KARAN VIREN CONSTRUCITONS P.LTD,MUMBAI vs. ITO WD 6(2)(4), MUMBAI

Brief facts of the case are that the assessee company engaged in the business as developers and builders filed its return of income for the assessment year 2009-10 declaring the total income as NIL. During the assessment proceeding, since it was observed that the assessee had shown the closing work in progress (WIP) of Rs. 3,18,09,807/-, the AO asked the assessee to furnish the details of the closing work in progress along with the details of the project to which WIP pertains. The details filed by assessee revealed the following facts. i). One Shri. Sudhir Sharad Redkar, entered into an agreement dated 17/02/2002 with the Central Co-operative Housing Society Ltd.(CCHS) as per which Shri. Redkar acquired development rights in respect of the property bearing Cadastral survey no. 1/1245, final plot no. 382, of Lower Parel Division situated at Agashe Path, off Bhavani Shankar Road, Dadar, Mumbai. ii). The Central Co-operative Housing Society Ltd. granted development rights to Shri. Redkar in respect of property aforesaid to demolish the existing structure for construction of two buildings, one for the rehabilitation of the tenants and the other for constructing society’s Hall and there above further floors for sale in open market for consideration. iii). Accordingly, Shri. Redkar took possession of the property for construction of the proposed buildings and assigned the project in favour of the appellant/assessee by entering into a construction contract on 18.5.2006 for a total consideration of Rs. 2,47,00,000/- however, subsequently the consideration amount was enhanced to 2,49,00,000/-vide memorandum of understanding entered between the parties. Initially the developer paid Rs. 81 lacs to the assessee. Later on due to financial crises, Sh. Radkar offered to sell seven flats in the building which was to be constructed for a total consideration of Rs. 3,86,00,000/- and to adjust the balance amount against the said sale consideration.

Accordingly, assessee entered into an agreement with Shri. Redkar on 29/12/2006 for purchasing flat No.s 2,3,4,5,6,7,& 8 in the building “Aarohi Tower” i.e. the building to be constructed on Cadastral survey No. 1/1245. The details of consideration paid as per clause 2(b) of the said agreement are Rs. 47,88,000/- as the cost of each flat, Rs. 4,00,000/- as the cost of one of the stilt car parking and Rs. 75,000/- as open car parking space allotted including Rs. 65,000/- each being the proportion price of the common areas. During the Assessment year under consideration the assessee sold flat No. 2, 4 and 7. The assessee was asked to explain as to why capital gain should not be charged and why the provisions of section 50 of the Act should not be applied.

The assessee contended that since the construction work was not completed the developer Shri. Redkar was not in a position to apply for occupation certificate due to dispute between society owner and the owner of garage. Hence, possession could not be handed over to the buyers. Since the assessee had not received full payment from the buyers section 50C would not be applicable in the assessment year under consideration.

The A.O rejected the contention of the assessee and calculated the Short term capital gain of Rs. 2,41,90,270/- and also estimated the profit on the contract activity @ 8% of the work done amounting to Rs.6,24,520/- and assessed the total income of the assessee at Rs. 2,48,14,790/-. In appeal the CIT(A) confirmed both the additions made by the A.O. Aggrieved by the impugned order passed by the Ld.CIT(A), the assessee is in appeal before the Tribunal raising the following effective grounds of appeal:-

Before us the Ld. Counsel for the assessee submitted that the CIT(A) has wrongly confirmed the findings of the Ld. A.O. The main object of the assessee company was to carry on its business as developers and builders. Mr. Redkar approached the directors of the appellant company to carry out the construction and development work and the agreements were entered into between the parties. Since Mr. Redkar could not make payments as per the terms of the agreements, he offered to sell seven flats in the proposed building, including open parkings, four stilt parking and two terraces for a total consideration of Rs. 3,86,00,000/- so as to adjusted and set off the amount under the memorandum of understanding dated 25/05/2006 between Mr. Sudhir Redkar and the appellant. While registering the said agreement, a sentence was deliberately inserted that the flats were purchased for the purpose of investment with a view to save stamp duty.

The Ld. Counsel for the assessee further submitted that the agreement between the assessee and Mr. Sudhir Redkar was a financial arrangements and the appellant company had entered into the agreement for purchasing seven flats so as to adjust the expenditure which it had agreed to incur in construction of three buildings. But, because of the subsequent developments, the appellant’s transaction of purchase of seven flats from Mr. Redkar and further sale of three flats to different customers could not be completed as the possession of the flats never came into the possession of the assessee. Since the assessee did not transfer the capital assets, the question of short term capital gain does not arise at all. Section 50C of the Act comes into picture only when land or building or both are transferred. In the present case there is no transfer of any land or building or both as the assessee was not in possession of the flats in question to transfer the same. The amount received during the previous year is, therefore, pertaining to its business and the same cannot be treated as income from short term capital gain. Therefore the addition confirmed by the Ld. CIT(A) is liable to be deleted.

As regards ground No 2, regarding confirmation of addition of Rs. 6,24,520/-assessed as profit on the contract activity, the Ld. Counsel for the assessee submitted that the order of the Ld. CIT(A) suffers from serious error as the same has been passed without appreciating the fact that contractor’s profit cannot be determined before completion of construction work. To substantiate his contention, the Ld. Counsel placed reliance on the following decisions:-

Asif Abdul Kader Fazlani Vs. ACIT (2013) 26 CCH 234 Mumbai Tribunal 2. ITO vs. Yain Moosa Godil (2012 72 DTR 167 (Ahd) Tribunal. 3. Weiner V. Harris (1910) 1 KB 285 4. Sunil Siddharthbhai Vs. CIT (1985) 156 ITR 509(SC).

On the other hand the Ld. departmental representative (DR) relying on the concurrent findings of the authorities below submitted that since the assessee has purchased the flats from Shri. Redkar in the capacity of an investor, the gain arising from transfer of such property has to be taxed as capital gain in the hands of the assessee. As regards second ground of appeal, the Ld. DR submitted that since the assessee had carried out the construction work during the previous year, the Ld. CIT (A) has rightly confirmed the addition made on account of profit earned @ 8% of the difference of amount of closing WIP as on 31.3.2008 and WIP as on 31.3.2009.

We have heard the rival contentions and perused the material placed before us in the light of the respective contentions of the parties. Admittedly, the Sh. Redkar entered into an agreement with the assessee and assigned the construction work to the assessee. Sh. Redkar made part payment to the assessee as per the terms of the contract, however, later on asked the assessee to purchase seven flats in question in the building which was to be constructed and further asked to adjust the expenditure to be incurred on construction. Thus the flats along with parking facilities were purchased by the assessee against consideration for construction work done. Agreements for sale in respect of three flats in question were entered into during the relevant previous year. As per the assessee, since the project could not be complete due to some ongoing dispute, Sh. Radkar could not hand over possession of the seven flats in question to the assessee due to which further possession of three flats could not be transferred to the purchasers by the assessee. Accordingly, assessee did not mention the transaction of purchase and sale of flats in question in its books of account and only mentioned the amounts received as advance. The authorities below have treated the receipts as short term capital gain mainly on the grounds that the assessee had purchased the said seven flats in the capacity of an investor; under section 2(14) of the Act, any kind of property held by the assessee whether or not connected with his business or profession comes within the definition of “capital asset” except the properties mentioned under clause (i) to (vi) and under section 2(47) of the Act, transfer in relation to a capital asset includes; sale, exchange or relinquishment of the asset or extinguishment of any rights etc. Since, the assessee had transferred its right in the said three flats during the relevant previous year, the consideration receive against the said transfer is liable to be taxed as capital gain under the provisions of section 45 of the Act.

In our considered view, the revenue authorities have held the amounts received from the three buyers as capital gain on the basis of the agreements dated 20.5.2008, 23.5.2008 and 7.7.2008, without taking into consideration the earlier agreements and memorandum of understanding entered between Sh. Redkar and the assessee. The construction contract agreement dated 18.5.2006, agreement for sale dated 29.12.2006 and books of account maintained by the assessee company corroborate the contention of the assessee. The assessee agreed to purchase the aforesaid seven flats against consideration of construction work done by it. Further the assessee entered into an agreement with the buyers of the three flats in order to recover the cost of construction of the building. Since, the flats in question were purchased to adjust the cost of construction, the amounts received by the assessee cannot be treated as capital gain. At that stage it was even not possible to assess any gain or loss from the business because the construction of building was still in progress during the relevant previous year. The revenue authorities have treated the amounts received by the assessee without taking into the consideration the facts that the assessee had agreed to purchase the flats in question against consideration for the construction work done. As per the settled position of law consideration can be paid or received either in terms of money or money’s worth. So, perusal of all the agreements/memorandum of understandings entered between Sh. Redkar and the assessee, in the light of the contention of the assessee, gives rise to the conclusion that the amount of Rs,1,68,00,000/- which was payable by Sh Redkar was to be adjusted against the cost of seven flats which was fixed at Rs.3,86,00,000/- and this arrangement was made due to inability of Mr. Redkar to pay the aforesaid amount to the assessee. In our considered view contents of clause 3(h) of the agreement that the assessee is buying the flats as an investor, do not ipso facto change the nature of actual transaction. Moreover, the assessee has explained before the authorities below as well as before us that the said clause was deliberately inserted at later stage in order to save stamp duty. The revenue authorities have not pointed out any cogent evidence on record to rebut the contention of the assessee. Hence, we set aside the findings of the Ld. CIT(A) and hold that the consideration amounts in question received by the assessee cannot be considered as capital gain within the meaning of section2(14) of the Act, to assess the same under the head income from short term capital gain. Accordingly, we decide this ground of appeal in favour of the assessee

The AO rejected the contention of the assessee and on the basis of WIP as on 31.3.2008 and 31.3.2009 in the P&L account calculated the work done at Rs. 78,06,498/- and estimated the profit @ 8% and added the same to the income of the assessee. In appeal the Ld. CIT(A) affirmed the action of the AO. We notice that during the course of assessment proceedings the assessee also submitted that it had appointed a sub contractor to construct one of the buildings and the cost of construction was borne by the assessee. We find merit in the contention of the assessee that contractor’s profit cannot be determined before completion of construction work. It is not the case of the revenue that assessee had completed the construction work during the previous year. Hence, we set aside the findings of the Ld. CIT(A) on this issue and decide this ground of appeal in favour of the assessee.