RONAK MARBLE INDUSTRIES,MUMBAI vs. ITO WD. 24(3)(4) (ERSTWHILE KNOWN AS WARD 20(2)(4)), MUMBAI

The grounds of appeal

Since the grounds of appeal taken in the original appeal memo and in the application for additional ground as stated hereinabove are inter connected and are being decided together hereinafter.

On the other hand, the ld. DR relied heavily on the order of FAA by submitting that the assessee has actually transferred the right of ownership rights in the land with the execution of agreement with the Developer and therefore the same was covered within the definition of section 2(47) of the Income Tax Act, 1961 read with Section 53A of the TPA, 1882. Accordingly the AO has rightly brought to tax LTCG arising on transfer of interest in the land. The ld. DR further defended the order of the adoption of value as per stamp authorities for the calculation of capital gain in terms of provisions of section 50C of the Act and requested the Bench that the order passed by the AO should be upheld.

We have carefully considered the rival submissions and perused the material placed before us including the orders of authorities below and case law 10 relied upon by both the parties. Undisputed facts of the case are that the assessee entered into a development agreement on 21.4.2008 for development of piece of land admeasuring about 1010 sq.yds situated at C-14, Dalia Industrial Estate, Veera Desai Road, Off Andheri Versova (JP Road), Andheri (W), Mumbai-400058 with M/s Nanavati Construction which was registered with the Sub-Registrar Assurance at valuation of Rs.5,32,98,000/-. Under the said development agreement the assessee was to receive 65% of the total constructed area whereas 35% was to be given to the developer in lieu of development cost of the said plot. The plan for development of the land was approved by the local authority on 11.6.2009 and the commencement certificate from Bombay Municipal Corporation was approved vide letter dated 1.8.2009. It is, therefore, clear from the facts before us that the developer M/S Nanavati Construction has not carried out any construction during the year under consideration. Now, the issue before us is whether the transfer of interest in the plot took place with signing of the development agreement or on the date when the assessee was given possession of 65% of the constructed area. In our considered view, the conclusion drawn by the FAA appears to be not correct as the assessee has not received any consideration in the form of 65% of the total constructed area. It is an undisputed fact that during the year under consideration the 65% of the constructed area was not received nor had accrued in favour of the assessee as per the transfer of the property as defined 11 2(47) of the Income Tax Act, 1961. For the sake of ready reference and convenience, we reproduce section 2(47) of the Act as under : ―2(47) ―transfer‖, in relation to a capital asset, includes,— (vi) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation 1.—For the purposes of sub-clauses (v) and (vi), ―immovable property‖ shall have the same meaning as in clause (d) of section 269UA. Explanation 2.—For the removal of doubts, it is hereby clarified that ―transfer‖ includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;‖ After taking into consideration the facts of the case vis a vis the provisions of the Act we find merit in the argument of the ld.AR that no sale transaction has taken place with the signing of the development agreement as the sale is 12 54 of the Transfer of Property Act, 1882 wherein the prime determining factor is receipt of monitory consideration. There is no monitory consideration whatsoever in the development agreement entered in to by the assessee and therefore cannot be construed as sale. We also find merit in the argument of the ld. AR that entering development agreement with the Developer, the assessee has not relinquished any interest in the said property as the right in the property continue to belong to the owner. Subsection 3(v)of section 2(47) of the Act is not relevant to the case under consideration and the development agreement nowhere falls under ambit the transaction of allowing possession of immovable property to be taken or part performance of contract of the nature referred to in section 53A of the TPA, 1882 because the development agreement is not an agreement for sale because the assessee executed a contract with the developer and not with the intended purchaser. The development agreement is some sort of business agreement and it basically postulates coming together of two parties only i.e.the developer and the owner of the land. The developer does not have land to develop the land and the assessee did not have sufficient finance to develop the land and therefore they come together i.e. land and finance for the development of project is necessarily business agreement whereby the owner of land allows the developer to enter and exploit the land for the limited purposes of developing the said land. Looking into the provisions of TPA,1882 which clearly shows that allowing the 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.‖ 14 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 15 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 16 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 17 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:

In appeal, the Commissioner of Income Tax (Appeals) (CIT (A) did not accept the petitioner's contention and upheld the Assessing Officer's order by relying upon decision of this Court in Chatrubhuj Dwarkadas Kapadia's case (supra). However, the CIT (A) held the consideration for the 18000 sq.feet of constructed area is to be arrived at on the basis of cost of construction and not the Ready Reckoner rates adopted by the Assessing Officer. Consequently, the consideration to be brought to tax was an amount Rs.2.17 crores. On further appeal, the Tribunal set aside the orders of the Assessing Officer and the CIT (A) by holding that the decision of Chaturbhuj Dwarkadas Kapadia (supra) would not apply in the facts of the present case as in this case there is no dispute as to transfer of property taking place as a result of the development agreement. The dispute is with regard to quantum of sale consideration to be taken for the purpose of computing capital gains. Moreover, the Tribunal also placed reliance upon decision of Kalpataru Construction Overseas P.Ltd 13 SOT 194 wherein on similar facts the Tribunal had held that where consideration to be received originally was Rs.1.25 crores but, finally settled at Rs.1 crores then such a subsequent settling of the consideration of at Rs.1 crores although arrived at a subsequent year it would relate back to an earlier 19 assessment year. Further, the Tribunal also placed reliance upon the decision of this Court in Commissioner of Income Tax vs Shivsagar Estates 204 ITR 1 to conclude that on the basis of real income theory in the facts of the present case no income on account of 18,000 sq.feet of constructed area has either been accrued or received for it to be brought to tax.

Grievance of the revenue is that the decision of this Court in Chaturbhuj Dwarkadas Kapadia (supra) should apply to the present facts. As pointed out by the Tribunal, the issue before the Court in the above case was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset. Thus, reliance upon Chaturbhuj Dwarkadas Kapadia (supra) does not assist the revenue. We specifically asked the revenue whether the decision of the Tribunal in Kalpataru Construction Overseas (P) Ltd has been appealed to this Court and to which the answer was ―we do not know‖.

We find that on facts the impugned order of Tribunal has held that no income has been accrued or received of the value of 18000 sq.feet of constructed area under the development agreement dated 16.6.2006. This on account of the fact that the agreement dated 16.6.2006 was not acted upon as it came to be superseded/modified by the Tripartite agreement dated 6.7.2007. This was the position when the return of income was filed.The income accrued and earned under the subsequent agreement dated 6.7.2002 was offered as capital gains in the subsequent years. Therefore, on the application of the real income theory, the Tribunal held that on these facts there would be neither accrual nor receipt of income to warrant bringing to tax to the constructed area of 18,000 sq.ft which has not been received by the respondent-assessee. As observed by the Apex Court in CIT vs Shoorji Vallabhdas 46 ITR 144 : ― Income­tax is a levy on income. No doubt, the Income­Tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a 'hypothetical income' which does not materialise. Where income tax, has in fact, been received and is subsequently given up in such circumstances that it remains the income of the 20 recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.‖ (emphasis supplied)

On the second argument of the ld.AR that the provisions of section 50C of the Act are not applicable in the case of Development Agreement. We find that the Co-ordinate Bench of the Tribunal in the case of Voltas Ltd (supra) has held as under : ―3.8. We have gone through the submissions of the assessee. We shall first deal with the last argument of the assessee which is directly on the scope of section 50C. The perusal of section 50C shows that the section 50C shall be applicable where the consideration received as a result of transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government………. Thus, it is noted that the term ‗capital asset‘ mentioned in the section specifically refers and confines its meaning to ‗land or building or both‘. Thus, scope of section 50C is restricted by the legislature itself to these two types of capital assets only. 3.9. Turning back to the facts of the case before us, the capital asset transferred by the assessee was ‗Development Rights in the land‘ and not the ‗Land‘ itself. If we go through few other similar provisions of the Act, we find that the legislature has used this expression consciously and carefully and keeping in view its need and objective of legislating section 50C. For example, in section 269A, the expression ‗immovable property‘ has been defined as under:

We have already decided the issue of chargeability of LTCG in favour of the assessee in , therefore, in view of our findings therein, we dismiss the appeal of the revenue as infructuous.

In the result, the appeal of the assessee is allowed and that of revenue stands dismissed.