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O R D E R PER LALIET KUMAR, J.M.
These appeals are filed by the assessees, feeling aggrieved by the separate orders passed by the Commissioner of Income Tax (Appeals) – 11, Hyderabad for the AY 2016-17. Since facts are identical and issues are common, for the sake of convenience, these appeals filed by the assessees are being heard together and are being disposed of, by this consolidated order by taking appeal of assessee Bandi Sudhakar Reddy in as lead appeal.
All these assessees have more or less filed common grounds of appeal in their respective grounds of appeals and therefore, for the sake of brevity, the grounds of appeal filed by the assessee in are reproduced as under :
“1.The Appellate order of Commissioner of Income Tax Appeals), Hyd-11 is bad and erroneous both of facts bad in law.
2. On the facts and circumstances of the cases and in law, the Ld.CIT(Appeals) has erred in the computation of short term capital gain on the basis of land development agreement cum GPA where physical possession could not be delivered during the assessment year. He ought to have considered the fact that the "transfer" could not be completed due to problems in handing over of the physical possession of the land to the developer.
3. On the facts and circumstances of the cases and in law, the Learned CIT(A) has erred in sustaining the addition made under short term capital gains for the land intended to transfer under (development cum GPA ignoring the fact that physical 8,87,9 possession has not been delivered to the developer and the contents of the affidavit" given by the developer
were completely ignored. He ought to have considered the fact that the contents of affidavit were not enquired into by the A.0 and it has not been proved by him as in correct. 4 On the facts and circumstances of the cases and in law, the Learned CIT(A) has erred in sustaining the disallowance of claim of appellant for the development expenditure of Rs. 6,90,400/- alleging that such as expenditure is not supported by any evidence ignoring the fact that the development expenditure is paid to a contractor and such agreement entered into with the contract is produced before the A.0.”
Facts of the case, in brief, are that the assessee is an individual filed his return of income u/s 139(4) of the Act for A.Y. 2016-17 on 03.12.2016 declaring total income of Rs.5,46,030/-. A search and seizure operation u/s 132 of the Act was conducted on 26.04.2018 in the case of Sri Allam Raja Reddy of M/s. Gandhari Constructions group. During the course of search, certain documents were found and seized in the residential premises of said Allam Raja Reddy, including the copy of Development Agreement cum General Power of Attorney dt.27.06.2015 entered into by the assessee and 4 others Subsequently, notice u/s 153C of the Act was issued to the assessee on 09.02.2021 and the assessee filed the return of income for A.Y. 2016-17 on 22.02.2021 admitting total income of Rs.5,46,030/-.
3.1. Subsequently, statutory notices u/s 143(2) dt.30.06.2021 and notice u/s 142(1) dt.18.11.2021 were issued to the assessee. As there was no compliance to the said notices, show cause notice dt.10.12.2021 was issued, for which assessee furnished information. However, the submissions of the assessee were not accepted by the Assessing Officer. During the verification, Assessing Officer observed that the income arising out of the above development agreement was not offered to tax either in the original return of income or return filed in response to notice u/s 153C of the Act. Assessing Officer also observed that out of sale consideration of Rs.15,000/-, the assessee had claimed cost of acquisition at Rs.2,85,080/- and development charges at Rs.6,90,400/- but not provided supporting documents. Subsequently, Assessing Officer completed the assessment by making addition of Rs.32,14,995/- being capital gains on account of development agreement cum GPA and Rs.6,90,400/- being disallowance of improvement expenses, thereby assessed the income of the assessee at Rs.44,51,425/- and passed assessment order on 18.02.2022 u/s 153C of the Act.
Feeling aggrieved by the order passed by the Assessing Officer, assessee filed appeal before the Ld. CIT(A), who dismissed the appeal of assessee.
Feeling aggrieved with the order of ld.CIT(A), assessee is now in appeal before us.
Before us, ld.AR Shri ChandraMouli, C.A, has drawn our attention to paras 4 to 4.3 of the assessment order, which are to the following effect :
“4.0) Development Agreement-cum-GPA During the course of search proceedings conducted in the case of Sri Allam Raja Reddy (Giridhari Construction Group) on 26.04.2018, a document pertaining to the assessee was found and seized. The details of the document are as follows: Development Agreement-Cum-General Power of Attorney document no. 8396 of 2015 dated 27.06.2015 executed between Sri Bandi Sudheer Reddy & 4 others [Land Owners] and M/s Giridhari's Vue represented by its Partners Sri K. Indra Sena Reddy and Sri O. Raghupathi Reddy [Developer] in respect of the property in Survey No.46 land admeasuring Ac.0.32 Guntas (Eastern Side Portion) situated at Kismathpur Village & O.P, Rajendranagar Mandal, Ranga Reddy District, Telangana State. Further, as seen from the Annexure-1A of the said Development Agreement, the proposed total built-up area is mentioned as 80,000 sq. ft. and the estimated market value of the building is mentioned as Rs.6,48,08,000/-. 4.1) As could be seen from the development agreement, the land owners/developer agreed to divide the respective share of units according to the sanction plan of the schedule property in the ratio of 33:67. As the said document did not specify about sharing ratio among the landowners, it is deemed appropriate to apportion the landowners' share equally between assessee and four others. Accordingly, the working with respect to assessee's share of income (capital gain) is as under: Market Value of the Building as per document = Rs. 6,48,08,000 Total share of landowners as per document = 33% 4.2) In connection with above, vide this office notice u/s 142(1) dated 18.11.2021, the assessee was asked to furnish complete details of the said transaction along with supporting documentary evidences. As the assessee has failed to comply with the said notice, a show cause notice dated 10.12.2021 was issued wherein the assessee was requested to explain why an amount of Rs.42,77,328/- should not be brought to tax as additional income over and above the regular income for the AY 2016- 17. 4.3) In response to the above notice, the assessee has submitted an affidavit given by the partnership firm M/s. Giridhari's Vue wherein it was mentioned that at the time of execution of the development agreement on 27.06.2015, the landlords have not given possession due to some problems created by trespassers. It is further mentioned in the affidavit that the permission was also granted by the GHMC on 05.01.2021.”
6.1. It was submitted by the ld.AR Shri ChandraMouli, C.A that though the Development Agreement cum General Power of Attorney was registered vide document no.8396/2015 dated 27.06.2015 executed between Bandi Sudheer Reddy (assessee at Sl.No.1) and 4 others (land owners) and M/s. Giridhar’s Vue represented by its Partners Sri K. Indra Sena Reddy and Sri S. Raghupathi Reddy (Developer), however, the possession of the property has not been handed over to the developer on account of the encroachment made by some parties. It was further submitted that during the assessment proceedings, the developer, who happens to be the third party has filed the affidavit submitting that the possession of the property was not given to the assessee at the time of Development Agreement cum General Power of Attorney and therefore, the permission for erection of the property was given on 05.01.2021. It was submitted by the ld.AR that the Assessing Officer without examining the affidavit filed by the assessee, (the third party) and without taking into the encroachment of the property, has taxed the income on account of the Development Agreement cum General Power of Attorney, in the year of agreement i.e., for the assessment year 2016-17. Ld.AR further submitted that the Assessing Officer was bound to apply his mind to the facts of the case and that the Assessing Officer has wrongly relied upon the judgment of jurisdictional High Court in the case of Potla Nageswara Rao Vs. DCIT reported in (2014) 8 TMI 636 (Andhra Pradesh High Court) and has wrongly decided the issue against the assessee. It was submitted by the ld.AR that the issue was decided by the hon'ble Supreme Court in the case of CIT Vs. Balbir Singh Maini reported in (2018) 12 SCC 354, wherein it was held that the year of taxation would be the year in which the physical possession of the property has been handed over in pursuance to the agreement u/s 53A of the Act. The relevant portion of the said judgment is reproduced hereinbelow :
“20. The effect of the aforesaid amendment is that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of Section 53A. In short, there is no agreement in the eyes of law which can be enforced under Section 53A of the Transfer of Property Act. This being the case, we are of the view that the High Court was right in stating that in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in Section 53A. The ITAT was not correct in referring to the expression “of the nature referred to in Section 53A” in Section 2(47)(v) in order to arrive at the opposite conclusion. This expression was used by the legislature ever since sub-section (v) was inserted by the Finance Act of 1987 w.e.f. 01.04.1988. All that is meant by this expression is to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein. It is only where the contract contains all the six features mentioned in Shrimant Shamrao Suryavanshi (supra), that the Section applies, and this is what is meant by the expression “of the nature referred to in Section 53A”. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression “of the nature referred to in Section 53A” would somehow refer only to the nature of contract mentioned in Section 53A, which would then in turn not require registration. As has been stated above, there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered. This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no “transfer” can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken; whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their part of the bargain. Since we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted on the facts of this case, we need not go into any other factual question.
However, the High Court has held that Section 2(47)(vi) will not apply for the reason that there was no change in membership of the society, as contemplated. We are afraid that we cannot agree with the High Court on this score. Under Section 2(47)(vi), any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within its purview. The High Court has not adverted to the expression “or in any other manner whatsoever” in sub-clause (vi), which would show that it is not necessary that the transaction refers to the membership of a cooperative society. We have, therefore, to see whether the impugned transaction can fall within this provision.
The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression “enabling the enjoyment of” takes color from the earlier expression “transferring”, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. 1 The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact.
A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to The maxim “noscitur a sociis” has been repeatedly applied by this Court. A recent application of the maxim is contained in Coastal Paper Limited v. Commissioner of Central Excise, Visakhapatnam, (2015) 10 SCC 664 at 677, para 25. This maxim is best explained as birds of a feather flocking together. The maxim only means that a word is to be judged by the company it keeps ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction.
The matter can also be viewed from a slightly different angle. Shri Vohra is right when he has referred to Sections 45 and 48 of the Income Tax Act and has then argued that some real income must “arise” on the assumption that there is transfer of a capital asset. This income must have been received or have “accrued” under Section 48 as a result of the transfer of the capital asset.
25. This Court in E.D. Sassoon & Co. Ltd. v. CIT, (1955) 1 SCR 313 at 343 held: “It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson (Inspector of Taxes) [(1946) 1 AER 532 at p. 539], and Webb v. Stenton, Garnishees [11 QBD 518 at p. 522 and 527]. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.”
This Court, in Commissioner of Income Tax v. Excel Industries, (2014) 13 SCC 459 at 463-464 referred to various judgments on the expression “accrues”, and then held: “14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held as follows: (ITR p. 148) “… Income tax is a levy on income. No doubt, the Income Tax 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 bookkeeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the 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.”
The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word “accrue” and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) “11. … the date of payment … does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately.”
This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”.
It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is, therefore, not the income of the assessee.”
In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.
In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act.
We are, therefore, of the view that the High Court was correct in its conclusion, but for the reasons stated by us hereinabove. The appeals are dismissed with no order as to costs.”
6.2. The ld.AR Shri Mohd. Afzal, Advocate, appearing for the assessee Shri Pramod Reddy Tekula has submitted that besides the decision in the case of CIT Vs. Balbir Singh Maini (supra), the hon'ble Supreme Court in the case of Seshasayee Steels (P) Ltd. Vs. ACIT reported in 421 ITR 0046 (2020) has also decided the issue in favour of the assessee. The relevant portion of the said judgment is hereinbelow for the ready reference.
“… In order that the provisions of Section 53A of the T.P. Act be attracted, first and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof. Secondly, the transferee must have performed or be willing to perform his part of the agreement. It is only if these two important conditions, among others, are satisfied that the provisions of Section 53A can be said to be attracted on the facts of a given case. On a reading of the agreement to sell dated 15.05.1998, what is clear is that both the parties are entitled to specific performance. (See Clause 14) Clause 16 is crucial, and the expression used in Clause 16 is that the party of the first part hereby gives ‘permission’ to the party of the second part to start construction on the land.
Clause 16 would, therefore, lead to the position that a license was given to another upon the land for the purpose of developing the land into flats and selling the same. Such license cannot be said to be ‘possession’ within the meaning of Section 53A, which is a legal concept, and which denotes control over the land and not actual physical occupation of the land. This being the case, Section 53A of the T.P. Act cannot possibly be attracted to the facts of this case for this reason alone. We now turn to the argument of the learned senior counsel appearing on behalf of the assessee based on Section 2(47)(vi) of the Income Tax Act. This Court in Commissioner of Income Tax v. Balbir Singh Maini (2018) 12 SCC 354 adverted to the provisions of this sub-Section in the following terms: 24. However, the High Court has held that Section 2(47)(vi) will not apply for the reason that there was no change in membership of the society, as contemplated. We are afraid that we cannot agree with the High Court on this score. Under Section 2(47)(vi), any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within its purview. The High Court has not adverted to the expression “or in any other manner whatsoever” in sub-clause (vi), which would show that it is not necessary that the transaction refers to the membership of a cooperative society. We have, therefore, to see whether the impugned transaction can fall within this provision.
The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression “enabling the enjoyment of” takes color from the earlier expression “transferring”, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact. Given the test stated in paragraph 25 of the aforesaid judgment, it is clear that the expression “enabling the enjoyment of” must take colour from the earlier expression “transferring”, so that it can be stated on the facts of a case, that a de facto transfer of immovable property has, in fact, taken place making it clear that the de facto owner’s rights stand extinguished. It is clear that as on the date of the agreement to sell, the owner’s rights were completely intact both as to ownership and to possession even de facto, so that this Section equally, cannot be said to be attracted.
Coming to the third argument of the learned senior counsel on behalf of the appellant, what has to be seen is the compromise deed and as to which pigeonhole such deed can possibly be said to fall under Section 2(47) of the Income Tax Act. A perusal of the compromise deed shows that the agreement to sell and the Power of Attorney are confirmed, and a sum of Rs.50 lakhs is reduced from the total consideration of Rs.6.10 crores. Clause 3 of the said compromise deed confirms that the party of the first part, this is the appellant, has received a sum of Rs.4,68,25,644/- out of the agreed sale consideration. Clause 4 records that the balance Rs.1.05 crores towards full and final settlement in respect of the Agreement entered into would then be paid by 7 post-dated cheques. Clause 5 then states that the last two cheques will be presented only upon due receipt of the discharge certificate from one M/s. Pioneer Homes. In this context, it is important to advert to a finding of the ITAT, which was that all the cheques mentioned in the compromise deed have, in fact, been encashed. This being the case, it is clear that the assessee’s rights in the said immovable property were extinguished on the receipt of the last cheque, as also that the compromise deed could be stated to be a transaction which had the effect of transferring the immovable property in question. The pigeonhole, therefore, that would support the orders under appeal would be Section 2(47)(ii) and (vi) of the I.T. Act in the facts of the present case. This being the case, we dismiss this appeal but for the reasons stated by this judgment.”
6.3. Shri A. Shrinivas, counsel for the 3rd assessee namely, Shri Venkat Rajasekhar Koneru, had reiterated the submissions made by both the counsel for assessees 1 and 2.
Per contra, the ld.DR relied upon the orders of lower authorities. He further submitted that after entering into the development agreement cum General Power of Attorney executed on 27.06.2015, the supplementary agreement was entered into by the landowners with the developer on 24.01.2021, in the said supplementary agreement, there was no reference of any litigation or encroachment by the third party on the subject land. The ld.DR had also drawn our attention to Clause 8 of the development agreement cum General Power of Attorney at page 23 of the Paper Book, which is to the following effect :
“8) The Land Owners hereby deliver the vacant, physical possession of the schedule property, more fully described in the schedule mentioned below, on this day for the development of the same into Residential Apartment.”
7.1. Further, it was submitted by the ld.DR that as per the development agreement cum General Power of Attorney dt.27.06.2015, in case of delay, the developer is liable to compensate to the assessee and to buttress his arguments, the ld.DR has drawn our attention to page 20 of the order of Ld.CIT(A) wherein it was held as under :
“…. Further, the Development Agreement also mentions that the Developer would obtain any approvals / permissions required for construction activity and in case of any delay beyond the period of completion, mutually agreed by both parties, the developer was to pay a compensation of Rs.6,000/- per flat per month for the land owners share for such delayed period. This implies that the appellant and the other land owners had clearly considered the risk of delay in the project and are ready to take the risk.”
We have heard the rival contentions of both the parties and perused the material available on record and also the orders passed by the lower authorities. Undisputedly, as per the development agreement cum General Power of Attorney dt.27.06.2015 which was entered into between the land owners and the developer, the parties have agreed to venture into the development of flats, as per the subject matter of the property. As per clause 8 of the said development agreement cum General Power of Attorney, the possession has already been handed over to the developer at the time of entering into development agreement cum GPA. In our understanding, the law has been fairly settled by the jurisdictional High Court in the case of Potla Nageswara Rao Vs. DCIT (supra), wherein it was held that the year of taxation would be the year, in which the registered development agreement cum GPA was executed, coupled with transfer of possession for the development of the property.
8.1. In the present case, as per the development agreement cum GPA dt.27.06.2015 and the possession has already been handed over by the land owners to the developer and therefore, for all the requirements of law of transfer as per the pronouncement of the jurisdictional High Court in the case of Potla Nageswara Rao (supra) took place in the assessment year before us. In view of the above, the Assessing Officer as well as the Ld.CIT(A) were correct in making the additions in the hands of the assessee in the year under consideration.
8.2. With respect to other argument of the ld.AR that the Assessing Officer has not examined the affidavit filed by the developer and also has not taken into account the permission granted by the local authorities on 05.01.2021, we are of the opinion that the development agreement cum GPA dt.27.06.2015 is a registered document and there is a clear mention of handing over the possession by land owners to the developer. The above said facts mentioned in the said document cannot be merely disbelieve on the account of the affidavit filed by the developer at the request of the assessee. The law is fairly settled that the contents of the registered document shall prevail over the affidavit or the oral statement. In view of the above, we have no hesitation to say that the Assessing Officer was right in not entertaining the self-serving affidavit filed by the developer.
8.2. With respect to other argument i.e., the permission was accorded on 05.01.2021 is concerned, we are of the opinion that the grant of permission is nothing to do with the transfer of property. In the present case, we are only concerned with the transfer of the property and the income arising out of the said transfer. In view of the above, we are of the opinion that the grant of permission by local authorities on 05.01.2021 is nothing to do with transfer of the property. Furthermore, once the developers have decided to compensate owners on account of failure by the developer to raise construction beyond a period of time, then it is for the developer and for the land owners to inter-se decide the issue of delay in raising the construction. The last argument raised before us is with respect to the applicability of decision of Hon'ble Supreme Court in the case of CIT Vs. Balbir Singh Maini (supra) and the decision in the case of Seshasayee Steels Pvt. Ltd. Vs. ACIT (supra), we are afraid that both the judgments are not relevant for the purpose of deciding the issue. In the case of CIT Vs. Balbir Singh Maini (supra), the Hon'ble Supreme Court has held in para 20(supra) that the year of registration of the development agreement cum GPA would be the year of transfer. Since the JDA was not registered, therefore, it was held it is not a transfer. In the present case, first the development agreement cum GPA was entered into and thereafter, it was registered on 27.06.2015 and therefore, the year of taxation would be the assessment year 2016-17. On account of the above, we do not find any reason to interfere with the orders passed by the learned lower authorities. Thus, the appeals of the assessees are dismissed.