang/2017 Assessment Years :2008-09 to 2011-12
M/s. ITC Employees Housing Co-operative Society Ltd., The Income Tax Officer No. 34, High Street, (TDS), Vs. Cooke Town, Ward – 2 (1), Bangalore – 560 005. Bangalore. PAN: AAAAI0532L / BLRIO5890D APPELLANT RESPONDENT
C.O. Nos. 66 to 69/Bang/2017 (in ITA Nos. 264,266,268 & 270/Bang/2017) Assessment Years :2008-09 to 2011-12
M/s. ITC Employees Housing Co-operative Society Ltd., The Income Tax Officer No. 34, High Street, (TDS), Cooke Town, Vs. Ward – 2 (1), Bangalore – 560 005. Bangalore. PAN: AAAAI0532L / BLRIO5890D APPELLANT RESPONDENT
Assessee by : Shri Vishnu Moorthi, CA Revenue by : Dr. P.V. Pradeep Kumar, Addl. CIT (DR)
Date of hearing : 15.05.2018 Date of Pronouncement : 25.05.2018
O R D E R PER BENCH; Out of this bunch of 8 appeals filed by the revenue and 4 COs filed by the assessee, the appeals filed by the revenue are for Assessment Years 2008-09 to 2011-12 in respect of demand raised by the AO u/s. 201(1) andu/s. 201(1A) of IT Act and the COs filed by the assessee are also for the same four
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 2 of 24
Assessment Years in respect of these same two issues of demand u/s. 201(1) and demand u/s. 201(1A) and all these are filed against a combined order of ld. CIT(A)-13, Bangalore dated 02.11.2016.
All these were heard together and are being disposed of by way of this common order for the sake of convenience. Identical grounds and identical additional grounds are raised by the revenue in these four years and hence, the same are reproduced herein below from the appeal for Assessment Year 2008- 09 in ITA No. 264/Bang/2017. “1. The order of CIT(A) is opposed to the facts and nature of the case on hand. 2. The ld. CIT (A) erred in holding that the assessee was not required to deduct tax at source u/s. 194C from the payments made to developer. 3. The Ld. CIT(A) erred in deleting the demand u/s. 201(1) and 201(1A). 4. The ld. CIT (A) ought to have considered the fact that as per the assessee's agreement with the developer the works to be carried out like for procuring of land, developing, conversion, plan for approval, drainage, culverts and laying roads etc., clearly attracted provisions of Section 194C. 5. The Id. CIT (A) ought to have considered the fact that the agreement entered into by the assessee with the developer are in the nature of composite contracts for works for which provisions of Section 194C is clearly applicable. 6. The Ld. CIT(A) erred in relying on the decision of the jurisdictional High Court in the case of M/s. Karnataka State Judicial Department Employees House Building Co-Operative Societies in ITA No. 1275 of 2036 and the ITAT's order in the case of M/s. Kautilya House Building Co-Operative Society Limited in ITA No. 1324 to 1337/Bang/2015 dated 7.4.2016 while allowing the assessee's appeal which have been accepted by the Department only for low tax effect and not in principle. 7. The appeals have been filed for all the assessment years including the assessment years where the tax effect is below the prescribed minimum since a composite order has been passed by the CIT(A) and therefore para 5 of the CBDT's Circular No. 21 of 2015 dated
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 3 of 24
10.12.2015 is applicable in this case. For these and other grounds that may be raised during the course of appeal and actual hearing it is prayed that the order passed by the AO u/s. 201(1) and 201(1A) be upheld and the order of the learned Commissioner of Income Tax (Appeals) may be set aside and cancelled.” Additional grounds:- “1. Ld . CIT (Appeals) failed to appreciate the fact that the Respondent housing society entered into a TRIPARTITE AGREEMENT / MOU with a Developer/ Contractor and a Vendor for development of a self-contained layout where in, the retails clearly show that – (i) The VENDOR, being the absolute owner of the un-converted agricultural land (property), has consented for selling of individual sites to the MEMBERS of the Respondent Housing Society/ Purchaser (ii) The DEVELOPER / Contractor agreed to develop the property belonging to the Vendor into residential sites, so that the vendor can directly sell the sites to the members of the Respondent Society (iii) The RESPONDENT Housing Society agreed to purchase the developed sites at a fixed price per sqft from the Vendor and paid certain sum in pursuance of the Agreement . (iv) The Vendor authorized the Developer to negotiate on his behalf with the purchaser and to form the layout consisting of residential sites (v) It is further agreed by the Vendor and Developer to procure balance lands ONLY in the name of vendor or his nominees by virtue of Sale deeds 2. Ld . CIT (Appeals) would have seen from the records that the Vendor, being absolute owner of the property, has undertaken to sell the developed sites to the Respondent Society/ Purchaser or its members at a fixed price and the Respondent Society has agreed to purchase such sites and paid certain sum (Clause 2 the Agreement ) in pursuance of the agreement . All these arrangements in the impugned MOU, read as a whole, confirm the privileges of ownership on Respondent Society without transfer of title, which could fall under section 2 (47) (v) as held by Hon' ble Bombay High
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 4 of 24
Court in the case of Chaturbhuj Dwarakadas Kapadia v . CIT [2003] 2601TR 491/129 Taxman 497 .
Ld, CIT (Appeals) ought to have considered the fact that the impugned MOU is a combination of both Agreement to Sell and Agreement to Develop; and that once the agreement question is excused in favor of the Respondent Society Vendor:transferee),some right in respect of the said property belonging to the Vendor to Vendor had been extinguished and some right had been created in favor of the Respondent Society, as held by Hon' ble Supreme Court in the case of Sh . Sanjeev Lal Ect vs Commissioner of income Tax, Chandighar&Anr. In CIVIL APPEAL Nos . 58995900 pf 2014 lArising out of SLP © Nos . 16958-59 of 2013 ) . Thus a right in respect of the capital asset in question had been transferred by the Vendor in favor of the Respondent Society on the dateof the Tripartite Agreement in question.Thus, in substance, the agreement in question makes both the Respondent Society and the Vendor as "owner" of the impugned property and then the said "owner" have given the said property for 'development' to the Developer . 4. Ld.CIT Appeals failed to appreciate that the question as to whetherthe subject contract was a `work contract 'was largely one of the facts depending upon terms of contract on proper construction of terms and conditions between parties including obligation cast upon them which had to be discharged under contract. Ld . CIT (Appeals) should have appreciated the fact that the developer who was party to the MOU has ONLY agreed to facilitate and develop the sites and as such the element of transfer of land in true sense from developers to respondent society or its members is not there . There is no element of "supply" by the Developer. Thus, the subject contract was a 'works contract' but not sale contract and as such the provisions of section 194C are squarely attracted in this case . 5. The case laws relied upon by the respondents viz .,CIT Vs Karnataka State Judicial Department Employees House Bldg. Cooperative Society in ITA No. 1260/2006 (High Court of Karnataka) and ITO (TDS) Vs M/s . Kautilya House Bldg Co -operative Society Ltd ., in ITA No . 1324-1337/Bang/2015 dated 07-04- 2016 are not applicable to the facts of the present case, as in both the above cases, the developer procures the land, developed it into sites and then registered them to the members of the society; whereas in the present case the developer has only facilitated and developed the property into residential sites and never transferred them to the members .
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 5 of 24
Without prejudice to the above grounds of appeal, it is submitted that a contract comprising both 'works contract' and `transfer of immovable property' , does not denude it of its character as 'works contract' as held by the five Judge Constitution Bench o9f Hon' ble Supreme Court in the recent case of Kone Elevator India Pvt . Ltd ., Vs State of Andhra Pradesh (2014-TIOL-57-SC-CT-CB), where the issue before the Hon'ble Supreme Court was Whether supply, erection, installation and commissioning of lift of customer's premises constitute "Contract for sale of goods" or "Works contract"? 7. For these and other grounds that may be urged during the course of hearing, it is prayed that the order passed by the AO u/s . 201 (1) and 201 (1A) be upheld and the order of the Ld. CIT (Appeals) may be cancelled. 3. Regarding the grounds raised by the assessee in the CO, we are not reproducing the grounds raised by the CO because in the course of hearing, ld. AR of assessee submitted that the assessee is not pressing these COs filed by the assessee and hence, we dismiss all the four COs of assessee as not pressed.
Regarding the appeals filed by the revenue in respect of these four years, for deletion of the demands raised by the AO u/s. 201(1) and u/s. 201(1A), the ld. DR of revenue submitted written submissions which are as under. “1. The Respondent is a Co-operative Society engaged in the business of allotting housing sites to its members. It entered into a TRIPARTITE AGREEMENT / MOU dated 13.02.2008 with a Developer/ Contractor, M/s. Rasari Developers and a vendor, Mr. Yarlagadda Venkateswarulu, for development of a layout where in, - (i) The VENDOR, being the absolute owner of the un-converted agricultural land (the property), has consented for selling of individual sites to the MEMBERS of the Respondent Housing Society/ Purchaser (ii) The DEVELOPER / Contractor agreed to develop the property belonging to the Vendor into residential sites, so that the vendor can directly sell/register the sites to the members of the Respondent Society (iii) The RESPONDENT Housing Society agreed to purchase the developed sites at a fixed price per sft from the Vendor and paid certain sum in pursuance of the Agreement (iv) The Vendor authorized the Developer to negotiate on his
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 6 of 24
behalf with the Respondent / Purchaser and to form the layout consisting of residential sites (v) It is further agreed by the Vendor and Developer to procure balance lands ONLY in the name of Vendor or his nominees by virtue of Sale deeds (vi) The Developer further agreed to execute any 'additional work' that may be entrusted by the Respondent society, other than those specified under the said agreement 1.1 The relevant 'recital' of the MOU is reproduced hereunder : "WHEREAS the PURCHASER/ SOCIETY who are interested in forming a residential layout for distribution of sites to its members are on the lookout for contiguous stretch of lands measuring about 40 Acres (approximately 10,00,000 Sq ft (Ten Lakhs Sq.Ft of sital area) to form a self contained layout. In this regard the said society who is the PURCHASER herein has approached the DEVELOPR herein for procuring such lands and forming the layout. The DEVELOPER accordingly has identified the Schedule Properties for formation of the layout for the benefit of the PURCHASER or its members herein and has further agreed to procure the balance extent of lands from the adjacent owners to form a contiguous stretch of land for formation of the layout. In respect of the lands presently available to the extent mentioned in the schedule here below the VENDOR has authorized the DEVELOPER to negotiate on behalf with the PURCHASER and to form the layout consisting of residential sites and the VENDOR has therefore consented for selling individual sites to the members of the PURCHASER society who would be the assignees/ nominees of the PURCHASER / SOCIETY being entitled to purchase of the site depending on the allotment made by the PURCHASER/ SOCIETY " "WHEREAS, the VENDOR and DEVELOPER herein have also agreed and undertaken to procure the balance extent of lands either in the name of the VENDOR or his nominee/s by virtue of registered Sale Deeds and get the same converted for residential purpose at the cost and expenses of the DEVELOPER. Subsequently, the parties herein shall enter into a Supplementary Agreement in addition to this agreement if the same is found necessary at a later point of time." (emphasis supplied) 1.2 The relevant clauses of the said Tripartite Agreement are reproduced hereunder : "1. The Vendor and the Developer herein have agreed to form the residential layout in the Schedule Properties for a sale
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 7 of 24
consideration of Rs. 425/- (Rupees Four Hundred and Twenty Five only) per Sq. ft. being the cost of the site including the expenses for development of the layout 2. That the Purchaser has paid a sum of Rs. 25,00,00,000 (Rupees Twenty Five Crores only) in the following manner — i) A sum of Rs. 15,00,00,000/- (Rupees Fifteen Crores only)by way of an account payee Cheque bearing No. 332667 dated 13.02.2008, drawn on State Bank of Mysore, Cooke Town Branch Bangalore ii) A sum of Rs. 5,00,00,000/- (Rupees Five Crores only)by way of an account payee Cheque bearing No. 332668 dated 13.03.2008, drawn on State Bank of Mysore, Cooke Town Branch Bangalore iii) A sum of Rs. 5,00,00,000/- (Rupees Five Crores only)by way of an account payee Cheque bearing No. 332669 dated 13.05.2008, drawn on State Bank of Mysore, Cooke Town Branch Bangalore The said payment is paid in favour of the DEVELOPER herein on the instructions of the VENDOR as advance / security deposit towards the sale consideration. Therefore the VENDOR is not receiving any sale consideration under the sale deeds. 6. That the Vendor as stated above is the absolute owner of the Schedule properties and in the event, of their being any defect in the title of the Vendor over any portion of the property the same would be set-right by the Vendor / Developer at their own cost and Vendor / Developer would extend all co-operation to the Purchaser or their nominees in completing the transaction. 7. If a good and marketable title is made out and the property is found to be free from encumbrances, attachments, charges and other claims and demands and not effected by any notice or scheme of acquisition or requisition, the Vendor shall execute a proper conveyance in favour of the Purchaser or their nominees as converted land, house site basissubject to the payment terms stated in Para 4 above. The Vendor and Developer shall bear and pay all outgoing liabilities on the Schedule properties up to registration of the schedule property. 10. The Developer herein as a part of the development package, shall be responsible to ensure clear, valid, subsisting, marketable, enforceable title in regard to the schedule property along with Vendor. The Vendor shall ensure and satisfy the Purchaser that the schedule property is free from all encumbrances of whatsoever nature, that there is absolute ownership with power of alienation and disposal over the schedule properties.
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 8 of 24
The Developer shall be responsible to approach various statutory authorities, to secure NOC for purpose of securing the plan sanction from the competent authority such as water supply and sewage boards, electrical board, pollution control board and such other statutory authorities, governmental, semi-governmental etc. to secure the plan sanction. 17. The expenses of stamp duty for registration of individual sites shall be borne exclusively by the Purchaser society's allottee members or their nominee/s. The Vendor has no objection for the Purchaser / society registering the individual sites, in favour of its members. 18. That in the event of the Vendor herein requesting the Purchaser to make any payments, to governmental agencies or to any other persons such as, for conversion charges, KEB Charges, Betterment Charges to CMC and to the Land owners etc., the Purchaser shall make such payment directly to such authorities and any such payment made shall be adjusted towards the sale price agreed above. 19. The Developer agrees to execute any additional work that may be entrusted by the society other than those specified under this agreement at rates and upon terms and conditions that may be mutually agreed upon from time to time.” (emphasis supplied) 1.3 The relation between the said four categories of persons, viz., Vendor, Developer, Respondent housing society, and its Members; is pictorially depicted in Annexure — 1. As can be seen from the entire scheme of things; the Developer is engaged in the contract of developing the um-converted agricultural land belonging to the vendor into fully converted housing sites by performing a series of acts like land conversion, plan sanctions, obtaining approvals from various authorities and finally development of the land into a layout, apart from acting as a facilitator between the Vendor and the Respondent. The Developer passes on the payments received from the Respondent to the Vendor towards the land cost, after retaining its contract fee. 2. It is respectfully submitted that from the MOU in question, it is clear that, - • At no point in time the developer / contractor is the owner of the un-converted land (property) or the fully developed housing sites • The Vendor is the absolute owner of the property all the time, and • The vendor shall register / transfer fully developed housing sites directly to the Respondent society or its members
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 9 of 24
2.1 The Assessing Authority has recorded the above finding in Para 2, Page no. 4 of hisorder u/s. 201(1) of the Income-tax Act, 1961. Relevant portion is extracted as under : "As mentioned earlier the developer M/s. RASASRI Developers doesn't own any land as on date of the agreement/MOU with the society. Even afterwards the developer doesn't acquire any land in its name and transfer the same in the name of the society. After negotiation with the landlords payments are made by the developer to the landlords for procurement of property and the same is developed into a layout by doing civil works such as lying of drains, road, erection of electric poles etc. and the same is registered in the name of members of the society. As such the role of the developer is of a contractor to facilitate procurement of land and develop the same into residential layout by carrying out civil works on the land after converting the same from agriculture to non agriculture in the name of the landlords then register in the name of members of the society. Hence, this agreement / MOU between the society and the developer cannot be termed as contract for sale as there is no transfer of chattel qua chattel." (emphasis supplied)
The impugned MOUconfirm the privileges of ownership on Respondent society without transfer of title: In the instant case, the vendor has undertaken to sell the developed sites to the Society or its members at a fixed price and the Respondent Housing Society / Purchaser has agreed to purchase the sites and paid certain sum (Clause 3 of the Agreement) in pursuance of the agreement. All these ingredients / arrangements enshrined in the impugned agreement, read as a whole, confirm the privileges of ownership without transfer of title on the respondent, that could fall under section 2(47)(v). Under section 2(47)(v), any transaction involving allowing of possession to be taken over or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act would come within the ambit of section 2(47)(v). That, in order to attract section 53A, the following conditions need to be fulfilled. There should be a contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to transfer of immovable property; the transferee should have taken possession of the property; lastly, the transferee should be ready and willing to perform his part of the contract. That even arrangements confirming privileges of ownership without transfer of title could fall under section 2(47)(v). Section 2(47)(v) was introduced in the Act from the assessment year 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance.... and to
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plug that loophole, section 2(47)(v) came to be introduced in the Act (Hon'ble Bombay High Court in the case of Chaturbhuj DwarkadasKapadia v. CIT [2003] 260 ITR 491 / 129 Taxman 497).
4.Land is deemed to be transferred to the Respondent society on the date of the impugned Agreement : From the recitals and various clauses of the MOU reproduced in the above paras, it is clear that the impugned MOU is a combination of both 'Agreement to Sell' and 'Agreement to Develop'. Once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the Landlord (vendor) had been extinguished and some right had been created in favour of the Respondent society (vendee/transferee), when the agreement in question had been executed. Similar view is expressed by Supreme Court in the case of Sh. Sanjeev Lal Etc. vs. Commissioner of Income Tax, Chandigarh &Anr. in CIVIL APPEAL Nos.5899-5900 OF 2014 (Arising out of SLP (c) Nos.16958-59 of 2013). Relevant extracts of the judgement of the Hon'ble Supreme Court are as under :
"In normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in personam is created in favour of the transferee/vendee. When such a rightis created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the agreement to sell some right is given by the vendor to the vendee. The question is whether the entire property can be said to have been sold atthe time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of Section 2(47) of the Act, which defines the word "transfer" in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred."
"In the light of the aforestated facts and in view of the definition of the term "transfer", one can come to a conclusion that some right in respect of the capital asset in question had been transferred in favour of the vendee and therefore, some right which the appellants had, in respect of the capital asset in question, had been extinguished because after execution of the agreement to sell it was not open to the appellants to sell the property to someone else
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in accordance with law. A right in personam had been created in favour of the vendee, in whose favour the agreement to sell had been executed and who had also paid Rs.15 lakhs by way of earnest money. No doubt, such contractual right can be surrendered or neutralized by the parties through subsequent contract or conduct leading to no transfer of the property to the proposed vendee but that is not the case at hand." (emphasis supplied) Thus, a right in respect of the capital asset, viz. the un- converted agricultural land in question had been transferred by the Landlord in favour of the Respondent Society on the date of the Tripartite Agreement in question. Thus, in substance, the agreement in question makes both the respondent society and the Landlord as the "owners" with respect to the property in question and then the said "owners" have given the said property for development to the Developer. 5. Work on Vendor's own account : As rightly pointed out by the Respondent in para 5 (a) of its Cross objections, the Vendor of the property would be absolute owner of such property and not the Respondent. Hence, the work involved is on Vendor's own account. However, on the date of agreement, out of a bundle of rights, few rights have been transferred to the Respondent Society in the form of limited ownership from the Vendor. The role of the Developer is only facilitation and development of the layout. Thus, it cannot be said that the Developer has "undertaken to supply any article or thing fabricated according to the specifications given" by the Society. In the instant case, there is no element of "supply" by the Developer. Thus, CBDT Circular No. 681 dated 8-3-1994 referred by the Respondent in para 5(b) of the Cross objections has no application in the instant case.
Engagement of Developer as per the Agreement is a 'Works Contract' : 6.1 The main or dominant purpose of 'engagement' of developer in this case is to develop the housing sites. All other activities are either supplementary or subordinate to such developmental activity. So, it is the dominant object which would determine the nature of the contract. If the dominant object is to transfer the chattel as chattel then it would be a contract of sale even though goods might have been manufactured as per the requirement and specification of the client. On the other hand, if the dominant object is to carry out a work, it would be a works contract even though some material might have been used in the execution of the contract. In such cases, section 194C would be attracted as held by Hon'ble Supreme Court in the case of State of Himachal Pradesh vs. Associated Hotels, AIR 1972 SC 1131; [1972] 29 STC 474 (SC). When this test
ITA Nos. 264 to 271/Bang/2017 & C.O. Nos. 66 to 69/Bang/2017 Page 12 of 24
is applied in the present case, it is clear that the dominant object is to carry out the development work on the land belonging to the Vendor and as such it is a works contract and provisions of section 194C are clearly attracted. 6.2The predominant activity of developer in this case is in the nature of 'works contract' as held by Hon'ble Supreme Court in the recent judgement in the case of Larsen & Toubro &Anr. vs. State of Karnataka &Anr. [Civil Appeal NO. 8672 of 2013 (Arising out of SLP(C) No.17741 of 2007)], in which the Apex Court has upheld the levy of VAT by the states on the sale of flats which are under construction, as it amounts to works contract. The matter in the L&T case (supra) was referred to a Larger Bench of the Supreme Court for re-consideration of the decision of the Division Bench in the case of K. Raheja Development Corporation vs. State of Karnataka [(2005) 5 SCC 162]. The view taken in the K. Raheja case was referred for consideration of the following issues: Whether the tripartite agreement could be considered as works contract? If the ratio of the decision in the K. Raheja case was accepted, there would be no difference between a works contract and a sale of chattel as a chattel. Can the developer be said to be a contractor for the prospective flat purchaser? 6.3Without prejudice to the above grounds of appeal, it is submitted that a contractcomprising both 'works contract' and 'transfer of immovable property', does not denude it of its character as "works contract" as held by the five Judge Constitution Bench of the Hon'ble Supreme Court in the recent case of Kone Elevator India Private Limited Vs. State of Andhra Pradesh [2014-TIOL-57-SC- CT-CB], where the issue before the Hon'ble Supreme Court was Whether supply, erection, installation and commissioning of lift at customer's premises constitute "Contract for sale of goods" or "Works contract"? 7.Present contract is squarely covered u/s 194C : 7.1Whether the subject contract was a works contract or sale contract waslargely one offact depending upon terms of contract on proper construction of terms and conditions between parties including obligation cast upon them which had to be discharged under contract (Mani Muthusarnyv.Personal Assistant to the Collector*T.S. SIVAGNANAM, J. [2010] 328 ITR 588 (Madras).
7.2From the arrangements made in the tripartite agreement between the respondentsociety, developer and the vendor it is clear that it is
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a combination of 'contract for sale' and `contract for work'. There is no dispute that works contract (including job work) are covered within the scope of section 194C of the Act. But there has always been dispute between the tax payers and the department whether a particular contract is a works contract or contract of sale. The hon'ble Supreme Court has decided such issue in many cases. It would be appropriate to refer the decision in the case of State of Himachal Pradesh vs. Associated Hotels, AIR 1972 SC 1131; [1972] 29 STC 474 (SC) wherein the court observed in para 9 as under:-
"The difficulty which the courts have often to meet with in construing a contract of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very often a fine one. This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of propertv in, and the delivery of the possession of a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel."
"From the decisions earlier cited it clearly emerges that such determination depends in each case upon its facts and circumstances. Mere passim; of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it....." (emphasis supplied) A contract for sale has hence to be distinguished from a contract of work. Whether a particular agreement falls within one or the other category depends upon the object and intent of the parties, as evidenced by the terms of the contract, the circumstances in which it was entered into and the custom of the trade. The substance of the matter and not the form is whatis of importance. In the present case, the respondent housing society
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entered into a tripartite agreement with both the developer and landlord; and the transaction can be regarded as transfer of property u s 2(47)(v) between the respondent society and landlord. Here, both the landlord and respondent society jointly constitute the "owner" of the property. Since certain rights of one have passed to the other as held by Hon'ble Supreme Court in the case of Sh. Sanjeev Lal Etc. vs. Commissioner of Income Tax, Chandigarh &Anr. (supra), it can be said that both these parties have jointly given the land for development to the developer. In such a scenario, the dominant role of the developer is the development of housing sites, which constitutes a job work or works contract. Thus, the payments from Respondent to the developer will be caught in the mischief of sub-section (1) of section 194C.
Case Laws relied upon by the Respondent (Para 8 of Cross objections) : The facts of the following cases relied upon by the respondent are significantly different from those of the instant case and hence cannot be relied upon.
8.1 CIT vs. Karnataka State Judicial Department Employees House Bldg. Co-operative Society in ITA No.1260/2006 (High Court of Karnataka): In this case, the respondent co-operative society entered into an agreement with one Mr. Lakshman (developer) to purchase the sites from out of the layout formed by Mr. Lakshman. In this case, since the respondent society was only a purchaser, Hon'ble High Court of Karnataka held that there was no need for deduction of tax at source on the advances paid to the developer.
8.2ITO (TDS) vs. M/s.Kautilya House Bldg. Co- operativeSocietyLtd. ITA No.1324-1337/Bang/2015 dated 07-04- 2016: In this case, the respondent co-operative society entered into an agreement with only the developer for purchase of developed house sites. The developer procured the land, developed it into sites and then registered them to the members of the society. After perusing the agreement dated 11/4/2005 entered into by the respondent-co-operative society with one Shri Lakshman (Developer) as well as the sale deed entered into by Shri Lakshman with members of the society on 27/8/2014, Hon'ble ITAT held that it is a case of sale of developed sites of the developer to individual members of the co-operative society. In both the above cases, the developer transferred the housing sites directly to the members of the housing society; whereas in the present case, the developer has developed the layout and the landlord registered the sites to the members of the housing society. Thus, in the above cases, transfer took place between the housing society and the developer; whereas in the present case the transfer
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took place between the housing society and the landlord (who is different from the developer). 9. The appellant, in the light of the facts of the case, prays this Hon'ble Tribunal to hold,- a) That all these arrangements in the impugned MOU, read as a whole, confirm the privileges of ownership on Respondent society without transfer of title, which could fall under section 2(47)(v); b) That the subject contract was a 'works contract' but not 'sale contract' as there is no element of "transfer" between the developer and the respondent society; c) That the works to be carried out by the developer as per the MOU like procuring the land, developing, conversion, plan for approval, drainage, culverts, laying roads etc. are in the nature of 'work', which attract the provisions of section 194C; d) That the impugned MOU between the respondent society, developer and the vendor, to the extent applicable to the developer, is in the nature of composite contract for works, for which the provisions of section 194C are applicable; e) Without prejudice to the above, to hold that a contract comprising both 'works contract' and 'transfer of immovable property', does not denude it of its character as "works contract" as held by by the five Judge Constitution Bench of the Hon'ble Supreme Court in the recent case of Kone Elevator India Private Limited vs. State of Andhra Pradesh [2014-TIOL-57-SC-CT-CB] ; f) Grant such other relief as this Hon'ble Tribunal deems fit and proper under the facts and circumstances of the case. 10.In the light of above arguments, the appellant prays this Hon'ble Tribunal to allow this appeal in favour of Revenue for the advancement of substantial cause of justice.” 5. He also placed reliance on a judgement of Hon’ble Apex Court rendered in the case of Shri Sanjeev Lal Etc. Etc. Vs. CIT &Anr. in Civil Appeal Nos. 5899-5900 of 2014 dated 01.07.2014, copy submitted and kept on record. He also placed reliance on another judgement of Hon’ble Apex Court rendered in the case of M/s. Larsen & Toubro Ltd. &Anr. Vs. State of Karnataka &Anr. in Civil Appeal Nos. 8672 to 8699 of 2013 dated 26.09.2013, copy submitted and kept on
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record. He also submitted that the copy of MoU entered by the assessee with the developer and vendors by way of tripartite agreement is available on pages 35 to 55 of paper book submitted by assessee and he drawn our attention to various paras of this tripartite agreement and submitted that this tripartite agreement is in the nature of works contract and therefore, provisions of section 194C of IT Act are applicable in the present case and hence, the order of CIT(A) should be reversed and that of AO should be restored. As against this, the ld. AR of assessee supported the order of CIT(A) and placed reliance on various judgements of Hon'ble Karnataka High Court of which copies are available in the paper book filed by the assessee and these judgements are as under. a) Karnataka State Judicial Department Employees House Building Cooperative Society vs. ITO in ITA Nos. 629 to 632/Bang/2004 dated 17.03.2006 being Tribunal order available on pages 56 to 68 of paper book. b) CIT Vs. Karnataka State Judicial Department Employees House Building Co-operative Society Ltd. in ITA No. 1275/2006 dated 10.03.2010 being judgement of Hon'ble Karnataka High Court, copy available on pages 69 to 71 of paper book c) ITO Vs. Kautilya House Bldg. Co-operative Society Ltd. in ITA Nos. 1324 to 1337/Bang/2015 dated 07.04.2016 being Tribunal order of Bangalore bench, copy available on pages 72 to 78 of paper book.
We have considered the rival submissions. We find that the issue was decided by ld. CIT(A) as per paras 7 to 10 of his order and these paras are reproduced hereinbelow for the sake of ready reference. “7. I have gone through the orders of the Assessing Officer, the written submissions filed by the appellant, relevant case laws and other material on record. The main issue in the present appeals is whether there was an obligation on the part of the appellant society to deduct tax at source in relation to the amounts paid by the appellant society to the developers. To determine the true character of the payment, it is pertinent to consider the relevant clauses of the Agreements. The same are reproduced below - 1. The Vendor and the Developer herein have agreed to form the
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residential layout in the Schedule Properties for a sale consideration of Rs. 425/- per sq. ft. being the cost of the site including the expenses for development of the layout.
The Vendor and Developer have agreed to form the layout which shall consist of roads, common amenities and parks in the following manner i.e., the cross roads shall be minimum 30' feet width and the main road shall be minimum of 40' feet width. The layout shall therefore comprise of roads, parks, civic amenities, etc., on an area measuring minimum of 45% of the total area and the balance 55% area shall consist only of residential sites of different dimensions to be indicated separately. The Plan will be approved by appropriate authority/ BMRDA/ BL4APA or any other statutory authorities constituted by the Govt. The formation of Layout shall be in accordance with the Plan approved by BIAAPA/ BMRDA.
That the Purchaser has paid a sum of Rs……..in the following manner –
The Vendor / Developer shall execute an absolute sale deed and transfer the converted lands to the purchaser society on the followingterms after change of land use i.e. from Agricultural to Residentialpurpose.
(a) The Vendor, Developer and the purchaser have agreed that the total cost of the entire project is @ Rs. 425/- per sq. ft. being the cost of the site including the expenses for development of the layout, which shall be paid in the following manner………
That the Purchaser/ Society shall bear the stamp duty chargesand other expenses towards transfer of converted lands fromthe Vendor/ Developer in the name of the Purchaser/Societyor their nominees.
That the Vendor as stated above is the absolute owner of the Schedule properties and in the event, of their being any defect in the title of the Vendor over any portion of the property the same would be set- right by the Vendor/ Developer at their own cost and the Vendor/ Developer would extend all co-operation to the Purchaser or their nominees in completing the transaction.
If a good and marketable title is made out and the property is found to be free from encumbrances, attachments, charges and other claims and demands and not effected by any notice or scheme of acquisition or requisition, the Vendor shall execute a proper conveyance in favour of the Purchaser or their nominees as converted land, house site basis subject to the payment terms
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stated in Para 4 Above. The Vendor and Developer shall bear and pay all outgoing liabilities on the Schedule properties up to registration of the schedule property.
If the Vendor and Developer fails or neglect to complete the sale after the title being made out as aforesaid or otherwise to carry out any one or more of the obligations on their part, subject to the Purchaser carrying out their obligations, the Purchaser is at liberty to sue, to enforce specific performance of agreement by institution of legal proceedings or at their option, may sue the Vendor for recovery of earnest money with interest, cost and other relief
That if good and marketable title is not made out within stipulated period or the property is subject to any scheme of the acquisition or requisition for any reason cannot be alienated by virtue of any Central or State act, or not able to get permission from agricultural zone to residential purpose from the competent authority, the Purchaser is at liberty to rescind this agreement and the Vendor/ Developer on demand shall refund the advance/ Security deposit received by them without any interest.
The Developer herein as a part of the development package, shall be responsible to ensure clear, valid, subsisting, marketable, enforceable title in regard to the schedule property along with Vendor. The Vendor shall ensure and satisfy the Purchaser that the schedule property is free from all encumbrances of whatsoever nature, that there is absolute ownership with power of alienation and disposal over the schedule properties.
The Developer shall be responsible to carry out the initial survey, to fix the boundaries in the schedule lands and to get appropriate topographical sketch of the schedule lands. The Vendor have no-objection for the joint survey of the Schedule Properties.
The Vendor and more particularly the Developer shall be primarily responsible to ensure that the Schedule Lands had got converted as per law for residential purpose from the competent authority and make the layout capable of being sold as house, sites with individual Katha from the Municipality/ jurisdictional competent authority.
The Developer shall be responsible to approach the concerned competent authorities having jurisdiction over the schedule lands and seek sanction and approval of the layout plan or the developmental plan at their cost.
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The Developer shall be responsible to approach various statutory authorities, to secure NOC for purpose of securing the plan sanction from the competent authority such as water supply and sewage boards, electrical board, pollution control board and such other statutory authorities, governmental, semi- governmental etc., to secure the plan sanction. 15. The Vendor and Developer herein shall develop the residential layout, for the benefit of the Purchaser/ Society or its member/ s which among other things shall comprise of the following infrastructure, benefits, amenities. The details are as follows: a. Front Arch with Security room. b. Laying and asphalting of roads with 25mm thickness, according to the planning authorities norms. c. Tree Plantation. d. Box type drainage with 2 feet width. e. Culvers covered with RCC slabs, f. 3 feet width Footpath with inter lock tiles. g. Underground Sanitary network with provision of Sewage treatment plant to ensure proper out flow of sewerage. h. Water supply net work with PVC Pipe, which includes provision for sufficient numbers of bore-wells. Construction of over head tank (1.0 Lakhs litres capacity), Underground Sump with 25,000 Litres Capacity for pumping and supplying of water through underground water lines. i. Over Head Electricity with Street Lighting which includes laying of electrical poles, drawing of electrical lines, providing of street lights, erection of sufficient numbers of transformers, charging of electricity by KEB authorities for the entire layout. J. To provide sufficient number of boards indicating the Main Road, Cross Road, etc., besides on board showing entire layout plan. k. Marking of individual site, numbering the individual sites as per the approved plan. 1. The entire layout will be constructed with 6' feet compound wall with solid bricks. m. Parks with landscaping, pathways and garden. n. Rain water harvesting for the entire layout to conserve water sources. 16. The Purchaser society and Society's consulting engineer is entitles to periodically visit the layout to satisfy itself, regarding the quality, progress and other related matters. The
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Officers, employees of the Developershall extend full co- operation to the office bearers or officials of the Purchaser society during the course of their inspection of the Schedule Property.
17.The expenses of stamp duty for registration of individual sites shall be borne exclusively by the Purchaser society's allottee members or their nominee/ s. The Vendor has no objection for the Purchaser/ society registering the individual sites, in favour of its members.
On perusal of the relevant clauses of the said Agreement, it is clear that the payment was calculated on sq.ft. area of the property and was paid for the purchase of completed property and not development work carried out. The agreement is only for purchase of developed sites and does not involve any works contract.
The issue is clearly covered by the decision of Hon'ble Karnataka High Court in the case of Karnataka State Judicial Department Employees House Building Co-operative Society Ltd.(supra). The relevant extract of the said judgement is reproduced as under - “….. the short question that fell for the consideration for the Assessing Officer, the Commissioner of Income-tax and the Tribunal was whether if the assessee has agreed to purchase the sites from a vendor if any sale consideration is paid on instalment basis, the assessee is required to deduct the tax at source or not. When the assessee is only a purchaser, if any advance sale consideration is paid, the assessee has no business to deduct the tax at source as it is for the seller of the sites to pay the capital gains depending upon the tax payable by him."
In the said case, earlier Hon'ble ITAT, Bangalore had held that - "....the agreement between Sh. Lakshman, and Karnataka State Judicial Department Employees House Building Co- operative Society begins to operate only after the layout is formed and so can never be construed as an agreement in the nature of works contract. A contractor is one who undertakes to do a particular work for a price. No such contract is envisaged in this agreement. This agreement envisages purchase of specified intermediate sites at a price after Sri Lakshman completes the job of formation of a layout either in full or in part. We accordingly hold that the assessee was not required to deduct tax in this regard." — 10. Similar decision has been rendered by Hon'ble ITAT, Bangalore in the case of M/s Kautilya House Building Co-op. Society Ltd. (ITA No. 1324 to 1337/Bang/2015; order dated 07.04.2016). The facts in the case of the appellant are similar to the facts in the cases referred to above. Respectfully following the decisions of the Hon'ble High Court of Karnataka and ITAT, Bangalore, it is held that the appellant
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society was not required to deduct tax at source from the payments made to the developers. Accordingly, the demand raised u/s 201(1) and 201(1A) is deleted.”
From the above paras reproduced from the order of CIT(A), it is seen that ld. CIT(A) has followed the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Karnataka State Judicial Department Employees House Building Co-operative Society Ltd. (supra) and also the Tribunal order rendered in that case and also the Tribunal order rendered in the case of ITO Vs. Kautilya House Bldg. Co-operative Society Ltd. (supra) and a categorical finding has been given by CIT(A) in para 8 of his order that on perusal of the relevant clauses of the agreement, it is clear that the payment was calculated on sq.ft. area of the property and was paid for the purchase of completed property and no development work was carried out. When we examine the MoU available on pages 35 to 55 of paper book, we find that the recital on page no. 43 of this MoU is very much relevant and hence, the same is reproduced hereinbelow. “WHEREAS under such circumstance the VENDOR herein has agreed to develop the schedule properties through the DEVELOPER herein to form a residential layout and to sell the sites formed and carved out it Schedule Properties and convey the same to thePURCHASER or their members on the consideration of Rs.425/- (Rupees Four Hundred and Twenty Five Only) per Sq.ft., being the cost of the Site including the expenses for development of the layout.”
From the above recital, it comes out that the agreement for development of the property is between the vendor and developer and after such development; the property has to be transferred to the purchaser or other members for consideration of Rs. 425/- per Sq.ft. being the cost of the site including the expenses for development of the layout. There is no such bifurcation as to how much is the cost of undeveloped land and how much is the cost for development. Thereafter as per para 7 of this MOU, it has been specified that if a good and marketable title is made out and the property is found to be free from encumbrances, attachments, charges and other claims and demands and not effected by any notice or scheme of acquisition or requisition, the vendor
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shall execute a proper conveyance in favour of the purchaser or their nominees as converted land, house site basis subject to the payment terms stated in para 4 and the vendor and developer shall bear and pay all outgoing liabilities on the schedule properties up to registration of the schedule property and from para 8 of MoU, it is specified that if vendor and developer fail or neglect to complete the sale after the title being made out as aforesaid or otherwise to carry out any one or more of the obligations on their part, subject to the purchaser carrying out their obligations, the purchaser is at liberty to sue, to enforce specific performance of agreement by institution of legal proceedings or at their option, may sue the vendor for recovery of earnest money with interest, cost and other relief. It was argued by ld. AR of assessee that from these clauses of MOU, it is seen that this MOU is conditional and therefore,it cannot be said to be a works contract between the assessee being the purchaser and the vendor being the developer because in para 6 of the MOU, it is specified that in the event of their being any defect in the title of the vendor over any portion of the property, the same would be setright by the vendor / developer at their own cost and the vendor / developer would extend all co-operation to the purchaser or their nominees in completing the transaction. Under these facts, we find no infirmity in the finding of CIT(A) as per which it is stated by CIT(A) that the consideration of Rs. 425/- per Sq.ft. was being paid for the purchases of completed property and not for development work being carried out.
In the light of these uncontroverted facts, now we examine the applicability of judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Karnataka State Judicial Department Employees House Building Co-operative Society Ltd. (supra). In this case, it was held by Hon'ble Karnataka High Court that the assessee has agreed to purchase sites from vendor and if any sale consideration is paid on instalment basis, the assessee is not required to deduct the tax at source because in such situation, the assessee is only a purchaser and hence, there is no liability to deduct TDS. In that case, the agreement was not a tripartite agreement but the agreement was between the assessee buyer and Mr. Lakshman being vendor/developer and it is noted by
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Tribunal in its order in that case that Mr. Lakshman undertook to acquire and deliver approximately 60% of the scheduled property as residential intermediate sites to the assessee after forming them into sites of dimensions specified by the assessee to enable the assessee to allot them to its members. It was also noted that the cost of development including provision for providing amenities like road, drainage system, water, electricity were to be met by the said Shri Laxman. We find that there is no difference in facts in the present case and in that case except this that in that case, the vendors being owners of land were not known and they were not a party of agreement and that agreement was between the assessee being purchaser and Mr. Lakshman, who undertook to acquire the land and develop it in residential sites as required by the assessee. In the present case, the vendors being the land owners are already there and therefore, there is tripartite agreement in the present case between the assessee, the vendors being the land owners and developer M/s. Razari Developers Pvt. Ltd. In the present case, development work which was being done by Mr. Lakshman in that case is to be done by the vendor and developer jointly. Merely because there is a tripartite agreement in the present case, it cannot be said that the facts are different in the present case and hence, in our considered opinion, there is no infirmity in the order of CIT (A) as per which he has decided the issue in favour of the assessee by following the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Karnataka State Judicial Department Employees House Building Co-operative Society Ltd. (supra). We, therefore, decline to interfere in the order of CIT (A).
Regarding various judgments of Hon’ble apex court cited by the learned DR of the revenue, we hold that in our considered opinion, these are not applicable in the present case because the price determined as per MOU is the price of developed land and not of undeveloped land separately and for development work separately.
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In the result, all the appeals filed by the revenue are dismissed and all the COs filed by the assessee are also dismissed. Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (LALIET KUMAR) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 25th May, 2018. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order
Senior Private Secretary, Income Tax Appellate Tribunal, Bangalore.