M/S CHAITANYA PROPERTIES PRIVATE LIMITED,BANGALORE vs. JCIT, BANGALORE

O R D E R Per Shri Jason P. Boaz : These are cross appeals by the assessee and revenue against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore for Assessment Year 2009-10 dt.22.10.2012. Having been heard together, they are disposed off by way of this common order.

2. The authorities below are not justified in adding a sum of Rs.1,93,730 under section 14A of the Act read with Rule 8D of the Rules since the mandatory conditions for invoking the said provisions has not been complied with as the Assessing Officer has not recorded satisfaction under Section 14A of the Act read with Rule 8D of the Rules under the facts and circumstances of the case.

3. Without prejudice, the addition made is highly excessive and needs to be substantially reduced.

4. Without prejudice, the addition made at the rate of 0.5% on the average investment is arbitrary, incorrect and not in accordance with law.

5. Without prejudice, the addition cannot exceed the exempt income earned of Rs.18,400 under the facts and circumstances of the case.

6. The authorities below failed to appreciate that the provisions of section 41(1) of the Act are not applicable to the facts of the case of the appellant as there is no remission or abatement of the liability.

7. The authorities below are not justified in adding a sum of Rs.5,87,817 on account of difference in account balances with M/s. KBD Sugars & Distilleries Ltd under the facts and circumstances of the case.

8. The authorities below failed to appreciate the fact that when M/s. KBD Sugars & Distilleries Ltd has offered the sum of Rs.5,57,817 for tax, the addition in the hands of the appellant amounts to double taxation.

9. The appellant denies itself liable to be levied to interest under Section 234B of the Act and further the computation of interest under Section 234B was not provided to & 125/Bang/2013 S.P. No.148/Bang/2014 4 the appellant as regard to the rate, period and method of calculation of interest under the facts and circumstances of the case. The appellant expressly urges that the period of levy of interest is not in accordance with section 234B of the Act.

10. The appellant craves leave to add, alter, delete, modify any of the grounds which are urged above.

11. For the above and such other grounds as may be urged at the time of hearing the appellant prays your Honour to consider the facts and circumstances of the case and justice be rendered.”

5. The grounds at S.Nos.1, 10 & 11 of the assessee's appeal are general in nature and not being urged before us are dismissed as infructuous.

6. Grounds 2 to 5 : Disalowance u/s.14A of the Act – Rs.1,93,730. 6.1 The facts of the matter on this issue as emanate from the record are that the Assessing Officer in the order of assessment has observed that the assessee, in spite of having huge liabilities by way of Term Loans and Current Liabilities continued to invest in associate companies in the form of shares with the intention of earning interest income and that in order to carry on such investment activity it has directly or indirectly utilized the services of man power, office, etc to earn such income. The Assessing Officer invoking the provisions of section 14A of the Act r.w. Rule 8D(2)(iii) of the IT Rules disallowed an amount of Rs.1,93,730. 6.2 On appeal, the assessee challenged the disallowance of Rs.1,93,730 made by the Assessing Officer u/s. 14A r.w. Rule 8D(2)(iii) on three counts. Viz., (i) that the Assessing Officer has invoked section 14A of the Act in a manner contrary to the provisions of law; & 125/Bang/2013 S.P. No.148/Bang/2014 5 (ii) that the Assessing Officer has applied the provisions contained in Rule 8D mechanically and automatically, without proper application of mind; (iii) that the addition made is also excessive and unreasonable in the facts and circumstances of the case. The learned CIT (Appeals) held that the Assessing Officer had invoked the provisions of section 14A of the Act in accordance with law and also that in view of the applicability of the provisions of Rule 8D and the judicial pronouncements in the case of – (i) Technopark Advises (P) Ltd., 18Taxman.com 146 (Del), and (ii) Cheminvest 121 ITD 318 (Del)(SB), he confirmed the entire disallowance of Rs.1,93,730. 6.3.1 In the proceedings before us, the learned Authorised Representative submitted that the Assessing Officer has not rendered any correct or cogent reasons for rejecting the assessee's contention that it has not incurred any expenditure to earn the exempt income of Rs.18,400 and has proceeded to mechanically apply the provisions of Rule 8D without making out a proper case for disallowance. Thus the learned Authorised Representative contends, the disallowance under Section 14A of the Act is made without arriving at a satisfaction as envisaged by sub-sections (2) and (3) of section 14A of the Act. 6.3.2 The learned Authorised Representative further submitted that the investments in question amounting to Rs.3,87,66,000 have not been made during the year under consideration, but are opening balances of such investments as appear in the books of account of the assessee. It is submitted that the break-up of the investments in shares are as under :- & 125/Bang/2013 S.P. No.148/Bang/2014 6 In associate companies 38,70,000 equity shares in Trichy Steel Rolling Mills P. Ltd. : Rs.3,87,00,000. In other companies 4600 equity shares of Andhra Bank : Rs.46,000. 6.3.3 The learned Authorised Representative submits that, from the above break up of investments, it is clear that out of the total amount of Rs.3,87,46,000, the assessee's investment in associate / group company to the extent of Rs.3,87,00,000 is made not with a view to earn exempt income but for strategic business purposes. Therefore, the investment of Rs.46,000 made in other companies i.e. Andhra Bank only could be considered as investments made with a view to earn exempt income. It is further submitted that the investments (supra) in purchase of Andhra Bank shares was made in the financial year ended March, 2001 and of the investment of Rs.3.87 Crores in Trichy Steel Rolling Mills, Rs.1,87,00,000 was invested in the financial year ending 31st March, 2001 and the balance Rs.2.00 Crores was invested in the financial year ending 31st March, 2003. It is contended by the learned Authorised Representative that these investments are long term investments, which form a part of the record before the IT Department and that no expenditure has been incurred to either maintain or monitor these investments. It is submitted that the assessee has earned exempt income of Rs.18,400 only, out of the investment of Rs.46,000 invested in the shares of Andhra Bank and that no dividend income has been earned out of the investment of Rs.3.87 Crores made in its sister concern M/s. Trichy Steel Rolling Mills P. Ltd.. The learned Authorised ITA Nos.52 & 125/Bang/2013 S.P. No.148/Bang/2014 7 Representative contends that it is not only excessive but also absurd that the assessee has had to suffer a disallowance of Rs.1,93,730 as expenditure incurred on earning the exempt income of Rs.18,400. 6.3.4 In this context, the learned Authorised Representative placed reliance upon the decision of the Hon'ble ITAT, Mumbai Bench in the case of J.M. Financial Ltd. V Addl. CIT in dt.26.3.2014. The learned Authorised Representative submitted that in this order the Tribunal has held that where the investment is made in sister / associate concerns, it is so made for the purpose of having control or for business purposes and not with a view to earn dividend income from such investments and therefore it cannot be said that the assessee is incurring administrative expenses to monitor these investments. Further, in the case where investments are long term in nature, it cannot be said that expenditure is being incurred to maintain the portfolio. The learned Authorised Representative further submits that the Mumbai ITAT in the aforesaid order has also stated that similar view has been held by the ITAT, Mumbai Bench in the case of Garware Well Ropes Ltd. V Addl. CIT in ITA No.5408/Mum/2012. The learned Authorised Representative prays that in view of the facts and circumstances of the case and the judicial pronouncements on this issue on similar facts, the addition of Rs.1,93,730 made under Section 14A rws Rule 8D ought to be deleted. 6.3.5 The learned Authorised Representative alternatively placed reliance on the decision of the ITAT, Mumbai Bench in the case of Daga Global Chemicals Pvt. Ltd. V ACIT in ITA No.5592/Mum/2012 wherein it was stated to be held that the disallowance under Section 14A & 125/Bang/2013 S.P. No.148/Bang/2014 8 r.w. Rule 8D cannot exceed the exempt income. It is submitted by the learned Authorised Representative that since the exempt income earned in the case on hand is Rs.18,400, the maximum amount that could be disallowed is Rs.18,400. 6.4 Per contra, the learned Departmental Representative, in arguments and submissions put forth, has placed strong reliance on the action and finding in the orders of the authorities below. 6.5.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial pronouncements placed reliance upon by the assessee. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. V CIT reported in 347 ITR 272 has held that by virtue of the provisions of sub-section (2) and (3) of Section 14A of the Act, if the Assessing Officer is not satisfied by the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon the determination of the amount of expenditure in accordance with Rule 8D. While rejecting the claim of the assessee, the Assessing Officer has to render cogent reasons for the same. In a case where the assessee states that no expenditure has been incurred by it to earn exempt income, the Assessing Officer has to verify the correctness of the assessee's claim having regard to the accounts of the assessee. In the case on hand, we find that the Assessing Officer has not given any cogent reason in the order of assessment for disbelieving the contention of the assessee that it has incurred no expenditure to earn the exempt income & 125/Bang/2013 S.P. No.148/Bang/2014 9 of Rs.18,400 but has proceeded to apply the provisions of Rule 8D to arrive at the disallowance of Rs.1,93,730 as the expenditure deemed to be incurred for earning exempt income. 6.5.2 Further, as contended by the learned Authorised Representative, the judicial pronouncements relied on by the assessee i.e. J.M. Financial Ltd (supra), apply to the factual matrix of the case on hand and in this view of the matter, it cannot be said that the assessee was incurring expenditure to maintain and / or monitor its long term investments of Rs.3,87,00,000 in its sister / associate concern M/s. Trichy Steel Rolling Mills P. Ltd. and Rs.46,000 invested in the shares of Andhra Bank. In view of the legal and factual circumstances of the case as discussed and for the reasons stated above, we delete the disallowance of Rs.1,93,730 made by the Assessing Officer under Section 14A r.w. Rule 8D.

7. Ground Nos. 6 to 8 : Addition u/s.41(1) of the Act. 7.1 These grounds are raised in respect of the addition made under Section 41(1) of the Act in respect of the difference in liability towards Karnataka Breweries & Distilleries Ltd. (‘KBDL’). 7.2 The facts of the matter, briefly, are that in the course of assessment proceedings the Assessing Officer noticed that in the books of the KBDL, the assessee was shown to be due to the extent of a sum of 3,71,80,073 whereas in the assessee's books the liability of Rs.3,65,92,256 was claimed as liability due towards ‘KBDL’. In other words, the assessee had shown a liability which is less than what its creditor had shown in its books of account. The & 125/Bang/2013 S.P. No.148/Bang/2014 10 Assessing Officer added the difference of Rs.5,87,817 (i.e. Rs.3,71,80,073 less Rs.3,65,92,256) as unexplained payment and cessation of liability and brought the same to tax in the assessee's hands under Section 41(1) of the Act. On appeal, the learned CIT (Appeals) sustained the addition made by the Assessing Officer. 7.3 The learned Authorised Representative submitted that the addition of Rs.5,87,817 made cannot be sustained on basic accounting principles considering the fact that the liability admitted by the assessee at Rs.3,65,92,256 is less than the dues of Rs.3,71,80,073 shown by its creditor, KBDL. It is contended by the learned Authorised Representative that in these circumstances, no addition can be made under Section 41(1) of the Act and that such an addition can be made only if the liability shown by assessee is higher than the dues shown by the creditor. In such a case the revenue can perhaps take a view that the liability to the extent of the difference is no longer payable and therefore be treated as income under Section 41(1) of the Act. It is contended that in the said case since the assessee has shown a lesser liability than the amount shown as due by its creditor, the basic requirement that a liability no longer exists is not present in the facts of this case in order to apply the provisions of section 41(1) of the Act. 7.4 The learned Departmental Representative supported the orders of the authorities below and prayed for the assessee's appeal on this issue to be rejected as the orders of the authorities below were factually indisputable. & 125/Bang/2013 S.P. No.148/Bang/2014 11 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record. It is not disputed that the assessee in its books of accounts has claimed that the liability due to KBDL is Rs.3,65,92,256 whereas on examination of the books of account of KBDL by the Assessing Officer, it was found that the assessee was shown to be liable to pay KBDL Rs.3,71,80,073. As there was no satisfactory explanation, the Assessing Officer brought to tax the difference of Rs.5,87,817 as unexplained payment and cessation of liability under Section 41(1) of the Act and brought the same to tax in the assessee's hands. On appeal, during remand proceedings, the assessee submitted that the difference appearing in this account was offered to tax by KBDL in the year ended 31.3.2008. The learned CIT (Appeals), observing that in respect of the discrepancy of Rs.5,87,817, no proof was produced by the assessee to establish that this amount was offered to tax by KBDL, sustained this addition as cessation of liability under Section 41(1) of the Act. 7.5.2 We have carefully perused the submissions of the assessee (supra). It has been submitted by the assessee that the impugned addition of Rs.5,87,817 can be made only if the liability claimed by the assessee is higher than the dues shown by the creditor viz. KBDL. In the case on hand, the undisputed facts as per record show that the liability claimed by the assessee is Rs.3,65,92,256, whereas on examination of the books of KBDL by the Assessing Officer, it was found that the assessee was shown to be liable to pay KBDL Rs.3,71,80,073. We find that it is in these factual circumstances the finding of the authorities below is & 125/Bang/2013 S.P. No.148/Bang/2014 12 erroneous as the basic requirement that a liability no longer exists is not present in the case on hand to warrant the application of the provision of section 41(1) of the Act. In this being the factual matrix of the case, we delete the addition of Rs.5,87,817 made under Section 41(1) of the Act and consequently allow grounds at S.Nos.6 to 8 raised by the assessee.

8. In Ground No.9, the assessee challenges the action of the Assessing Officer in charging it interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order.

Ground No.1. The learned CIT (Appeals) erred on fact and in law n holding that no income is chargeable for the assessment year ignoring the fact that the assessee received huge amount of non-refundable deposits in lieu of transfer of its right in the constructed area to be received. Ground No.2. The learned CIT (Appeals) erred in fact and in law in holding that the year of taxability is the year in which stock-in-trade (land/flats or transferred apartments) are sold on registration. & 125/Bang/2013 S.P. No.148/Bang/2014 13 Ground No.3. The learned CIT (Appeals) erred in fact and in law in contradicting his own findings where he accepted that the capital gains will arise only in the assessment year 2005-06 since the transfer took place during the year on the basis of execution of JDA by the appellant company and further execution of Power of Attorney on 5.2.2005 and 1.3.2005 in favour of M/s. PEPL for transfer of stock for development and finally the CIT (Appeals) is directing the Assessing Officer to take necessary remedial action to tax the capital gains in the appellant’s case in the year in which the stock is sold and transferred by the appellant company in accordance with the provisions of section 45(2) and also tax the business profits in the year in which flats / constructed area were sold on registration.”

11. Grounds No. 1 to 3 : Income from ‘Prestige Shantiniketan’ Project. 11.1 The facts of the matter as emanate from the record are, briefly, as follows. The assessee entered into a Joint Development (‘JDA’) in respect of 94 acres 1.82 gutnas of land with Prestige Estate Projects Ltd. (‘PEPL’) by agreement dt.5.2.2005, in the period relevant to Assessment Year 2005-06 and the project was named ‘Prestige Shantiniketan’. 11.2.1 In the course of assessment proceedings, the Assessing Officer after examining the JDA dt.5.2.2005 came to the conclusion that the assessee has transferred stock-in-trade to PEPL and is therefore liable to pay tax arising out of the said transaction. In coming to this conclusion, the Assessing Officer had drawn support from the following clauses of the JDA :- (i) Clause(k) of the JDA – Wherefrom the Assessing Officer observed that the assessee company has passed all the necessary resolutions for the development and sale of the scheduled property and duly authorizing the person executing the JDA to execute the agreement and all other consequential documents / deeds / including the power of attorney for transfer / surrender / relinquishment of right, etc vested in the stock; & 125/Bang/2013 S.P. No.148/Bang/2014 14 (ii) From Clause (xviii) of the JDA, it is clear that the assessee company has obtained approval from their share holders to enter into the JDA with PEPL and to execute the necessary documents in connection with the same; (iii) As per page 11 of the JDA, the assessee has handed over possession of the property to PEPL till the completion of the development and construction of the project on the property; (iv) As per page 19 of the JDA, the assessee company has agreed to transfer / relinquish / sell 68.23% of the undivided portion of stock of land to PEPL. Assessee company has executed power of attorney (POA) on 5.2.2005 and 1.3.2005 in favour of PEPL for transfer of stock of land for development. 11.2.2 In view of the above actions by the assessee company – transferring its stock in trade of land, the Assessing Officer was of the view that the stock-in-trade of land was transferred in the period relevant to Assessment Year 2005-06 itself. In this view of the matter, the Assessing Officer then proceeded to determine the assessee's income on the Percentage Completion Method holding that the assessee was not correct in following the Project Completion Method as it was maintaining its books of account on the Mercantile System of Accounting and not the cash system and that the assessee ought to have recognized and admitted its income in accordance with Accounting Standards –

7. The Assessing Officer contends that when both the assessee and PEPL have held common stock of land on which construction activity has been simultaneously started, and PEPL is offering the income earned from this project on Percentage Completion Method, it is difficult to accept the assessee's & 125/Bang/2013 S.P. No.148/Bang/2014 15 proposition that percentage completion method is not applicable to the assessee. The Assessing Officer was also of the view that once the stock of land is given for construction of the apartments, all such contracts would fall within the ambit of Percentage Completion Method for recognition of income and since PEPL, the developer, offers its income on the Percentage Completion Method, the same is also applicable to the assessee and it should offer its income on this basis. The Assessing Officer on the basis of advances collected from customers, on behalf of the assessee by PEPL and the non-refundable deposit paid by the PEPL to the assessee, arrived at a sale consideration of Rs.260,09,86,890. Applying the Percentage Completion Method thereon, the Assessing Officer arrived at the Gross Income of Rs.46,81,77,640 and after deducting cost of construction of Rs.17,25,85,438 from the gross income, determined the income of the assessee at Rs.29,55,29,202. 11.3.1 On appeal, the learned CIT (Appeals) in his order has upheld the basic contention of the assessee that the property, which is the subject matter of JDA between the assessee and PEPL, is held as stock-in-trade by the assessee and not as a capital asset. He was therefore of the view that the income arising under Section 45(2) of the Act in respect of the conversion of the capital asset to stock-in-trade, as well as business income arising on the sale of such stock-in-trade will accrue and arise only in the year in which the stock-in-trade is actually sold. 11.3.2 At para 5.9 of the impugned order, the learned CIT (Appeals) has held that it is an undisputed fact that the assessee was holding the land as stock-in-trade after converting the & 125/Bang/2013 S.P. No.148/Bang/2014 16 capital asset and the same was disclosed in the assessee's Balance Sheet and that this fact has also been admitted by the Assessing Officer in the order of assessment. 11.3.3 In para 5.10 of the impugned order, the learned CIT(A) has also held that the assessee is a landlord in the transaction with PEPL and is entitled to compute its income in accordance with the provisions of the IT Act,1961 and is not required to follow the Percentage Completion Method, just because the other party viz. PEPL, was following that method. 11.3.4 In para 5.14 of the impugned order, the learned CIT(A) observes that capital asset as defined in Section 2(14) of the Act specifically excludes stock-in-trade. It is also observed that the conversion of a Capital Asset into stock-in-trade amounts to transfer under Section 2(47)(iv) and that transfer of a business asset is not defined under the Act. The learned CIT(A) has observed that the Assessing Officer is of the opinion that in view of the fact that the assessee has entered into a JDA with PEPL and also executed a POA in their favour in the period relevant to Assessment Year 2005-06, the transfer had taken place in that year itself and if this view of the Assessing Officer were to be held to be correct, then the Capital Gains would arise during Assessment Year 2005-06. 11.3.5 In para 5.15 of the impugned order, the learned CIT(A) has held that in a case where immovable property has been held as stock-in-trade, the conveyance of the same cannot be made by merely handing over possession, but takes place only by registration of sale of the immovable property in order to pass on the title to the purchaser or developer in as much as section 53 of the Transfer of Property Act applies only to those immovable properties which & 125/Bang/2013 S.P. No.148/Bang/2014 17 are held as Capital Assets as provided under Section 2(47) of the Act and not to those held by way of stock-in-trade. In both paras 5.15 and 5.17 of the impugned order, the learned CIT(A) has held that since no stock (land/flats or apartments) are sold in the impugned Assessment Year 2009-10, no Capital Gains or Business Profits would arise for Assessment Year 2009-10 to the assessee in the case on hand. 11.3.6 In para 5.16 of the impugned order, the learned CIT(A) has concluded that in view of the fact that the Assessing Officer has neither rejected the books of account nor found any discrepancy in the same, the Assessing Officer’s action is resorting to estimation of profits is not correct. The learned CIT(A) has also observed that the Assessing Officer has not rendered any finding of sale of land / flat, held as stock-in-trade, by the assessee in the impugned Assessment Year 2009-10 in order to warrant estimation of income by rejection of books of account. The learned CIT(A), in the impugned order, however directed the Assessing Officer to take necessary remedial action to tax the capital gains in the assessee's case in the year in which the stock of land was sold or transferred by the assessee in accordance with the provisions of section 45(2) of the Act and also to tax the business profits in the year(s) in which the flats / constructed area is sold. 11.4 The learned Departmental Representative was heard in support of the grounds raised by revenue. The learned Departmental Representative contended that the order of the Assessing Officer in making the addition, estimating the income of the assessee on the & 125/Bang/2013 S.P. No.148/Bang/2014 18 percentage completion method was in order. The learned Departmental Representative contends that the assessee, as per the JDA dt.5.2.2005, has actually transferred the share of the developer, PEPL, in the immovable property in the Assessment Year 2005-06 and that the assessee's claim of conversion of the Capital Asset into stock-in-trade is factually incorrect and is merely a cover up to avoid payment of tax for Assessment Year 2005-06. The learned Departmental Representative also placed reliance upon written submissions dt.10.11.2014 which is common to the appeal for Assessment Year 2005-06 and the impugned Assessment Year 2009-10. Therein, Revenue has contended that in the balance sheets of the assessee filed with the Registrar of Companies for the years ended 31.3.2006 and 31.3.2007 the assessee has shown fixed assets at Rs.3,13,17,741 and Rs.3,14,85,823 respectively, while the inventories for both years are shown at NIL. This, the learned Authorised Representative contends also demonstrates that the assessee had not converted the Capital Assets into stock-in-trade even as on 31.3.2007 and therefore the assessee claim that the same was stock-in-trade even before the JDA was entered into with PEPL on 5.2.2005 is not correct. The learned Departmental Representative supported the findings rendered by the Assessing Officer in the order of assessment and prayed for the impugned order of the learned CIT(A) on this point to be reversed and that of the Assessing Officer to be restored. 11.5.1 The written submissions put forth by the learned Authorised Representative on this issue regarding the findings rendered by the Assessing Officer in the order of assessment are extracted as under :- & 125/Bang/2013 S.P. No.148/Bang/2014 19 “8.5 PERMISSION TO DEVELOP: i. Clause 1.1(page 50 of the paper book) of the JDA (which is placed at pages 39 to 102 of the Paper Book) states that The First Party (Assessee) hereby permits the Second Party (PEPL) to enter the schedule ‘D’ property for development thereof in terms of this Development Agreement. ii. Clause 1.3 (Page 51 of Paper Book) specifies that such permission to enter upon the schedule ‘D’ property shall however not be construed as delivery of possession under section 53 A of the Transfer of Property Act read with section 2(47) (v) of the Income Tax Act, 1961. The legal possession of Schedule ‘D’ Party shall continue to vest in the First Party. The Second Party shall only be permitted to enter upon the Schedule ‘D’ Property by way of license to develop the same. iii. The JDA is a contract between the Assessee and PEPL and the covenants contained therein should be read & understood in the manner it was agreed to between the parties. Further it is correct to give it a meaning which runs contrary to the understanding between the parties. iv. Keeping the above parameters in mind if one were to analyse the covenants agreed to and contained in clauses 1.1 & 1.3, it is clear that they should be read together & it is clearly understood between the parties that the Assessee continues to be in legal possession of the Schedule Property & the permission given to PEPL to enter upon & develop the Schedule Property is for the limited purpose of Development & should not be construed as handing over of possession as contemplated by section 53A of the Transfer of Property Act read with section 2(47)(v) of the Income Tax Act. v. The conclusion of the assessing officer that the Assessee has handed over possession is therefore incorrect. 8.6 TRANSFER OF LAND TO DEVELOPER: i. Clause 11.1 of the JDA (page 70 of paper book) covenants that even though the Developer has the right to enter into agreements to sell its share of the development to prospective buyers, the land owner (Assessee) will transfer the land only after receiving the it’s share of the built up area, with the construction complete in all respects and occupancy certificate obtained in respect of such built up area. In the event the Developer were to hand over the built up area belonging to the owner in a phased manner, then the owner shall transfer only such portions of land which is proportionate to such built up area. & 125/Bang/2013 S.P. No.148/Bang/2014 20 ii. It is clear that the Assessee shall transfer the land only after receiving its share of built up area, wherein the construction is complete in all respects & such built up area is fit for occupancy & use. It is therefore important to examine the fact as to when the developer has actually completed construction & handed over the built up areas to the owners. Certainly this cannot happen on the very day the JDA is entered into. iii. Further it is evident from the Agreement entered into dated 24/03/2011, between the Assessee & PEPL which is filed in pages 150 to 178 of the paper book compilation, that the Developer has completed overall development by 24/03/2011, but is still in the process of final finishing, inspecting & handing over of the Owner’s Constructed Area as on 24/03/2011 (paras 8 & 9 of the agreement in paper book page no. 165 & 166). Thus it is evident that the Developer has not completed the construction of the Owner’s constructed area in all respects even as on 24/03/2011, relevant to the A.Y.2011-12 & therefore the question of considering any income from the JDA in the hands of the Assessee upto the A.Y. 2011-12 does not arise. iv. The Assessing officer is therefore wrong in coming to the conclusion that the Assessee has transferred land to the Developer. 8.7 OBLIGATIONS OF THE ASSESSEE: i. Page 5, sub para IV of the preamble in the JDA (Page 44 of paper book) states that the Assessee has received possession of 14 acres 12 guntas of land from KIADB & is yet to receive the absolute sale deed in its name. ii. Page 4, sub para III of the preamble in the JDA (page 43 of paper book) states that the Assessee is required to take conveyance of 10 acres of land from Vicon Ltd. iii. Page 4, sub para IV of the preamble in the JDA (page 44 of paper book) states that the Assessee is required to take conveyance of 7acres 9 guntas of land from Vicon Ltd. iv. Clause No.13(1) of the JDA (page 75 of paper book) stipulates that the Assessee shall complete the purchase of land from KIADB within 12 months from the date of the JDA (05/02/2005), perfect title to the same by obtaining a Sale deed for 14 acres 12 guntas of land in its favour from KIADB. The final sale deed from KIADB was obtained on 23/01/2006 & the same is evidenced by the recital to this effect in the agreement dated 24/03/2011(in page 156 of the paper book). & 125/Bang/2013 S.P. No.148/Bang/2014 21 v. Clause No.13(2) of the JDA (page 76 of paper book) stipulates that the Assessee shall secure a sale deed in its favour from Vicon Ltd in respect of 10 acres of land within a period of 45 days from the date of the JDA (05/02/2005). The final sale deed from Vicon Ltd was obtained on 17/02/2005 for 2 acres 30 guntas & on 19/5/2008 for 7 acres 10 guntas & the same is evidenced by the recital to this effect in the agreement dated 24/03/2011( in page 158 of the paper book). vi. Clause No.13(3) of the JDA (page 76 of paper book) stipulates that the Assessee shall secure a sale deed in its favour from Shivakumar Reddy in respect of 7 acres 14 guntas of land within a period of 45 days from the date of the JDA (05/02/2005). vii. It is clear from the above that as on the date of JDA the Assessee had not secured conveyance of title deeds in its name in respect of 31 acres 21 guntas of land out of the total area of 94 acres 1.82 guntas committed to Joint Development. If this be the case then can it be said that the Assessee had transferred the lands when 1/3 rd of lands are yet to be secured in the first place by the Assessee. The time accorded is 12 months in the case of KIADB & 45 days in the other 2 cases. In the light of the fact that the obligations of the Assessee as per the JDA extend beyond 31/03/2005, can it be said that the Assessee has sold/transferred its stock in trade in the A.Y. 2005-06 itself. 8.8 EXECUTION OF POWER OF ATTORNEY IN FAVOUR OF THE DEVELOPER: i. Clause 13.4 of the JDA (page 76 of paper book) states that the Assessee has on 05/02/2005, executed a POA in favour of PEPL authorising it to represent the Assessee before all statutory authorities to secure necessary licenses & permissions to carry out the Development authorities. ii. The presence of this clause itself demonstrates that the land is in the name of the Assessee & all permissions, licenses etc are to be obtained in the name of the Assessee in order carry out development on the Schedule Property. If the land were to be transferred the question of obtaining permissions & licenses in the name of the Assessee would not arise. In the eyes of the concerned statutory authorities the land continues to be the property of the Assessee & the JDA does do not in any way alter this fact. iii. Clause 13.5 (page 76 of paper book) states that the Assessee has executed a separate POA, on 05/02/2005, other than the one mentioned in Clause 13.4 authorising the PEPL to enter into agreements for sale, lease of PEPL’s share of the constructed area. & 125/Bang/2013 S.P. No.148/Bang/2014 22 iv. Clause 13.6 (page 76 of paper book) states that the Assessee has executed a separate POA, on 05/02/2005, other than the ones mentioned in Clause 13.4 & 13.5 authorising the PEPL to convey sale deeds, lease deeds etc in respect of PEPL’s share of the constructed area & that the said POA is kept in escrow in terms of Cl.13.9 of the JDA. v. Clause 13.9 of the JDA (page 77 of paper book) states that the POA mentioned in Clause 13.6 shall be kept in Escrow with Mr.Kusuma Muniraju, Advocate having his office at Eden Park, No.20, Vittal Mallya Road, Bangalore and that the said POA is available to PEPL to exercise its rights thereunder in proportion to the delivery of the Owner’s Constructed Area to execute conveyances , lease deeds, mortgages for such undivided share in the Schedule ‘D’ Property corresponding to the delivery of the Owners Constructed Area ( eg. If 100 sft of super built area is delivered to the Assessee being 31.77% , PEPL will be entitled to convey the undivided share for 214.76 sft of super built area).That on completion of the construction of the Owners Constructed Area, the Developer shall intimate the Owner in writing with the architect’s certificate and the occupation certificate as to the said completion and if the Assessee does not take possession within 10 days of such intimation, PEPL shall be entitled to exercise its rights over the proportionate undivided interest in land that it is eligible to without waiting for the Assessee to take possession of its share of constructed area. vi. From the above it is amply clear that the POA to actually convey title can be activated only upon delivery of the owners constructed area to the Assessee or at least not before the same is intimated to be ready for delivery of possession to the Assessee. The POA is no doubt executed on 05/02/2005 but the same is done to protect the interest of PEPL. The fact that PEPL is not put in possession of the POA as the same is kept in escrow shows that PEPL cannot convey title before completing its obligation namely keeping the owners constructed area ready for delivery to the Assessee. Further the undivided interest in land which PEPL is entitled to convey is restricted to only those portions which is proportionate to the Area of Owners whose construction is complete. vii. In view of such conditions as stipulated above can it be said that the Assessee has transferred land on 05/02/2005, relevant to the A.Y. 2005- 06itself? The answer has to be categorically in the negative. viii. Further it is evident from the Agreement entered into dated 24/03/2011, between the Assessee & PEPL that the POA which is kept in Escrow was not acted upon but instead a fresh POA was executed by the Assessee on 24/03/2011 & all documents which are executed to convey title to the undivided interest in land is done only subsequent to this date with the aid & 125/Bang/2013 S.P. No.148/Bang/2014 23 of the POA executed on 24/03/2011 and the POA executed on 05/02/2005 was handed back to the Assessee on 24/03/2011 by the Escrow, which fact is evidenced in page 15 of the said agreement of 24/03/2011(paper book page no.168) under the head “Documents of Title”. 8.9 DOCUMENTS OF TITLE: i. Clause No.14 of the JDA (page 78 of paper book) specifies that the Original Documents of Title shall also be kept in Escrow with Mr.Kusuma Muniraju, Advocate having his office at Eden Park, No.20, Vittal Mallya Road, Bangalore and that the handing over of the same will depend on the phase being complete and whether for that phase there are independent title deeds. Further in the event of termination of the agreement the Original Title Deeds shall be returned to the Assessee. In the event of dispute the same shall be handed over to the forum which is presiding over the dispute. ii. The above covenant also demonstrates that ownership shall get transferred only upon the developer completing the development of the Owners share of the Constructed Area agreed upon & not before that. iii. Further it is evident from the Agreement entered into dated 24/03/2011, between the Assessee & PEPL that the Documents of title which is kept in Escrow is handed over by the Escrow to the Developer for the benefit of all owners only on 24/03/2011, which fact is evidenced in page 15 of the said agreement of 24/03/2011(paper book page no.168) under the head “Documents of Title”. 8.10 RECEIPT OF NON REFUNDABLE DEPOSIT: i. The assessing officer also mentions the fact that the Assessee is in receipt on non refundable deposit which is to be treated as part of the sale consideration received towards transfer of stock. ii. The conclusion drawn by the assessing officer that Non Refundable Deposit is part of sale consideration is premature at this stage as the JDA has been just entered into. The Concept of Non Refundable Deposit is that if after some period of time the Developer due to some reason is unable to proceed with the Development & is forced to abandon or terminate the same, then in such an event any amount received by way of Non refundable Deposit by the Assessee is not returnable to the Developer and this partakes the nature of compensation & becomes a Capital Receipt in the hands of the Assessee. iii. In the event the Developer is able to complete the project then the Non Refundable Deposit gets converted to Sale Consideration & is to be spread & 125/Bang/2013 S.P. No.148/Bang/2014 24 over the entire area of land sold and will be treated as income to the extent the ownership of land is actually registered. iv. Thus the Non Refundable Deposit partakes the character of Sale Consideration only upon the ownership of the undivided interest in land being transferred by a sale deed & not before & further it is only to the extent of amount proportionately applicable to the extent of land so transferred. 8.11 From the above facts of the case & the relevant clauses of the JDA which determine the actual point in time as to when the ownership of the land gets transferred from the Assessee it is clear that no part of it is transferred for and upto the A.Y. 2011-12 much less on 05/02/2005 itself. 8.12 The fact that the land which is subjected to Joint Development is Stock In Trade of the Assessee is a very important fact to take note off in order to decide the exact point in time as to when the ownership in these lands held as stock in trade gets actually transferred from the Assessee. 8.13 The application of section 45 is limited to sub section (2) of section 45 in as much as the impugned lands are held as Stock in Trade. The provisions of section 53A of the Transfer of Property Act apply to an asset held as a Capital asset /investment & not to Stock In Trade. 8.14 From a reading & understanding of the JDA what has to be ascertained is the date on which PEPL starting exercising the POA to convey ownership of the undivided interest in the land held as Stock in Trade & treat only those portions of undivided interest in land which are actually registered in favour of PEPL or its nominees or any third person for that matter & bring to tax the Capital Gains arising out of such conveyance in such years in which it is so transferred. The sale of undivided interest in land has two components of income. The first is Income from Capital Gains which is to be worked out as per the provisions of sub section (2) of section 45 & the other component being Income from Business, which is to be computed on the basis of the value attributed to the building in the office of the sub – registrar for purposes of stamp duty at the time of registration of the sale deed of an apartment. The Sale deed for an apartment will consist of two components namely Value of the undivided interest in land & Value of building. The purchaser of the apartment will pay a composite price which will be split up into the above two components for purpose of registration. If one were to study the Sale deeds executed by PEPL transferring ownership of the apartment to the purchasers, one can find out the value per sft of land and the value per sft of building. Both these components are to be taxed in the assessment year relevant to the previous year in which the undivided interest in land is actually conveyed and to the limited extent of the land actually conveyed. & 125/Bang/2013 S.P. No.148/Bang/2014 25 8.15 The Hon’ble Chennai Bench of the ITAT has in the case of R.Gopinath (HUF) vs ACIT, 42 DTR Tribunal Judgments 127, held that one cannot presume any intention in executing the documents between the parties other than what was stated or be reasonably inferred from the document itself. A regard must be given to words used in the document. The nature of the transaction between the parties by way of development agreement cannot be said to be a sale of immoveable property which is stock in trade or otherwise transfer as provided in the Transfer of Property Act. The contentions of the AR of the assessee that the meaning of the words “Otherwise Transferred” in section 45(2) should be according to its ordinary, natural & popular sense, and it should not include a transaction referred to under sub –clause (5) of sub – section (47) of Section 2 of the IT Act, 1961 in relation to a Capital Asset are SUSTAINABLE. By no stretch of imagination, the said transaction can be termed as more or less as sale. When Legal title & possession were with the assessee, then the transfer of the same is not possible merely by allowing the developer to carry out construction work. Delivery of possession of immoveable property cannot be by itself treated to be as equivalent to Conveyance of Immoveable Property. In the case of stock in trade, the definition of transfer u/s 2(47) is not applicable. Therefore the contextual or the ordinary meaning of the word transfer is applicable in the present case. The sale or transfer of Stock in Trade cannot be equated with the transfer of a Capital Asset. As per section 2(14) Capital asset does not include Stock in Trade. Further the Tribunal confirmed that the sale of stock in trade is complete when title was conveyed by execution of a registered deed of conveyance. 8.16 In the present case, the facts being similar, the decision of the ITAT Chennai Bench in the case of R.Gopinath (HUF) vs ACIT, 42 DTR Tribunal Judgments 127 is squarely applicable. 8.17 One another important fact that needs to be considered is the assessment order u/s 143(3) passed for the A.Y. 2007-08, in the case of the Assessee, a copy of which is filed. In Par 4 of the said order, the assessing order observes as follows “The most important that is to be noticed here is that the assessee company has not declared any income from the project ‘Shantiniketan’. However it has claimed an expenditure which is on account of booking of share, documentation etc. In case the share of the assessee has been determined and it has accrued, the income of the same has to be declared for tax purpose. This has not been done by the assessee company. It stated that the income would be declared when the project is completed. Presumably the assessee is following the project completion method for recognizing the income. This method of revenue recognition has been ITA Nos.52 & 125/Bang/2013 S.P. No.148/Bang/2014 26 examined in detail in A.Y. 2005-06. There the assessing officer held that since the corresponding income is not declared for taxation, the corresponding expenses should not be booked as expenditure. The expenditure should be recognised as project expenditure incurred towards Prestige Shantiniketan and should be accounted to increase the value of Work in Progress. I find merit in the argument of the assessing officer in the assessment order for the A.Y. 2005-06 on 31/12/2007”. 8.18 The fact that the Department has all along been accepting the Assessee following the Completed Contract Method of Accounting & offering its income to tax accordingly, the assessing officer is precluded from now taking a stand that the Assessee has to offer its income on Percentage Completion Method. 8.19 The reasoning of the assessing officer that the Assessee has to necessarily follow the percentage completion method merely because the Developer PEPL is doing so in respect of this project is absurd, to say the least. 8.20 Further Accounting Standard 7 is not applicable to the Assessee in as much as he is not a contractor & is only a land owner who holds the land as stock in trade. 8.21 All these submissions made by the Assessee are supported by the decision of a co- ordinate bench of the Bangalore ITAT in the case of Varun Developers vs JCIT in dated 05/12/2013, wherein the Hon’ble ITAT has held that Completed Contract Method of Accounting is an accepted method of accounting recognised in Income Tax Law which is not prohibited u/s 145 of the Act. The Tribunal has also decided on the applicability of Accounting Standard AS 7 & held that the same applies to pure contractors. Further the Tribunal has also held that Developers are also not precluded from following Completed Contract Method of Accounting. When that be the case how can this Assessee who is neither a Contractor and nor a developer but a pure land owner be compelled not to follow Completed Contract Method of Accounting & have Percentage Completion method thrust on it. 8.22 The Assessee has in fact declared the following income from the said project based on Actual Sales made: (i) For the A.Y. 2012-13, Gross Income of Rs.61,26,29,381/- and a Net Income of Rs.48,20,29,955/-. (ii) For the A.Y. 2013-14, Gross Income of Rs.122,41,90,010/- and a Net Income of Rs.100,55,40,441/- (iii) For the A.Y. 2014-15, Gross Income of Rs.98,69,03,936/- and a Net Income of Rs.77,48,20,351/-.

ITA Nos.52 & 125/Bang/2013 S.P. No.148/Bang/2014 27 8.23 Thus considering the above facts, circumstances, position in law, the assessing officer is both legally & factually incorrect in making an addition by way of Income from Shantiniketan Project.” 11.5.2 On the issue of whether the assessee had actually converted the asset into stock-in- trade before entering into the JDA with PEPL, the learned Authorised Representative submitted that the issue was argued before this Tribunal in the appeal for Assessment Year 2005-06 by both the assessee and the Revenue. The co-ordinate bench of this Tribunal in its order in dt.21.11.2014 at para 21 thereof has rendered a finding of fact that the assessee had converted the lands held as Capital Assets into stock-in-trade and the same was held as stock-in-trade at the time of entering into that JDA on 5.2.2005 and that the point in time when the tax will arise in the year in which the stock-in-trade is sold. It is submitted that the co-ordinate bench has also observed that the Assessing Officer was aware of all these facts when he passed the original order of assessment for Assessment Year 2005-06 under Section 143(3) of the Act.

11.5.3 The learned Authorised Representative also contended that it was actually convenient for the assessee to sail with Revenue’s contention that the lands were never converted into stock-in-trade but was all along held as capital assets and that the ownership stood transferred to PEPL on 5.2.2005. The learned Authorised Representative contends that in these circumstances, in view of and accordance with the decisions of the Hon'ble High Court of Karnataka in the case of CIT V T.K. Dayalu 202 Taxman 531 and of the Hon'ble Bombay High Court in Chaturbhuj Dwarkadas Kapadia (260 ITR 491) (2001), revenue would be & 125/Bang/2013 S.P. No.148/Bang/2014 28 precluded from taxing the income from the said transfer as it is clearly barred by limitation. The learned Authorised Representative contends that the assessee is conscious of the law and its duty to pay taxes and has correctly offered income as and when the sale of stock-in-trade took place in the period relevant to Assessment Years 2012-13, 2013-14 and 2014-15 and has paid substantial taxes on the same. In view of the above, it is submitted by the learned Authorised Representative that the finding rendered on this issue in the impugned order of the learned CIT(A) is in order and therefore, the ground raised by revenue on this issue ought to be dismissed. 11.6.1 We have heard the rival submissions of both parties and perused and carefully considered the material on record. We have also perused the decision rendered by a co- ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2005-06 in ITA No.557/Bang/2014. From the material on record the following facts emanate :- i) The lands which are subject matter of the JDA dt.5.2.2005, between the assessee and PEPL, are stock-in-trade of the assessee at the time of JDA was entered into. There is a finding to this effect, rendered by a co-ordinate bench of this Tribunal in its order in ITA No.557/Bang/2014 in the assessee's own case for Assessment Year 2005-06. ii) As observed by the co-ordinate bench of this Tribunal in its order in ITA No.557/Bang/2014 in the assessee's own case for Assessment Year 2005-06, the point in time when the tax will arise is only in the year in which the stock-in-trade is sold; ITA Nos.52 & 125/Bang/2013 S.P. No.148/Bang/2014 29 iii) No sale of such stock-in-trade has been reported to have taken place during the year under consideration i.e. Assessment Year 2009-10; iv) The assessee has reportedly been consistently following the completed contract method of accounting and the same appears to have accepted by revenue; v) The Assessing Officer has not brought on record any material evidence to demonstrate that the system of accounting followed by the assessee does not show a true and correct picture of income, which in turn would warrant rejection of the books of account. The Assessing Officer has not rejected the books of account maintained by the assessee in the year under consideration; vi) The assessee is basically a landlord simpliciter as far as the JDA between the assessee and PEPL is concerned; vii) There is no requirement in law that the assessee ought to adopt the percentage completion method of accounting merely because PEPL, the developer in the JDA, in following the said method. In the light of the above facts, it would be incorrect to conclude that the assessee has earned any income out of the JDA in the period relevant to the impugned assessment year 2009-10. 11.6.2 On a careful perusal, we find that the judicial pronouncement rendered by the Chennai Bench of the ITAT in the case of R.Gopinath (HUF) V CIT in & 30/Mad/2008 dt.24.7.2009 and relied on by the assessee, does apply to the facts of the case & 125/Bang/2013 S.P. No.148/Bang/2014 30 of the assessee in the case on hand. We concur with the above said decision of the Chennai Bench of the ITAT (supra) in holding that when an immovable property is held as stock-in- trade, the same is to be considered as sold only when the sale is conveyed by means of a registered sale deed and not before that. The learned CIT(A) has also expressed the same view in the impugned order in the case on hand and the said view, in our considered opinion, is in order. No interference is therefore called for with the finding of the learned CIT(A) which are rendered at paras 5.6 to 5.17 of the impugned order. 11.6.3 As regards Ground No.1, pertaining to the receipt of non-refundable deposit by the assessee from PEPL, we are inclined to agree with the arguments advanced by the learned Authorised Representative on this issue that the non-refundable deposit would par take the character of sale consideration only upon the ownership of the undivided interest in land being transferred by a sale deed and not before and then only to the extent of the amount proportionately applicable to the extent of the land so transferred. 11.6.4 In the light of the facts and circumstances of the case as discussed above and the observations made and findings rendered by us, we see no reason for interfering with the findings rendered by the learned CIT(A) in the impugned order deleting the addition of Rs.29,55,92,202 as income from the Shantiniketan Project in the year under consideration. Consequently, revenue’s grounds at S.Nos.1 to 3 are dismissed.