ITO 24(3)(4), MUMBAI vs. RONAK MARBLE INDUSTRIES, MUMBAI

सुनवाई की तारीख /Date of Hearing : 1.3.2017 घोषणा की तारीख /Date of Pronouncement : 14. 3.2017 आदेश / O R D E R PER RAJESH KUMAR, A. M: These are the cross appeals filed by the respective parties and directed against the order dated 23.3.2015 passed by the ld.CIT(A)-36, Mumbai for the assessment year 2009-10. These appeals were clubbed together, heard together and are being disposed of by this common order, for the sake of convenience. ITA No.3045/Mum/2016

taken by the assessee are as under : und r mentioned Grounds of Appeal are without prejudice to one another: ―1. FIRST GROUND OF APPEAL: 1.1. The Learned Commissioner of Income Tax (Appeals) -36 Mumbai (CIT-Appeal) has erred in confirming the order of Assessing Officer (AO) by allowing partly by reducing the addition by 35% only without any express reason and conclusive evidence. 1.2. The Learned CIT (Appeals) failed to consider that the additions by the AO are arbitrary in nature, based on assumption and without considering facts of the agreement on which the addition is based.

2. SECOND GROUND OF APPEAL: 2.1. The Learned CIT (Appeals) erred in confirming the addition to the extent of 65% of Rs.5,00,38,800/- i.e. Rs.3,25,25,220/- by the AO based on misinterpretation of the terms and the facts of the agreement for development entered by the Appellant Firm. 2.2. The Learned CIT (Appeals), erred in law and on facts and in the circumstances of the case by confirming the addition to the extent of 65% without considering the fact that there is no sale or transfer of any property or any right on the property owned by the Appellant Firm to any party in any manner. The Appellant Firm merely entered into an agreement by which the cost of construction including incidental expenses to be borne by the other part in lieu of 35% rights on the constructed I.T.A. No.3045/Mum/2016 building, when completed, without any right of ownership or on title of the land which is owned by the Appellant Firm. Thus, the share of 35% given to the other part is equivalent to the cost of construction in the hands of the Appellant Firm. 2.3. The Learned CIT (Appeals), failed to consider the fact that the Appellant Firm is liable to pay any tax only when they sell any portion of property out of retained 65% of the constructed building, when completed. 2.4. The Learned CIT (Appeals), failed to note that the agreement was registered only for the authenticity of the contract and the stamp duty paid was just 1 % and not as applicable to conveyance or sale of the property which is as much as 6%‖ 3. The additional grounds of appeal taken by the assessee are as under : ―1. The Learned CIT(A) erred in confirming that the estimated full value of consideration for the purpose of computation of Capital gains which was in the womb of the future ignoring the position of law that full value of consideration cannot be estimated under Sec. 48 of the Income tax Act, 1961.

2. The Learned CIT(A) erred in confirming that the transaction under Development agreement with Mls. Nanavati Constructions as a transfer u/s. 2(47)(v) as on the date of entering the agreement.

3. The Learned CIT(A) erred in confirming the estimation of full value of consideration for the purpose of the Computation of Capital Gain when assessee claimed that Capital gain is not computable as the consideration has neither been received or accrued during the year under assessment.

4. The Learned A.O. & CIT(A) erred in applying the valuation u/s. 50C of the Income tax Act, 1961 on the Development agreement and taxing the same as Capital gain.

5. The Learned CIT(A) erred m taxing the· Capital gain as the consideration in the form of constructed area of 65% is concerned, the same was neither received nor had accrued and hence no occasion to bring it to tax could arise.‖

4. We have considered the submissions of the ld.AR on the admissions of additional grounds and also ld DR and respectfully following the decision NTPC Limited vs The Union Of India on 22 August, 2011 (SC), we admit the additional grounds taken by the assessee for adjudication.

6. The only issue raised by the assessee is against the confirmation of addition to the extent of Rs. 3,25,25,220/- (being 65% of Rs.5,32,98,000/-) by the CIT(A) as against Rs. 5,32,98,000/- made by the AO and also that the authorities below have erred in estimating the consideration and also erred in treating the transaction of entering into development agreement as transfer within the meaning of section 2(47)(v) of the Act.

7. Facts of the case in brief are that the assessee owns a piece of land 844.49 sq. meters with factory premises thereon. The assessee in order to develop the said property entered into an agreement dated 21.4.2008 with M/s Nanavati Construction whereunder the assessee was to retain 65% of total constructed area and the balance of 35% of the total constructed area would go to the developer. The constructed area would pass on to the assessee as well as the developer upon the development of the property. Accordingly the construction of the building was taken up and commenced by the Developer after obtaining requisite approvals/permissions from the various authorities. The developer M/s Nanavati Construction was given access to the land only for the purposes of development of the property. The developer was not authorized to either sell or entered into an agreement for sale on behalf of the of assessee‘s shares of constructed area. During the course of assessment proceedings, the AO observed that the assessee has not returned capital gains upon the execution of development agreement. The AO ascertained the market value of the said piece of land at Rs.5,32,98,000/- being market value as per the stamp duty valuation authority. The capital gain was calculated after allowing the deduction in respect of cost of acquisition and assessed the total income at Rs.5,00,38,800/- vide order passed under section 143 read with section 147 of the Income Tax Act, 1961. Aggrieved by the order of the AO, the assessee has preferred an appeal before the first appellate authority, who vide para 5.2.7 to 5.2.10 dismissed the appeal of the assessee as under : ―5.2.7 From the submissions made in appeal, it is gathered that the construction work was delayed and a suit was filed before the High Court by some of the partners of the appellant firm. A perusal of the contents of the said suit reveal that pursuant to the Development Agreement, the developer obtained 10D/CC began the construction work. The suit also indicates that the construction work not having been completed in the stipulated period of 24 months from grant of IOD i.e. 24 months from 11/06/2009, the applicants computed that they suffered a loss of Rs.18,00,000/- per month which was sought from the developer through written correspondence {refer clauses (v) to (xii) on pages 7-10} and that accordingly they sought arbitration. It is further elaborated that the arbitration was not followed through by the developers and hence the present suit was filed by the applicants. Further information was called from M/s Nanavati Constructions during the course of appellate proceedings and vide letter dated 04/03/2015, the said party confirmed that the project was 90% complete and that the OC was awaited. 5.2.8 Thus in the present case, it is clear that the conditions required for the transfer exist and it is only subsequently, that the matter has become disputed on the issue of compensation for delay in the project. During appeal hearings the AR stated that, as on date, the construction is completed but possession has not been taken by the appellant firm on account of the said dispute. 5.2.9 In the decision rendered in the case of in the case of KCP Ltd. v CIT ITR 421 (SC)], the Hon'ble Supreme Court had held that the subsequent event will not be ta e i 0 consideration while determining the taxability of an income. 5.2.10`The facts brought out in the preceding paragraphs indicates very clearly that in the instant case, the appellant signed development agreement dated 21.4.2008 with M/s Nanavati Constructions The Power of Attorney was executed, the agreement registered and the possession of the said plot was duly handed over to the developer and construction commenced shortly thereafter. Thus in the instant case there was transfer of a capital asserts and as per the provisions of the Act, the capital gains arising from such transfer is assessable in the hands of the appellant. The grounds raise by the appellant are therefore dismissed.‖ 8. The ld.AR submitted that the FAA has grossly erred in partly upholding the order of the AO by ignoring the facts that the development agreement entered into by the assessee with M/s Nanavati Construction on 21.4.2008 was nothing but understanding with the developer to develop the property. The lower authorities have misconceived the date of agreement as the date of sale and thereby made the addition on account of Long Term Capital Gains of Rs.500,38,800/-, which was reduced by the FAA to Rs.3,25,25,220/- being 65% of the total long term capital of Rs.500,38,800/- by holding that only 65% of the said LTCG belonged to the assessee as against the entire amount taken by the AO. The ld. AR further argued that the various modes of transfers are envisaged under section 2(47) of the Income Tax Act, 1961 and the relevant clause is 2(47) (v) reads as under : “Section 2(47) in The Income- Tax Act, 1995 (47) transfer", in relation to a capital asset, includes,- (i) ….. (ii) … (iii) …. (iv) …… (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance ofa contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 1 (4 of 1882 ); or Clause (v) of the said section provides that transfer would include any transaction wherein the possession of immovable property is taken or retained in part performance of the contract as referred in the Transfer of Property Act, 1882. The ld. Counsel submitted that by entering into a development agreement the assessee has not allowed the possession of the property to be taken by the developer M/s Nanavati Construction and the possession was given only for the purposes of obtaining the approvals from the concerned authorities and development thereof. The ld. AR further brought to our notice the provisions of section 53A of the Transfer of Property Act, 1882 which defined part I.T.A. No.3045/Mum/2016 performance and submitted that the development agreement in no way constituted part performance of the agreement in terms of section 2(47)(v) of the Act read with section 53A of the TPA, 1882. The ld. AR further submitted that the transfer could only be said to have taken place only when the transferee has performed its part of contract. In the present case, the commencement certificate was given in the subsequent year to M/S Nanavati construction by the Municipal Corporation and therefore the capital gain could not be said to have arisen or accrued during the year. In support of his contentions the ld.AR relied on the following case laws: N. Karuna v. Appropriate Authority [2001] 251 ITR 230 (AP); (A) The Fibars Infratech P. Ltd V/s ITO (ITA No.477/Hyd/2013 (B) dated 3.1.2014;= 2014] 46 taxmann.com 313 (Hyderabad – Trib) CIT V/s M/s Chemosyn Ltd in of 2013 dated 11.2.2015 (C) (Bom HC); Voltas Ltd V/ (D) s ITO in ITA No.5330 and 5331/Mum/2009 order dated (E) 16.9.2016 CIT V/s Smt Najoo Dara Beboo -38 Taxmann.com 258 (All) (F) Nathulal V/s Phoolchand9Civil Appeal No.2345 of 1966 (G) (AIR 1970 Supreme Court 546 The ld.AR submitted that since 2008 no possession of 65% of the constructed area has been given to the assessee. The second plea raised by the ld. Counsel was that the provisions of section 50C of the Income Tax Act should not be applied to the instant case as in this case the development agreement was entered into by the assessee for the development of property and not for the sale of property and the assessee did not part with his interest in the property. In defence of his argument he relied on the decision in the case of C.S. Atwal V/s CIT(2015) 378 ITR 244 (P&H). The ld. AR while taking us through the chronology of the events such as date of development dated 21.4.2008, intimation of disapproval dated 11.6.2009, date of plan approval 11.6.2009, permission from District Collector on 29.6.2009, date of Commencement Certificate from Brihan Mumbai Municipal Corporation 1.8.2009, prayed before the bench in view of the these facts of the case the FAA has grossly erred in upholding the order of the AO which should be reversed in view of the ratio laid down in the above judicial pronouncements.

In the case of N. Karuna (supra), the Hon‘ble High Court held that ―A perusal of the above referred provision shows that allowing of possession to be taken or retaining in part performance of a contract of the nature referred to in section 53A, of the TPA, 1882 alone could be considered as transfer and not a permissive possession or any other kind of possession delivered by the seller to the purchaser.‖ In the case of Smt Najoo Dara Beboo, the Hon‘ble Allahabad High Court held that ―Capital gains would be charged only on receipt of sale consideration and not otherwise.‖ “How can a person pay the capital gain if he has not received any amount. In the instant case, the assessee has honestly disclosed the capital gain for the assessment years 1998-99 to 2000-01, when the flats/areas were sold and consideration was received. During the year under consideration, only an agreement was signed. No money was received. So, there is no question to pay the capital gain. When it is so, then we find no reason to interfere with impugned order passed by the Tribunal. The same are hereby sustained along with reasons mentioned therein.‖ We also find that that the identical issue has been decided by the Co-ordinate Bench of Hyderabad Tribunal in the case of the Fibars Infratech P. Ltd (supra) as under : ―The primary contention of the assessee is that the land given for development is an agricultural land in terms of section 2(14)(iii) as on the date of Development Agreement and the land was converted on 27-6- 2006. But the facts brought on record clearly establish that the impugned land was converted from agricultural purposes to non-agricultural purposes by permission from competent authority on 27-12-2006 and the registration of supplementary Development Agreement cum GPA was executed on 4-1-2007 though it was presented for registration on 15-12- 2006. It was an admitted fact that the registration was delayed awaiting approval from RDO for land conversion and only after the approval was received on 27.12.2006 that the document was registered on 4-1-2007 and at the time of registration of Development Agreement, the land no more remained as agricultural land and it was non-agricultural land by valid conversion on approval from the competent authority. Being so, there was no merit in the argument of the assessee that the land is agricultural land. [Para 44]; The next argument of the assessee is that there is no transfer on account of development agreement cum GPA in terms of section 2(47)(v) on entering into agreement with MAK as there is no quantification of consideration to be received by the assessee from MAK. [Para 45]; It is important to bear in mind that section 2(47)(v) refers to possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act. [Para 51]; A plain reading of section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be ―of the nature referred to in section 53A of the Transfer of Property Act‖ it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. [Para 53]; It is thus, clear that ‗willingness to perform‘ for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under section 2(47)(v). [Para 55]; Coming to the facts of the present case, the assessee entered into Development Agreement with MAK with reference to a land. At the time of entering into development agreement on 15-12-2006, the land was in the promoter‘s name. The assessee was under incorporation. The same agreement was presented for registration on 29-12-2006. Later the assessee-company was incorporated on 4-1-2007. On the basis of this agreement, the Assessing Officer taxed the capital gain on the transaction treating that there was a transfer in terms of section 2(47)(v). Through this is a Development Agreement cum GPA the assessee has not received any monetary benefit. Being so, there is no receipt of any part of the sale consideration. Further, it cannot be said that there is any sale in terms of section 2(47)(i), (ii) or (iii) so as to say that there is sale, relinquishment, extinguishment or compulsory acquisition. [Para 56]; To say that there is an exchange under section 2(47)(i), both the properties which are subject matter of the exchange in the transaction are to be in existence at the time of entering into the transaction. It is to be noted that at the time of entering into development agreement as on 15- 12-2006, only the property – i.e., land pertaining to the assessee is in existence. There is no quantification of consideration or other property in exchange of which the assessee has to get for handing over the assessee‘s property for development. The contention of the department is that the consideration accrued to the assessee in the form of 16 villas comprising of developed land of 9602 sq. Yards and built up area of 58606 sft which the assessee has to get on completion of the project. There was no progress in the development work in the assessment year under consideration as the project is only in conception stage and it is not appropriate to tax the assessee on imaginary reasons. [Para 57]; Even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the previous year relevant to assessment year under consideration. It is submitted that the Director of Town and Country Planning approved the plan submitted by the assessee company only on 6-3-2007. The assessee submitted that there is no development activity until the end of the previous year relevant to the assessment year 2007-08.Commencement of building construction had not been initiated as the building approval was granted only on 6-3-2007. Therefore, no income could be said to have accrued, as laid down in section 48, in assessment year 2007-08. More so, building/villas has to be constructed as per the approved plan within 36 months from the date of agreement. The construction had not taken place in the assessment year under consideration. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties which was granted only in the last month of the year i.e., on 6-3-2007. Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. Since there was no amount of investment by the developer in the construction activity during relevant year in this project, it would amount to non-incurring of required cost of acquisition by the developer. Hence, no consideration can be attributed to said year.; Nothing is brought on record by authorities to show that there was development activity in the project during the assessment year under consideration and cost of construction was incurred by the builder/developer. Hence, it is to be inferred that there was no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer. In the assessment year under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agreement. The developer had not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredients that make a person eligible and entitled to make the construction. The act and conduct of the developer in this assessment year has to be seen to decide the taxability on transfer. Being so, it was clear that in the year under consideration, there was no transfer of not only the villas as superstructure but also the proportionate land by the assessee under the joint Development Agreement. But the fact remains that the transferee has not performed its obligations under the agreement, in the assessment year under consideration. Even otherwise, the assessing authority has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction work at any time during the assessment year under consideration or any development has taken place in the project in the relevant period. He went on to proceed on the sole issue with regard to handing over the possession of the property to the developer in part performance of the Development Agreement-cum-General power of Attorney. The handing over of the possession of the property is only one of the conditions under section 53A of the Transfer of Property Act, but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was ‗willing to perform‘ its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant; In such a situation, it is only the actual performance of transferee‘s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act. [Para 57]; In the present case, the situation is that the assessee has not received any consideration, and there is no evidence brought on record by the revenue authorities to show that there was actual construction taken place at the impugned property in the previous year relevant to the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration had actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is 30 months to complete construction with additional grace period of 6 months, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of section 2(47)(v) will apply in the situation. Considering the facts and circumstances of the present case as discussed above, the assessee deserves to succeed on the reason that the capital gains could not have been taxed in this assessment year. [Para 59]‖ In the case of M/s Chemosyn Ltd (supra), the Hon‘ble Bombay High Court has held as under:

―4. So far as the 1st issue is concerned, briefly the facts are that the respondent company owned two plots of land namely plot nos.256 and 257. On 16.6.2006 the respondent-assessee entered into a development agreement with one M/s Dipti Builders to develop plot no.257 for a consideration of Rs.16.11 crores and construction of 18,000 sq.ft of built up area free of cost on plot No.256. Thereafter on 5.7.2007 a tripartite agreement was entered into between M/s Dipti Builders, a new buyer and respondents under which both the plots were transferred to the new buyer at a total consideration of Rs.29.11 crores. Thus, in the return of income filed on 31.10.2006 for subject Assessment year, the petitioner offered only an amount of Rs.16.11 crores for the purpose of capital gains tax. This was as the development agreement dated 16.6.2006 stand rescinded/modified by the sale agreement dated 5.7.2007.

5. For the following Assessment year viz.2008-09 the respondent-assessee did offer as capital gains an amount of Rs.13 crores being the difference between Rs 29.11 crores and Rs.16.11 crores received earlier from M/s Dipti Builders and duly offered in the A.Y.2007-08. The respondent pointed out that the consideration in the form of constructed area of 18000 sq.feet is concerned, the same was neither received nor had accrued and therefore, no occasion to bring it to tax could arise. The Assessing Officer did not accept the contention of the petitioner and concluded that in view of the decision of this Court in Chatrubhuj Dwarkadas Kapadia vs Commissioner of Income Tax 260 ITR 260 491capital gains tax would be payable on the market value of the 18,000 sq.feet of construction to be carried out by M/s Dipti Builders. Resultantly, an addition of Rs.9.51 crores was made on the basis of Ready Rekoner rates as long term capital gains. Thus, determining the respondent- assessee's income at Rs.19.94 crores for the A.Y.2007-08 by order dated 2nd December, 2009.

Thus no income has either accrued or received in the form of 18000 sq.feet of constructed area. No occasion to tax the same can arise. The Tribunal on consideration of facts has reached a finding of fact that no income in- respect of 18000 sq.ft of constructed area has been accrued or received. This finding cannot be said to be perverse or arbitrary. According to us no substantial question of law arises to warrant interference with the order of the Tribunal. Thus, question nos.1 and 2 are dismissed”.

Order pronounced in the open court on 14th March, 2017.