ITO, WARD-2(1), NAGPUR vs. M/S ARSHAD DEVELOPERS PVT. LTD.,, NAGPUR

PER AMARJIT SINGH, J.M.

The Revenue has filed the present appeal against the impugned

order dated 13th June 2013, passed by the learned Commissioner

(Appeals)–I, Nagpur, relevant to the assessment year 2004–05.

“1. On the facts and circumstance of the case and in law, the CIT(A) erred in treating the surplus received on sale of land by the assessee as 'business income' without appreciating the fact that the land was shown as 'capital asset' in the balance sheet and not as stock in trade and therefore the surplus is to be treated as STCG;

2 Arshad Developers Pvt. Ltd. land in two year i.e. A.Y. 2004-05 and 0205-06 on the basis of actual receipts when the assessee handed over the possession of land in in F.Y.2003-04 after receiving part consideration which is 'transfer' of capital asset as per section 2(47)(v) and therefore the gains require to be assessed in A.Y. 2004-05;

the assessee company filed its return of income under section 139 of the Income Tax Act, 1961 (for short “the Act”) on 19th August 2004,

declaring total income to the tune of ` 1,07,670. The said return of

income was processed under section 143(1) of the Act on 19th

November 2004. The office of the DCIT, Circle–8, Nagpur, forwarded

the copy of agreement registered in the office of Sub–registrar–5,

Nagpur, which was executed by the assessee with M/s.Armour’s Developers Pvt. Ltd., Nagpur, on 11th August 2003, for a total sale

consideration of ` 1 crore. The market value of the property valued by

the Government of Maharashtra, Nagpur, for the purpose of the stamp

duty valuation on that date was ` 1.20 crore. The assessee did not

show the said transaction in his return of income. Thereafter, the case

was re–opened in view of the provisions of section 148 of the Act, and

the notice was issued and served upon the assessee. The Assessing

Officer afforded opportunities of being heard to the assessee. The

3 Arshad Developers Pvt. Ltd. market value of the immovable property determined by the stanp duty

authority was adopted to the tune of ` 1.20 crore and was treated as

short term capital gain and was assessed as short term capital gain.

After deducting the cost of acquisition of property to the tune of `

21,35,677, on the cost of improvement of property to the tune of `

47,83,940 totaling to the tune of ` 50,80,383. The assessee was not

satisfied, therefore, filed appeal before the learned Commissioner

(Appeals) who allowed the claim of the assessee. Being aggrieved, the

Revenue has filed the present appeal before us.

ISSUE NO.1 TO 3

up for disposing off together. The Revenue has challenged the

treatment of income as business income inspite of capital asset and

against the direction of the learned Commissioner (Appeals) in which

the learned Commissioner (Appeals) has directed to tax the amount of ` 75 lakh in two years. The assessee company was incorporated on 2nd

January 2002, with the object of business of land development. The

assessee required the land for the development of residential building

and incurred the expenditure. After the part development, the

assessee entered into an agreement with M/s. Armour Developers Pvt. Ltd. on 11th August 2003, at ` 1 crore. Since the transaction was not

shown in the return of income and thereafter on receipt of the

4 Arshad Developers Pvt. Ltd. information the short term capital gain was assessed to the tune of `

50,80,383, under section 50C of the Act. The assessee entered into

the agreement with M/s. Armour Developers Pvt. Ltd. and received

only ` 20 lakh in the year under consideration. Factually, no income

was accrued in the said year. How the income is required to be taken

into consideration for the purpose of tax is depending upon facts and

circumstances of each case. The agreement with M/s. Armour

Developers Pvt. Ltd., was not performed since no payment was fully

paid. Under the said circumstances, how the income is liable to be

taken into consideration on the basis of the facts and circumstances of

the case. The necessary conditions on the provisions of section 53A,

was not complied with. Here, it is pertinent to mention that the

assessment of the assessee for the assessment year 2005–06 was

completed by treating the income as income from business. The

present case is for the assessment year 2004–05. To make the things

very clear, it is necessary to advert the findings of the learned

Commissioner (Appeals). Accordingly, Para–8 of the learned

Commissioner (Appeals)’s order is reproduced below:–

5 Arshad Developers Pvt. Ltd. cost of land purchased and development expenditure incurred 011 such land are not disputed and have been accepted by the AO.

8.1 In the balance sheet, the property acquired was reflected under 'Fixed Assets' and development expenditure on the aforesaid land has been shown as 'work-in-progress' under the head "Current Loans 85 Advances". The AO has considered the asset / property as 'capital asset' whereas the appellant has claimed that same as 'business' asset. The intent of acquiring the land and incurring development expenses thereupon clearly demonstrates that land has been acquired in the course of carrying on business activity and is not in the nature of 'capital asset'. It is settled position of law that recording of transaction in books of account is not conclusive as regard to nature of transaction. In the facts of case considering the main object of development of land, expenses incurred on development of land having been shown as work-in- progress, the acquisition of land is also in the nature of acquisition of stock in trade and, thus, income arising from such transaction can only be considered under the head "Income from business". In view of above, the action of the AO in determining short term capital gain and invoking provisions of section 50C of I.T. Act 1961 in the case of the appellant is not correct. In view of above, I hold that the determining of income under the head "Short Term Capital Gain" by the AO is not justified.

8.2 With regard to the other contention of the appellant that it has not handed over the possession of the property and also the full consideration was not received as per the terms of the agreement is to be examined. This claim of not handing over the possession of the property by the appellant is conflicting as. the property was handed over to the developer as on date of agreement i.e. 1.08.2003, as per Clause No. 15 of the registered agreement of development dated 11.08.2003, which is reproduced below:–

"That the owner has already delivered a vacant and peaceful possession of aforesaid property to the developer"

8.3 From the above clause, it is clear that the transaction of sale of property is complete since the possession of property was already handed over to the purchaser on 11.08.2003 itself. The "transfer" includes any transaction which allows possession to be taken/retained in part performance of a contract. From the development agreement, it is noticed that a sum of Rs.25,00,000/- was received at the time of execution of agreement and the balance is receivable as per the terms & conditions of the agreement and the consideration receivable is fixed. Further, it is noticed from the records that the appellant is following 'mercantile system7 of accounting. In normal course non-receipt of balance amount of consideration will not alter the transaction. In the facts

6 Arshad Developers Pvt. Ltd. of the case of the appellant/it can be seen that the agreement was executed on 11/08/2003. The very first stipulation as to receipt of money at Rs.25,00,000/- was not implemented. The subsequent money as promised in the agreement has not been paid before the close of accounting year. The effect of non-implementation of the transaction between parties is corroborated from the financial statement and the bank account of the appellant. The above factual position submitted before the AO has not been disputed as is evident from the assessment order. It is further seen from bank account that cheque numbers which are appearing in the agreement have been presented in .the bank and have been dishonoured. The transaction as agreed has not been implemented as agreed is evident from the evidence on record. In view of the above, there is substantial force in the submission of the appellant that the agreement of development was not implemented as entered into between the parties. The contention of the appellant that the physical possession was not handed over also gets substantial strength.

8.4 Further, the appellant submitted that the accounting standard issued by the Institute of Chartered Accountant of India provides at para 17 that prudence and substance over form are important factors in choice of accounting policies. It is provided that in view of the uncertainty attached to future events, profits are not anticipated but recognized only when realized though not necessarily in cash. The accounting treatment and presentation in the financial statements of transactions and events should be governed by their substance and not merely by the legal form. The appellant argued that in the facts of the case of appellant, it is evident from the evidence on record that the agreement is not implemented and the same is evident from the events before the close of accounting year. The appellant averred that considering the principle of prudence and substance over form, the Auditors of the appellant have also accepted the accounting of the appellant, in not recognizing the income from the transaction of entering of the development agreement as uncertainty was looming large in respect to the implementation of the agreement by M/s Armour Developers Pvt. Ltd. The appellant further contented that the stand gets further fortified from the fact that over period of more than eight years the appellant has not received entire consideration and there is no ray of hope of recovery of Rs.25,00,000/- as per the agreement. The appellant stated that the above factual position is explained before the AO and same has not been disputed or found incorrect by the AO at the time of framing of regular assessment. In view of above the appellant argued that no real income has accrued to the appellant and thus addition made at the hands of appellant be directed to be deleted.

7 Arshad Developers Pvt. Ltd. 8.5 The issue of recognition of revenue in the case of hypothetical revenue was decided by the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. reported at 236 ITR 315 (SC). In the case before the Hon’ble Apex Court, it is seen that assessee had shown interest received from Hindustan Steel Ltd. in its books of account. The above interest received was reversed in subsequent year as the transaction was modified subsequently. The Hon'ble Apex Court held that considering the principle of real income interest shown in the books count not be brought to tax. The ratio laid down by the Hon’ble Apex Court fully supports the facts of the case of the appellant that there is no real income arisen and even before the close of accounting year it had become evident that transaction as stipulated in agreement is not implemented.

8.6 In the case of appellant, it is seen that the appellant has acquired property at Rs.21,35,000/- on which development expenses have been incurred at Rs.47,84?000/-. The acquisition of property as well as the development expenses are not disputed by the AO and the AO while computing the short term capital gain has allowed deduction for cost of acquisition and development expenses at Rs.69,19,000/-. In the event the entire agreement as made between the parties would have been implemented there would be surplus arising to the appellant at Rs.30,81,000/-. In the facts of the appellant's case it is seen that the appellant has received only 20% of the agreed consideration during the previous year under consideration. In the subsequent year the appellant has received Rs. 55,00,000/- and has not received any amount thereafter pursuance to the agreement of development. The taxability of these receipts need to be considered based on mercantile method of accounting as business receipt.

the assessee in accordance with the Memorandum of Association was

to carry business of land development. The assessee acquired land at

Sugat Nagar, for a consideration of ` 21,35,677 and incurred the

expenditure to the tune of ` 47,83,940, for the development of the

8 Arshad Developers Pvt. Ltd. said property. This fact has is not in dispute. In the Balance Sheet, the

development expenditure has been shown as work–in–progress. In the

notes to account under inventories, it is shown that inventories consist

of land and assessee has accepted advance for sale. The Assessing

Officer considered the property as capital asset whereas the assessee

has considered the same as business asset. The intention to acquire

the land clearly speaks about this fact that the said land was

purchased with the intention to carry out the business activity. The

evidence in record also support the fact that the activity of assessee is

development of land and business activity. In view of the said

circumstances, no doubt, the income is liable to treated as income

from business. The view of the Assessing Officer to invoke the

provisions of section 50C to determine the short term capital gain was

not correct. There was dispute as to possession as the assessee did

not receive even the first amount as observed in the development

agreement. The cost of the property as well as development charges

was to the tune of ` 69,19,617 [amount of acquisition of ` 21,35,667

(+) 47,83,940 towards expenditure incurred for development]. In the

year under consideration, assessee received 20% of the agreed

amount in the agreement and in the subsequent year, the assessee

received a sum of ` 55 lakh. The full amount was not paid. No doubt,

as per the accounting standard, the learned Commissioner (Appeals)

has directed the Assessing Officer to treat the amount received by the

9 Arshad Developers Pvt. Ltd. assessee in both the years in accordance with the factual position of

the case. No case is made out before us to find fault in the findings of

the order of the learned Commissioner (Appeals). In the case of

assessee, assessment for assessment year 2005–06 has been made

by the Assessing Officer assessing income arising out of receipt of ` 55

lakh for this development agreement which has achieved finality. We

find no tangible material on record to interfere with the finding of the

learned Commissioner (Appeals) in question. In view of the said

circumstance, we are of the view that the learned Commissioner

(Appeals) has passed the order judicially and correctly which is not

required to be interfered with at this appellate stage. Accordingly, the

grounds raised by the Revenue are decided against the Revenue.

Order pronounced in the open Court on 27.06.2017

Sd/- Sd/- P.K. BANSAL AMARJIT SINGH VICE PRESIDENT JUDICIAL MEMBER

NAGPUR, DATED: 27.06.2017

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Nagpur City concerned; (5) The DR, ITAT, Nagpur; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Nagpur