ACIT 12(1), MUMBAI vs. DEVIKA C. RAO, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM (A.Y:2005-06) Devika C. Rao, 3rd floor, 269, Reliance Vs. The Asst. Commissioner of Building, Dr. D. N. Road, Fort, Income Tax, Mumbai Mumbai-400 001, PAN:AAIPR 5718G Appellant .. Respondent (A.Y:2005-06) Vs. Devika C. Rao, 3rd floor, 269, The Asst. Commissioner of Income Tax, Mumbai Reliance Building, Dr. D. N. Road, Fort, Mumbai-400 001, PAN:AAIPR 5718G .. Appellant Respondent Assessee by .. Shri Vijay Mehta, AR .. Revenue by Shri B. S. Bist, Sr. DR Date of hearing .. 21-09-2016 Date of pronouncement .. 02-11-2016 O R D E R PER MAHAVIR SINGH, JM:

These two cross appeals, one by the assessee and other by the Revenue are arising out of the common order of the CIT (A)-23, Mumbai in appeal No.CIT (A)- 23/ACIT.12 (1)/IT-357/2009-10 dated 03-09-2010. Assessment was framed by the ACIT-12(1), Mumbai u/s 143(3) read with section 147 of the Income Tax Act, 1961 (hereinafter “the Act”) for assessment year 2005-06 vide his order dated 30-12-2009.

(1) The first issue in assessee’s appeal is as regards to reopening of the assessment u/s 147 read with section 148 of the Act.

(2) The second issue in the assessee’s appeal is as regards to issue of chargeability of capital gains in which assessment year 2005-06 or 2006-07.

2 & 8417/Mum/2010 3. At the outset, the learned Counsel for the assessee stated that he is not interest in pursuing these two issues under the instructions of the assessee. The learned Sr. DR has not objected to the same. Accordingly, these two issues are dismissed as not pressed.

4. The learned CIT (A) has erred in law and in facts in directing the Assessing Officer to compute capital gains after allowing the cost of acquisition without quantifying the amount. The learned CIT (A) ought to have directed the Assessing Officer to grant deduction on account of cost of acquisition as quantified/stated at para 5.2 (page 8) of her order . The Revenue has raised the following ground No.1:-

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the A. O. to allow cost of flats as on 05.08.1999, while computing the capital gain from transfer of “interest in 20% built up area without appreciating the fact that there was neither any flat existent on that date nor was any cost incurred by either the assessee or the builder on such flats as on 05.08.1999 . Revenue has also raised argumentative grounds Nos.2 to 5, which we will not reproduce but will deal with while adjudicating ground No.1 because these grounds pertain to same issue and is argumentative.

5. We find that the CIT (A) has noted the facts which are undisputed from both the sides and the same reads as under:-

“5.1 The brief facts as noted in the assessment order are the assessee entered into agreement with M/s.Garden City Home on 29/3/95 for development and exploitation of scheduled property, viz. city survey No. 145/1, 146/1, 146/2, 147/1 in Pattandur Agrhara Village, Krishnarajapuram, Hubti, Bangalore South. As M/s. Garden City Home was unable to continue and complete the project, assessee being a first party and Garden City Home second party entered into a joint development agreement with third party, i.e. M/s. Prestige Estate Project Pvt. Ltd. on 5/8/99 whereby assessee agreed to transfer 80% individual interest in scheduled property to M/s. Prestige Estates Project Pvt. 3 & 8417/Mum/2010 Ltd., Bangalore on consideration of 20% of built up area of the scheduled property. The development was agreed to be in two phases, Phase-I containing 4 acres 13 Guntas (Survey Nos 145/1 and 146/1) and Phase-11 containing 4 acres 30 Guntas (Survey Nos.146/2 and 147/1) Phase- I: This phase consists two blocks North a South Block. Vide supplementary agreement dated 27/12/99 and 27/11/2000 respectively, in terms of which the assessee allocated built up areas apartment in North & South Block of Prestige Langleigh. The assessee has sold 20% of Phase-I built-up constructed area and Long Term Capital Gain of Rs.2,61,36,783/- and Rs.1,94,83,000/- offered for taxation in the A.Y.2004-05 and A.Y.2005-06 respectively. Phase- II: Through a second agreement dated 22.05.04, the assessee agreed for consideration of Rs.8.85 Cr instead of constructed built up area. The said amount of Rs 8.85 Cr was offered by the assessee on receipt basis - Rs.4.50 Cr in A.Y.2005-06 and Rs.4.35 Cr in A.Y.2006-07. The series of transfers as had taken place, are tabulated below:- Date Vendor Purchaser Capital Asset Consideration received 05.08.1999 Assessee M/s. Prestige Land Ph-I 20% in total Estate Proj. (Survey No. built-up area, Pvt. Ltd. 145/1 & 146/1) Ph- I 20% in Land Phase –II total built up (Survey No. area, Phase- II 146/2 & 147/1) AY 2004-05 Assessee Various third 20% 2.16 crore parties constructed (offered as area – Phase – LTCG in AY- I 2004-05 AY 2005-06 Assessee Various third Remaining 1.94 Crore parties Units of 20% constructed area – Phase-I AY 2005-06 Assessee M/s. Prestige 20% 8.85 crore Estate Proj. constructed Pvt. Ltd. area- Phase_II Transfer of interest in 20% of constructed area of the Phase took place upon execution of agreement dated 22.05.04 for a total consideration of Rs 8.85 crores. As such, said transfer took place on 22.5.04 relevant to A.Y.2005-06, whereas assessee offered the capital gain on the basis of receipt of consideration in the financial year relevant to assessment year. As per the provisions of Law, contract completes on execution of agreement on 22.5.04. Hence, the whole capital gain of Rs,8.85 Cr becomes taxable In F.Y.04-05 relevant to A. Y .2005-06.

4 & 8417/Mum/2010 On the question as to when the gain on sale of capital assets arises and when the transfer took place, the assessee contended that as per the provisions of the Income Tax Act, the entire gain would have been assessed in A.Y.2000-01 since the said agreement is main agreement on which necessary stamp duty has been paid, possession of the land was given and the approval of appropriate authority was obtained. The Assessing Officer however held that the capital asset transferred in A.Y.2000-01 (i.e. though the agreement dated 05-08-1999) was 'interest in land'. The capital asset transferred on 22-05-2009 is 'interest in 20% built up area'. These are two distinct capital assets. By the assessee's logic assessee should not have offered any capital gain in A.Y.2004-05, A.Y.2005-06 & A.Y.2006- 07. Even sale of flats acquired in Phase-I and sold in A.Y.2004-05 and A.Y.2005-06 should not have been offered for tax by the assessee. The Assessing Officer stated that the capital asset under consideration is the 'interest in 20% of the buildup area. The cost of this asset is NIL. The assessee and the Department are both in agreement upon this. The agreement for sale of the right in 20% of the constructed area as executed on 22.05.2004. The assessee had relinquished her right on the said property at the very execution of the agreement. The consideration is accrued the same day, irrespective of the actual receipt. The assessee, prior to this agreement, held the rights in the said property by virtue of the earlier agreement dated 5/8/99. What is important is that the assessee should be holding the property in her own right. Transfer of title is not necessary for transfer of ownership. The assessee's contention that the agreement is conditional was not found acceptable by the Assessing Officer. In the current case, the agreement is clear. It does not subject the transfer of right on complete payment of the installments. The developer is free to sell the entire property, as purchased from the assessee, anytime after the agreement was executed on 22.05.2004. Clause 7 of the aforementioned agreement provides for payment of the total sale consideration in 17 installments. But the capital gain itself is not affected because of the installment clause. It accrues in one shot, and that too immediately on the date of agreement. Secondly, the restriction put on the purchaser, in clause 8, is only regarding transfer of title. Clearly if the transfer of title is postponed till the completion of payment installments it does not postpone ownership. The purchaser owns the property in his own right after entering into the agreement. The ownership can be stripped off only if the conditions, as stipulated in the sale agreement, is violated. Moreover Section 53A of Transfer of Property Act clearly states that if possession has been transferred and part of the consideration is paid, then it amounts to transfer of property. In the current case both the conditions are fulfilled in A.Y.2005.06. Hence the assessee cannot offer capital gain as and when the installments are received. The transfer as required by section 2(47) of the income-tax Act, 1961 is competed on the same day and the income of Rs. 8.5 Cr has also accrued at the same time. The underlying asset that is transferred is not 'Land' but 'interest in 20% constructed area'. The land no longer remained in the possession or ownership of the assessee ever since it entered into agreement with 5 & 8417/Mum/2010 Prestige Ltd on 05-08-1999. Hence it is clear that the capital asset that is transferred is 'interest in 20% of built-up area" and also that the date of transfer is 22-05-2004, The Transfer does not occur in installments because payment is made in installments. Hence the capital gain of Rs.8.85 crores was assessed in A.Y.2005-06, as against Rs.4.35 crores offered in A.Y.2006-07. 5.2 Before me in respect of the ground No.4 the appellant submitted that, the observations of the Assessing Officer in paragraph No. 5.6 of the impugned order where he has stated that the cost involved in the 'interest in 20% of the built-up area' is Nil and that the appellant is in agreement with the same, are incorrect and misconceived. In fact, the appellant had never agreed with such a stand of the Assessing Officer. As regards computation of long term capital gain with regard to appellant‟s share in Land for 20% of the constructed area, the appellant stated that on 29.03.1995 an agreement was executed by the appellant with M/s. Garden City Homes, Bangalore for development of the subject property after taking necessary permission for its conversion for non- agricultural use. However, since Garden City Homes could not carry out the development programme as per the terms and conditions stipulated in the said agreement for a considerable period of time, a tripartite agreement dated 05.08.1999 was executed between the appellant, M/s. Garden City Homes and M/s. Prestige Estates Project Pvt. Ltd., a company engaged in real estate development (hereinafter referred to as 'Prestige') for development of the property into residential buildings on the terms and conditions stipulated therein. As a result of the tripartite agreement dated 05.08.1999, the earlier agreement dated 29.03.1995 between the appellant and Garden City stood cancelled. As per clause 5.1 of this agreement, for agreeing to transfer her divided or undivided 80% share in the property to Prestige, the appellant was to receive 20% of the constructed area in the buildings, car parking area, terrace, private garden etc.; and Garden City and Prestige were to get 25% and 75% respectively Of the remaining 80% area. That Form No. 37-I filed along with the tripartite agreement dated 05.08.1999 was duly taken note of, considered and acted upon by the Appropriate Authority as is evident from his order bearing File No. AA/BNG/8(126)11/99-2000 dated 29.10.1999. Thus, that the transaction under consideration was already completed in all respects then. That as per agreement dated 22.05.2004 was executed between the appellant and Prestige under which the appellant agreed to accept a sum of Rs. 8,85,00,000/- in lieu of the 20% constructed area of Prestige along with proportionate car parking area etc from Prestige. This agreement dated 22.05.2004 has been considered by the Assessing Officer as the sale agreement giving rise to entire capital gain in the year under consideration i.e. A.Y. 2005-06. That a scrutiny of the conditions of the aforesaid agreement shows that it was a conditional agreement. In clause 8 of the agreement, it has been made specific that simply on execution thereof, Prestige would not get title over the 20% share of our client so as to enable it to convey the constructed apartments in favour of the prospective purchasers; and that only after making payment of the full amount of the consideration that it would be Legally entitled to deal 6 & 8417/Mum/2010 with the subject property. This condition is further reconfirmed in clause 9 wherein also it is stated in unequivocal terms that Prestige 'will be able to exercise its right to convey by executing and registering the necessary Sale Deeds in respect of Item No. 2 of the schedule property only after payment of the entire sum of Rs. 8,85,00,000/- (Rupees eight crores eighty five lakhs only) agreed to be paid by Prestige to the appellant. The consequences of the breach of contract on the part of Prestige have been made clear in clause 10. Thus, there can be no doubt that the agreement dated 22.05.2004 put it in unambiguous terms that the title over the appellant's 20% share would get transferred only upon fulfillment of the payment condition. Thus, that the inferences drawn by the Assessing Officer that the entire amount of the consideration of Rs. 8,85,00,000/- is chargeable to tax in A.Y. 2005-06 are not correct. As a matter of abundant caution, the appellant had offered the amount of consideration on the receipt basis in A.Y. 2005-06 and 2006-07. Without prejudice and in the alternative, it was submitted that even if the date of agreement between the appellant and Prestige is considered to be the determinative point, in that case the computation of the capital gain would have to be made after taking into account the cost of acquisition of the appellant's right of obtaining 20% constructed since the appellant has relinquished /transferred her right of acquiring 20% constructed area in phase 2 (Prestige Palms) the corresponding cost of the said asset has taken as cos t of acquisition. Such cost is nothing but the consideration accepted by the Appropr1rt5iityin his order bearing No. AA/BNG/8(126)/11/ 99- 2000 dated 29.10.1999 in respect of Survey Nos. 145/1 146/1 admeasuring 4 acres 13 guntas i.e.173 guntas and Survey Nos. 146/2 & 14711 admeasuring 4 acres 30 guntas i.e. 190 guntas at Rs. 6,98,50,000I. Therefore, the value of the subject property, i.e. Survey No. 14612 and 147/1 would approximately be Rs. 3,65,60,560/ (Rs.6,98,49,912 x 190 / 363). In the circumstances, Your Honour may be pleased to hold accordingly. What has been transferred by the appellant is the right of acquisition of 20% Constructed area and not anything else. Obviously, therefore, the said cost of acquisition has to be allowed as deduction. The Assessing Officer has not given any reasoning whatsoever as to why the said cost of acquisition should not be allowed as deduction. The property in question was not obtained by way of succession. By no stretch of imagination, it could be considered that anyone could get such a property, for a song. Capital gains would arise under section 45 of the I.T. Act when the immovable property being a capital asset is transferred. Immovable property does not consist merely of land and/or buildings alone, but also a bundle of rights on which capital gains are attracted. Such rights may be in the nature of leasehold rights, tenancy rights, right of Life interest of the property etc. To determine what right/s have been transferred it would be necessary to know from the agreement the real intentions of the parties to the transaction. The appellant on 05/08/1999 sought to transfer her [and for consideration in the form of 20% built up area in Phase I and 20% built 7 & 8417/Mum/2010 up area in Phase II. The Phase I construction materialized, the flats given to the appellant, sold by her and capital gains were declared. However with regard to Phase II, the building activity did not get completed, so the transfer with regard to built up area for Phase II did not take place then. The appellant has now, as per agreement dated 22/05/2004, transferred the interest in 20% built up area to Prestige Estate Project Pvt. Ltd. on a consideration of Rs. 8.85 crore. Drawing an analogy from the above cited case, what has been transferred in the present case is the interest in '0% built up area [which includes the interest in flat (superstructure) and 20% interest in the land. There was transfer of interest in 80% of the land in Phase II by the appellant to the1uilder and simultaneous transfer and possession of interest in 20% built up area by the builder to the appellant. The cost of acquisition of 20% interest in the built-up area would be worked out. The Assessing Officer in assessment order for A.Y 2007 has held that with regard to the amount of gain chargeable to tax, the cost of acquisition of the said capital asset (i.e. 20% of built up area of Phase- II sold on 22.5.2004) is „NIL‟ as the same carries no cost at all now in view of the following inferences:- (1) If the assessee would have offered the gain arising on the date of sate of Phase-11 by considering the value of 20% share of the built-up area, then the indexed cost of acquisition of the said Phase-11 would have been allowed to be deducted as cost of acquisition. (2) However, the capital gain under discussion is arisen on sale of 20% share, for acquisition of which the assessee has incurred no cost and hence the same does carry any cost o acquisition. Hence the entire amount of Rs. 8.85 received in this transaction as consideration is taxable as capital gain. The terms of the agreement show that the purchaser can exercise rights to convey the properties by sale as soon as the consideration of Rs. 8.85 crore is paid. After the full payment of consideration is made by the purchaser, no further payment to the appellant is envisaged in agreement. The intention of the parties is thus clear that the entire built up area in which the appellant had a right has been transferred by way of the agreement The cost of acquisition of the 20% interest in built up area cannot be taken as nil since it was not acquired by the appellant free of cost. The appellant on 05/0811999 had acquired the right in built up area, which was determined at this date. The cost related to both Phase I and Phase II. Although only Phase I materialized, the cost of acquisition for Phase II is determinable from such agreement. Thus the Assessing Officer is directed to compute the capital gains after allowing the appellant the cost of acquisition as per agreement dated 05/08/1999.