Income Tax Appellate Tribunal - Hyderabad
Shri. S. Narayan Reddy, Hyderabad vs Assessee on 2 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 292/Hyd/2012
Assessment year 2006-07
Sri S. Ranjith Reddy vs. Deputy CIT
Hyderabad Circle-6(1)
PAN: AOMPS8851D Hyderabad
Assessee Respondent
ITA No. 290/Hyd/2012
Assessment year 2006-07
Shri S. Narayan Reddy vs. Deputy CIT
Hyderabad Central Circle-6
PAN: AGHPR0315G Hyderabad
Assessee Respondent
ITA No. 336/Hyd/2012
Assessment year 2006-07
Deputy CIT vs. Shri S. Narayan Reddy
Central Circle-6 Hyderabad
Hyderabad PAN: AGHPR0315G
Assessee Respondent
Assessee by: Sri K.C. Devadas
Revenue by: Sri M. Ravindra Sai
Date of hearing: 02.04.2013
Date of pronouncement: 07/06/2013
ORDER
PER CHANDRA POOJARI, AM:
ITA No. 292/Hyd/2012 by the assessee is directed against
the order of the CIT(A)-IV, Hyderabad dated 30.12.2011. ITA No. 290/Hyd/2012 and ITA No. 336/Hyd/2012 are cross appeals directed against the order of the CIT(A)-I, Hyderabad dated 30.12.2011. Since the issues involved in these appeals are 2 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== common in nature all these appeals are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
ITA No. 292/Hyd/2012 - By S. Ranjith Reddy - A.Y. 2006-07:2. The assessee raised the following grounds:
"The order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad is unsustainable both on facts and in law.
I. Ground that the reopening of the assessment is not justified.
In the facts and circumstances of the case the Commissioner of Income-tax ought not to have denied the assessee's objection that the reopening of the assessment is not valid in law and therefore the finding of the Hon'ble Commissioner of Income Tax in this regard is not justified.
II. Grounds as to the nature of document:
a) The learned Commissioner of Income Tax (Appeals)-I, Hyderabad failed to note that the document executed on 28/2/2006 was not a development agreement but an agreement of settlement of rights amongst the legal heirs of Late S. Hanumanth Reddy executed consequent to his death and, therefore, erred in holding to the contrary and the conclusion thereon in holding that there was a transfer within the meaning of Sec. 2(47) of the I.T. Act, 1961 is clearly unsustainable in law.
b) No municipal sanctions for the development of property having been obtained based on the agreement dated 28/02/2006, the learned Commissioner of Income Tax (Appeals)-I, Hyderabad failed to note that the Agreement did not contemplate an exchange of properties and, therefore, the agreement does not by itself constitute a "Transfer" within the meaning of Section 2(47) of the I. T. Act, 1961.3 ITA No. 292/Hyd/2012 &Ors
Sri S. Ranjith Reddy & Anr.
=====================
c) The learned Commissioner of Income Tax
(Appeals)-I, Hyderabad, failed to note that the concept of Transfer as envisaged in Section 2(47)(v) of the IT Act, 1961 did not cover Development Agreement and much less the document in question does not fall under the category of development agreement and therefore erred in holding that there was a "Transfer" in terms of execution of the said Agreement which in no event is a development agreement that enables the chargeability to capital gains for the assessment year 2006-2007.
III. Grounds as to that there was no transfer at all:
a) The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad erred in holding that there was a transfer in terms of Section 2(47)(v) of the IT Act, 1961 and that capital gains was exigible on the date of Execution of Development Agreement.
b) The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, having found as a matter of fact that the layout permission was for the joint development from Hyderabad Urban Development Authority vide permit no.
6/Layout/CDA/2004 dated 07.07.2004 erred in holding that there was a "transfer" within the meaning of Sec. 2 (47) of the IT Act, 1961 on the date of execution of Agreement dated 28th February, 2006 relevant to the A.Y. 2006-2007.
c) The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, failed to note that the rights of the Assessee in a Development Agreement was an inchoate right till the project was completed by the Developer and the built-up area share of the Assessee was handed over by the Developer and until the happening of this event no Income much less Capital Gains accrues to the Assessee.
d) Without prejudice to any of the aforesaid grounds, the learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, failed to note that if the date of execution of the Development agreement is adopted as the date of transfer the 4 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== machinery provisions for computation of capital gains fails as the full value of the consideration receivable cannot by any stretch of imagination be quantified and therefore erred in holding that capital gains arose during the assessment year 2006-2007.
e) The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, failed to note that as on date of execution of document dated 28/2/2006 and in terms of such document the super structure was not in existence and therefore to assess the Assessee to Capital Gains on the date of Execution of Development Agreement is clearly unsustainable.
f) The order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad in holding that the consideration accruing or arising on the date of execution of the document of 28/2/2006 was Rs. 3,71,24,400/- is unsustainable as the built up area to be allotted to the assessee was non-
existing on the date of execution of the agreement and therefore erred in adjudging the aforesaid sum as consideration while computing capital gains.
IV. Ground as to the nature of capital gain:
a) The order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad in assessing the period of holding of the land as "Short - term" in nature is totally contrary to the facts and evidence on record and is therefore clearly unsustainable.
b) The order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad in computing the short term capital gains at Rs. 3,26,44,819 /- and the adoption of cost of acquisition is disputed being contrary to the facts and evidence on record.
V. The Assessee denies his liability to be assessed for Interest u/s 234B of the I. T. Act, 1961.
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=====================
3. Brief facts of the case are that the assessee filed return of income for A.Y. 2006-07 on 3.10.2006 declaring total income at Rs. 11,13,651. Assessment was completed u/s. 143(1) of the Act. Later, the Assessing Officer reopened the assessment and issued notice u/s. 148 of the Act on the reason that the assessee entered into Development Agreement with M/s. Lumbini Constructions on 28.2.2006 whereby 6 acres 48 guntas of land at Gachibowli was handed over by the assessee for development. In lieu thereof, the assessee received developed plots bearing Nos. 11, 54, 95, 75, 81, 3, 67 and 72. The Assessing Officer was of the opinion that the value of developed plots so received were taxable in the year of execution of the development agreement, as it was like an agreement for sale and the transfer of land is a transfer as per sec. 2(47)(v) of the Act. He noted that the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarakadas Kapadia vs. CIT (260 ITR 491), held that the date of transfer for the purpose of calculation of capital gains is the date of handing over the possession. He noticed that this view had been reiterated by this Tribunal in the case of Dr. Maya Shenoy also in ITA No. 266/Hyd/2005 dated 24.10.2008. Accordingly, he issued a notice u/s. 148 on 15.12.2009.
4. The assessee objected to the reopening of the assessment on the basis of the development agreement dated 28.2.2006, contending that the title 'Development Agreement' is wrong nomenclature, as the agreement was a settlement amongst the family members after the death of Sri Hanumanth Reddy. On a consideration of the assessee's objection, however, the Assessing Officer found the same is incorrect. He found that the above agreement had been entered into by the first party consisting of the 4 plot owners, viz. (1) Smt. S. Subhashini, wife of S. Hanumanth Reddy, (2) Smt. K. Kavitha, wife of Dr. K. Surya Pavan Reddy, (3) Sri S. Ranjith Reddy, s/o late S. Hanumanth Reddy, 6 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== and (4) S. Narayan Reddy, s/o late S. Hanumanth Reddy, with M/s. Lumbini Constructions Co Ltd., the second party and the developer. He noted that from the constituents of the agreement, it was clear that it was not a family settlement, as claimed, but a Development Agreement with the expressed objective of constructing a township with residential plots together with buildings. Accordingly, the claim of the assessee was not found to be favoured by the Assessing Officer.
5. From the Development Agreement, the Assessing Officer further noticed that both the parties had jointly obtained a layout permission from HUDA for development of 95 plots, agreeing that M/s. Lumbini Construction P. Ltd. would develop and construct houses over the said 95 plots at its cost. Besides, it was also mentioned that construction should be done by the second party only. Besides, the Assessing Officer noticed the following features of the transaction between them.
i) As per para 9, M/s. Lumbini Constructions P Ltd.
allowed 24 plots to the owners, out of which plot Nos. 11, 54, 95, 75, 81, 3, 67 and 72, besides, the joint ownership of plot No. 7 was allowed to the assessee, the developers got 69 plots.
ii) As per para 16, the entire construction cost was to be borne by the developers.
iii) The agreement showed that it was in the nature of a development agreement and the fact that M/s. Lumbini Construction P Ltd. had also contributed certain plots of land to the project could not change its character.
iv) The fact that some of the family members of the assessee were shareholders in M/s. Lumbini Constructions P Ltd. could not prove that the agreement was a family settlement as the developer company was a separate 7 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== corporate entity registered under the Law of the land. Therefore, the fact that some of the family members were shareholders thereof could not change its status into that of a family property of the assessee.
v) The assessee had sold two plots bearing Nos. 72 and 3 and plot No. 7, jointly allowed, during the financial year 2006-07.
6. In view of the above, the Assessing Officer concluded that the assessee had transferred plots of land owned by him to M/s. Lumbini Constructions P. Ltd., and in lieu thereof, had received certain plots, while the cost of the development was to be borne by the developer. He noted that the total area due to the assessee as per the Development Agreement was 3738.33 sq. yards, besides the joint holding in plot No. 7 admeasuring 342.5 sq. yards. He further gathered from the assessee that he had received built up area of 30,937 sq. ft. over the years from the financial year 2007- 08 to 2009-10 over and above the plots received. The Assessing Officer opined that as per the settled judicial pronouncements, the developed plots received are taxable in the year of execution of the development agreement itself, as there was a transfer envisaged under sec. 2(47)(v) of the Act. Accordingly, he worked out the cost of construction in respect of 30937 sq. ft. of built up area @ Rs. 12001- per sq. ft., as for the information from the assessee himself, which worked out to Rs. 3,71,24,4001 -. After reducing the cost of the acquisition of the land foregone of Rs. 44,79,581/-, the short term capital gains were worked out at Rs 3,26,44,819/-.
7. It was contended before the CIT(A) that the Assessing Officer's conclusions are contrary to the documents on record. It was submitted that the assessee had purchased the land on 19.11.2003 and 23.1.2004. It was argued that the document dated 28.2.2006, considered as development agreement by the Assessing 8 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== Officer, was in fact, an agreement inter se between the family members settling their rights after 'the death of their father, Late Sri Hanumanth Reddy. The assessee submitted that M/s. Lumbini Constructions P Ltd. and B. Laxman Reddy had also purchased certain lands from the same vendors. He submitted that the assessee's father, Late S. Hanumanth Reddy, the assessee himself, Sri B. Laxman Reddy are the share holders of M/s. Lumbini Constructions P Ltd., and therefore, the total land admeasuring Ac. 14.32 gts. was contemplated for joint development by all the land owners in the year 2004. Therefore, all the land owners jointly obtained the layout permission from HUDA, which goes to show that there was no development agreement per se that all the parties are the owners of the land. He explained that one of the owners, M/s. Lumbini Constructions, who possess the major extent of land, undertook the construction work. Accordingly, the extent of land in the layout for each owner duly stand registered by the joint owners represented through M/ s. Lumbini Constructions, who is also the owner. The assessee submitted that M/s. Lumbini Constructions admitted Income both from the sale of land and the construction work for which it was entitled to as one of the joint owners. Accordingly, it was contended that the venture was the development of the layout in their land by the joint owners.
8. The CIT(A) observed that it is the main contention of the assessee that the document titled as "Development Agreement" is in fact not a Development Agreement as such, but a settlement amongst the family members after the death of Late Sri S. Hanumanth Reddy. It has been strongly averred that the nomenclature given to the said document itself is wrong. However, on a consideration of the terms and clauses of the said agreement, he observed that all the elements of a development agreement are 9 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== indeed present in the agreement under consideration. From the document, he observed that the same is admittedly a 'Development Agreement', entered into between the first party, consisting of the 4 plot owners, viz. (1) Smt. S. Subhashini, wife of S. Hanumanth Reddy, (2) Smt. K. Kavitha, Wife of Dr. K. Surya Pavan Reddy, (3) Sri S. Ranjith Reddy, s/o late S. Hanumanth Reddy, and (4) S. Narayan Reddy, S/o. late S. Hanumanth Reddy, with M/s. Lumbini Constructions Co Ltd., the second party and the developer. The CIT(A) observed that the first party has been referred to as "OWNERS", while M/s. Lumbini Constructions Co Ltd. has been specifically referred to as "THE DEVELOPER".
9. The CIT(A) observed that out of the total 11 acres 22.4 gts. of land, Sri SLN Reddy, the previous owner, had sold land to the extent of 3 acres to Late Sri S. Hanumanth Reddy and the assessee by way of a Registered Sale Deed dated 19.11.2003. Sri SLN Reddy had sold further 5 acres 22.4 gts. out of the total land owned by him to ·M/s. Lumbini Constructions and Sri B. Laxman Reddy under a registered Sale Deed on same date. In addition to the above, Sri S. Chenna Krishna Reddy and Late Sri S. Hanumanth Reddy had executed a Registered Sale deed dated 19.1l.2003 in favour of M/s. Lumbini Constructions Ltd. and Sri B. Laxman Reddy in respect of 3 Ac. 04.8 gts. belonging to them.
10. The CIT(A) further observed that Sri Venkata Rami Reddy had also sold 1 ac. 22.4 gts. belonging to him to Dr. S. Ranjith Reddy, under a Registered sale deed dated. 22.1.2004. Sri S. Pandu Ranga Reddy had also sold 1 ac. 22.4 gts. of land to Late Sri S. Hanumanth Reddy on 19.11.2003. In view of the above acquisitions, M/s Lumbini Constructions Co P Ltd. along with Sri B. Laxman Reddy, had become the absolute owners and possessors of 8 ac. 27.2 gts. of land in Sy. No. 133, while Late Sri S. Hanumanth Reddy and Dr. S. Ranjith Reddy together were 10 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== owners of 3 acres. Besides, Late Sri S. Hanumanth Reddy and Dr. S. Ranjith Reddy individually became the owners of land to the extent of 1 ac. 22.4 gts., each. On the death of Sri S. Hanumanth Reddy, his wife Smt. S. Subhashini, son Sri S. Narayan Reddy, Daughter Smt. K. Kavita and another son, Sri. S. Ranjith Reddy, the parties of the first party became the legal heirs, succeeding the land owned and possessed by Late Sri S. Hanumanth Reddy. As mentioned above, the above parties therefore owned 14 acres 32 gts. of land taken together. As per the agreement, with a view to develop into a residential township, they reached an agreement, whereby, the first party agreed to give the property owned by it "for development" by the second party. The Development Agreement specifically stipulates the intention of the above persons to construct a township and necessary permission for the development of 95 plots thereon was also obtained by the other persons jointly.
11. The CIT(A) further observed that, in terms of the said agreement, M/ s Lumbini Constructions Pvt. Ltd, the second party, had agreed to construct houses on the said 95 plots at their own cost. It had been specifically mentioned that construction would be mandatorily done by them only. The second party also issued the "Lumbini SLN Springs" brochure, which forms a part of the agreement. The agreement, on page 6, specifically mentions that the parties, " .... shall also be bound to have the construction done only through Lumbini Constructions as that is the main purpose of obtaining a joint layout". Accordingly, M/s. Lumbini Constructions also prepared the development plan and design for the integrated development of the entire area together with common utilities, parks, landscaping etc. It has been further stipulated in the agreement that towards the contribution of land made by Late Sri S. Hanumanth Reddy and Dr. S. Ranjith Reddy, "the first party would be given 24 plots together with houses to be 11 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== constructed thereon in accordance with the extents and specifications made in Annexure-I of the brochure". He further observed that the said 24 plots had been even specified in the Schedules and termed as "the Schedule Plots". It is also mentioned that the second party was to construct houses on the said schedule plots at its own cost. With these terms, the first party gave the land to the extent of 6 ac. 4.8 gts. owned by it to the second party for development. The 24 plots falling to the share of the first party were even allotted to the members of the first party in the agreement itself, in view of the earlier oral agreement in this regard and the members were entitled to get the plots, together with the houses constructed thereon, transferred, mutated and substituted in their own names in the revenue records and / or with any concerned authorities as absolute owners, on the basis of the impugned Development Agreement or its certified true copy itself. The agreement further stipulates that the first party "shall not be entitled in their individual rights to other 69 plots", while they were required to join in any Deed / Document for assisting the second party in ) dealing with those plots.
12. Clause No. 16 of the agreement stats that the entire cost of construction, development and all incidental acts of the township including the common amenities and the club house shall be borne by the second party. The second party was also to obtain a comprehensive insurance from the date of commencement of the construction, till the date of completion.
13. The CIT(A) further observed that in terms of clause 22, though the first party had the liberty of getting their own architectural plan and designs for the houses to be constructed on plot No. 86, 92 and 95 allotted to them, the second parties liability was limited to construction of built up area, as per the Annexure 1 to the brochure. Additional work was to be paid by the first party 12 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== to the second party @ Rs 850/- per sq. ft. In view of the above, it becomes clear that the "Development Agreement under consideration" cannot be considered as a mere 'license' or even as a 'family settlement'. On going through the features of the agreement, it was observed by the CIT(A) that there is no mistake in the nomenclature, while terming it as a 'Development Agreement'. The terms of the said agreement clearly show that this is a conscious agreement for development of land entered into between the "owner" and "the Developer", wherein all the aspects of the transaction have been duly and specifically mentioned.
14. The CIT(A) observed that merely because the developer also owned part of the total land, it cannot be said that it was only a license granted to one of the land owners to enter the premises and construct the houses. There can be no dispute that the persons constituting the first party were taxable entities different from the company, M/s. Lumbini Constructions P Ltd., which is an independent taxable entity itself. The mere fact that some of the members of the first party were shareholders in M/s. Lumbini constructions P. Ltd., alone cannot mean that the agreement was in the nature of a family settlement. It was for this reason that the agreement stipulated that the first party "shall not be entitled in their individual rights to other 69 plots", to be received by M/ s. Lumbini Constructions P ,Ltd.
15. The CIT(A) observed that the sharing of plots has been done after meticulously considering the land cost and the construction cost. As a consequence, there is a specific mention regarding payment of extra cost of Rs. 850/- per sq. ft. towards any additional built up area, to be built up at the request of the first party. Therefore, it is clear that the development agreement had been entered into after considering the cost of land owned by the two parties and the cost of construction to be incurred in respect 13 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== of the township by the developer. This only implies that the consideration receivable by the first party from the second party had also been meticulously determined after considering all the facts.
16. The CIT(A) further observed that it also cannot be disputed that the first party gave possession of the land owned by them for constructing the township thereon. After the construction of such township, the individual land owned by the owners of the first party lost its identity and in lieu thereof, the first party got only built up area on the scheduled plots. In the process the assessee got plot numbers 11, 54, 95, 75, 81, 3, 67 and 72, totalling 3738.33 sq. yards of area, besides the joint ownership of plot No. 7, admeasuring 342.5 sq. yards. The Assessing Officer also ascertained that the assessee got built up area of 30,937 sq. ft. over the years, from the financial year 2007 -08 to 2009-10, over and above the plots received.
17. The CIT(A) observed that since the assessee had given effective possession of the land, by way of agreement dtd. 28.2.2006, and the said agreement amounted to sale and transfer of land in terms of sec. 2(47)(v) of the Act, the date of giving such possession is to be considered as date of transfer for the purposes of capital gains. The CIT(A) also placed reliance on the decision of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarakadas Kapadia vs. CIT (260 ITR 491). The same view was taken by the Tribunal also in the case of Dr. Maya Shenoy, Secunderabad in ITA No. 266/Hyd/2005 dtd. 24.10.2008. Accordingly, capital gains on such transfer has been rightly held as arising in the A.Y. 2006-07, as the assessee has received the developed plots in terms of the agreement mentioned above. Since the assessee received total built up area of 30,937 sq. ft. in terms of the said agreement, and the cost of construction thereof as per 14 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== the assessee himself was Rs. 1200 per sq. ft., the determination of the short term capital gains of Rs. 3,26,44,819 by the Assessing Officer is upheld. Against this, the assessee is in appeal before us through various grounds as reproduced in Para 2 of this order.
18. At the outset the learned AR objected reopening of the assessment by way of additional grounds as follows:
(1) The assessee having disclosed full and complete information and material facts relating to the transaction with M/s. Lumbini Constructions in the original returns filed on 31/10/2006, and therefore, the entire reopening of proceedings u/s. 147 is illegal, bad in law and, therefore, the entire assessment is to be quashed.
(2) The reasons recorded for reopening of assessment was fully appended by way of notes in the statement of total income to the original return of income filed and, therefore, the entire reasons recorded by the AO did not emanate from the views of the AO nor did he have reasons to believe that income has escaped assessment and, therefore, the entire reopening of assessment is bad in law and, therefore, the re-assessment proceedings are invalid.
19. He submitted that the above additional grounds are purely legal in nature arising out of the orders of the lower authorities and he submitted that the above grounds were inadvertently not raised before the lower authorities and prayed to admit the same by placing reliance on the judgement of supreme court in the case of National Thermal Power Co. Ltd. vs CIT (229 ITR 383), CIT vs Mohd. Iqbal (221 ITR 481), CIT vs Mahalaxmi Textiles Mills Ltd. (66 ITR 710) (SC), Jute Corporation of India Ltd vs CIT 187 ITR 668 (SC), Rajinder Nath vs CIT 120 ITR 14 (SC), CIT vs Pruthvi Brokers and Share Holders Pvt Ltd. (349 ITR 336).
20. On the other hand the DR seriously objected raising of additional grounds.
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21. We have heard both the parties on the admission of additional grounds. The assessee admittedly raised these grounds before the CIT(A). However, the CIT(A) observed that the claim of the assessee was not found to be valid. Against this finding of the CIT(A) the assessee raised the original grounds before us objecting that the reopening of the assessment is not valid in law. In addition to this the assessee raised the additional grounds more specifically as mentioned earlier. Being so, though the assessee raised the additional grounds which is already in the form of original grounds in the appeal Memo, as a matter of abundant caution the assessee raised this additional ground in addition to original grounds. Accordingly we admit the same as this ground has direct bearing on the tax liability of the assessee.
22. Regarding merit of the issue relating to reopening of the assessment the AR submitted that the assessee while filing the original return of income on 31 October 2006 for the A.Y. 2006-07 enclosed a detailed note forming part of the return of income wherein it was stated that consequent to the death of his father, the assessee became one of the successors to the interest and right in the layout at Gachibowli village, Serilingampally Mandal, R.R. Dist., and entrusted the development work to M/s. Lumbini Constructions Limited as evidenced by the Development Agreement dated 28 February 2006, duly registered with the office of Sub-Registrar, Moosapet on 13 March, 2006 vide document No. 5630/2006 and the assessee is entitled for 9 plots bearing numbers 3, 11, 54, 67, 72, 75, 85, and 95 on which houses will be constructed and in one plot the assessee is an equal co-owner with his elder brother S. Narayan Reddy in layout number 7. The AR contended that the fact of entering into Development Agreement was very much disclosed to the Assessing Officer. If the Assessing Officer failed to act on the material facts which were on record at 16 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== the time of original assessment, he cannot reopen the assessment on the basis of same documents which is nothing but change of opinion. According to the learned AR when there is no tangible fresh material, the Assessing Officer cannot come to the conclusion that there is escapement of income from assessment; a mere change of opinion on the part of the Assessing Officer in the course of assessment cannot be a legitimate reason for reopening of the assessment which was already concluded. According to the AR the assessee in the present case made a full disclosure in the note forming part of return of income and if the Assessing Officer completed the assessment on that basis, he cannot reopen the assessment without any fresh and tangible material. He relied on the judgement of Supreme Court in the case of CIT vs. Kelvinator India Ltd. (320 ITR 561) and CIT vs. Usha International Ltd. (348 ITR 485) (Del).
23. On the other hand, the learned DR submitted that there is a reason to believe that income has escaped assessment. Even the information may come from external sources or even from material already on record or may be derived from discovery of new and important matter on such facts. The word "information" u/s. 147 would also include correct state of law derived from judicial decisions either of Income-tax authorities or courts of law. For this proposition he relied on the judgement of Supreme Court in the case of Kalyanji Mavji (102 ITR 287). According to the DR, sufficiency of reason cannot be questioned by the assessee before the Tribunal. The Tribunal can only examine whether the reasons are relevant and have bearing on the matters with regard to which the Assessing Officer is required to entertain the belief before he can issue notice u/s. 148 of the Act. At the time of reopening, the Assessing Officer is not required to establish escapement of income. He relied on the following judgements:
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(a) Sri Krishna Pvt. Ltd. vs. CIT (221 ITR 538).
(b) Central Provinces Manganese Ore Co. Ltd. vs. ITO (191 ITR
662).
24. According to him, what is necessary to reopen assessment is not a final verdict but a prima facie reason. Once such reason is recorded by the Assessing Officer, he assumes jurisdiction to issue notice u/s. 148 of the Act. He relied on the judgement of Delhi High Court in the case of Rajath Export and Import (India) Pvt. Ltd. vs. ITO (347 ITR 135) (Del), ACIT vs. Tubes Investment of India Ltd. (133 ITD 79) (TM) (Chennai).
25. According to him, there is no change of opinion as there is no assessment in this case u/s. 143(3) of the Act. He relied on the following judgements:
(a) ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR
500) (SC)
(b) Kone Elevators Pvt. Ltd. vs. ITO (340 ITR 454)
(c) CIT vs. Ideal Garden Complex Pvt. Ltd. (340 ITR 609)
(d) ACIT vs. Maersk Global Services Centre (India) Pvt. Ltd.
(66 DTR 90)
26. We have heard both the parties and perused the material on record. In this case the assessee filed return of income on 31.10.2006 for A.Y. 2006-07 declaring income of Rs. 11,13,651. The return of income was processed u/s. 143(1) of the Act. During the course of proceedings u/s 143(3) for the A.Y. 2007-08, it is noticed from the information submitted by the assessee that he has entered into a development agreement with M/s Lumbini Constructions on 28.02.2006 and handed over Ac. 6-4.8 guntas of land at Gachibowli for development. Accordingly, he recorded the reasons for reopening assessment as follows. The assessee received developed plot Nos. 11, 54, 95, 75, 81, 3, 67 and 72 in lieu of the land given for development. The developed plots received are taxable in the year of execution of development agreement as it is like an agreement for sale and the transfer of 18 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== land is transfer as per section 2( 47)(v) of the IT Act. As held in the case of Chathurbhuj Dwarakadas Kapadia vs. CIT (260 ITR 491), the date of transfer for capital gains calculation purpose is the date of effective possession. The Tribunal Hyderabad Bench 'A' has also reiterated the same view in a recent decision rendered in the case of Dr. Maya Shenoy, Secunderabad in ITA No. 266/Hyd/2005, dt. 24.10.2008. Thus, capital gains arise on receipt of developed plots. In view of the above, computation of short term capital gains for the developed plots received is to be considered in the A.Y. 2006-07 as the assessee had executed development agreement on 28.02.2006. Accordingly, notice u/s. 148 was issued to the assessee on 15-12-2009.
27. Now the contention of the assessee's counsel before us is that there is no tangible fresh material on the basis of which assessment is sought to be reopened. A full disclosure was made by the assessee of all the facts that the assessee entrusted the work of development with M/s. Lumbini Constructions and the assessee is going to get 9 plots as discussed earlier. The Assessing Officer noticed while completing the assessment for A.Y. 2007-08 that the assessee entered into Development Agreement with M/s. Lumbini Constructions on 28.2.2006 and handed over 6 acres 4.8 guntas of land at Gachibowli for development and the assessee received developed plot Nos. 11, 54, 95, 75, 81, 3, 69 and 72 in lieu of the land given for development. The AR has taken a plea that assessment cannot be reopened without any tangible fresh material to come to the conclusion that there is escapement of income from assessment. The same principle was laid down by Supreme Court in the case of CIT vs. Kelvinator of India Ltd. (320 ITR 561). One needs to give a schematic interpretation to the words "reason to believe" failing which, section 147 would give arbitrary power to Assessing Officer to reopen assessments on the 19 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre- conditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department. then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power to by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe". Parliament introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer.
28. Now, undoubtedly an order of the assessment which has been passed in subsequent assessment year may furnish a foundation to reopen an assessment for an earlier assessment year. However, there must be some new facts which come to light in the course of assessment for the subsequent assessment year which emerge in the order of the assessment. Otherwise, a mere change of opinion on the part of the Assessing Officer in the course of assessment for a subsequent assessment year would not by itself legitimise reopening of assessment for an earlier year. The point, we make it clear herein is that whether in the course of 20 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== assessment proceedings for subsequent year certain additional information is obtained by the Revenue which was not available to it in the course of assessment for an earlier year, that may legitimately be utilised as a ground for reopening of assessment of the earlier year. Whether the reopening has taken place within four years that may legitimately give rise to an inference of escapement of income. The new information which has come to the knowledge of the Revenue, therefore, constitutes tangible material. If there is a fresh material that that would not preclude the Assessing Officer to reopen the assessment for an earlier year on the basis of fresh material which has come to light in the course of assessment for a subsequent assessment year. Now in the above background, considering the facts of the present case, there is no dispute that the assessee furnished a detailed note annexed to the return of income. For clarity, we reproduce the note appended to the return of income.
"S. Ranjith Reddy s/o. late S. Hanumanth Reddy PAN No: AOMPS8851D Assessment Year: 2006-07 Accounting Year: 2005-06 Note appended to and forming part of Return of Income The Return of the Income for the Accounting year ending on 31-03-2006 relevant to the Assessment Year 2006-07 is submitted.
1. The sources of Income for the Assessment year under consideration consist of (a) Income from House Property (b) Income from Capital Gains (c) Income from Salary and (d) Income from Other Sources.
2. My father Sri S. Hanumanth Reddy died on 07- 07-2005. He was assessed to Income Tax (a) in his individual status under PAN No. AIRPS8649A and (b) in HUF Status PAN No. AADGS8526A. He was in receipt of Property income and Interest 21 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== income in the Individual status that was being admitted year after year. The HUF was in receipt of Property income, Interest income and Agricultural income that was also being admitted year after year.
(a) Under my late father S. Hanumanth Reddy's Individual status as per the Hindu Succession Act, as legal heir per Schedule I, I became entitled to 1/4th share in his individual property income and his interest income.
Accordingly the property income declared in an amount of Rs. 3,39,195/- and interest income in an amount of Rs. 7,658/- thus represents my 1/4th Share as one of the legal heirs of my late father Sri S. Hanumanth Reddy. The said rental income on the property succeeded is for the period from 08-07-2005 to 31-03-2006.
(b) Under my late father S. Hanumanth Reddy's HUF status as per the Hindu Succession Act, as legal heir per Schedule I, I became entitled to 1/4th of 1/3rd share of his total HUF property, interest and agricultural income. Accordingly the property and interest income declared in an amount of Rs. 25,821/- and agricultural income of Rs. 15,833/- thus represents my 1/4th Share of 1/3rd share as one of the legal heirs of my late father Sri S. Hanumanth Reddy.
3. (a) As a consequence of death of my father I became one of the successor to the interests and rights in the layout at Gachibowli village, Serilingampally Mandal, R.R. District, entrusted for development to M/s. Lumbini Constructions Ltd, as evidenced by the Development Agreement dated 28th February 2006, duly registered with the office of Sub-Registrar, Moosapet on 31st March 2006 (Vide Document No. 5630/2006). I became entitled to 9 plots (bearing Nos. 3, 11, 54, 67, 72, 75, 85 & 95) on which houses shall be constructed and in one plot I am an equal co-
owner with my older brother S. Narayan Reddy in the layout (bearing No. 7) in the project that is in progress.
22 ITA No. 292/Hyd/2012 &OrsSri S. Ranjith Reddy & Anr.
=====================
(b) On one such allotted plots bearing No. 7 that is equally owned by myself and my brother I received an amount of Rs. 2,50,000 as advance towards my 1/2 Share from N. Vasumathi Reddy. The liability to the capital gains, tax will arise in the year in which the property, shall be transferred to the vendee.
4. In the year under consideration, I jointly purchased 28.75 Guntas of land from S. Suresh Kumar on February 16th, 2006 Vide registered Sale Deed (Doc. No. 2277/2006) in Shamshabad Village, Shamshabad Mandal R.R District. I own 50% share. Towards my share I paid an amount of Rs. 2,87,500 (Vide Cheque No. 559536 drawn from Syndicate Bank Somajiguda) on February 16, 2006 towards the purchase of 28.75 Guntas of land as a co-owner for 50% share to S. Suresh Kumar. The said land is situated in Sy. No. 656/Part Shamshabad Village, Shamshabad Mandal, R.R. District. The other 50% share is purchased by Rasuri Satish Kumar Reddy. The sources for the purchase are met from the balance to the credit of savings i.e. my Syndicate Bank Current account (Bearing no. 201/14508) at Somajiguda branch.
5. During the year I sold 2,02,616 Shares of Mali Florex Limited to my brother S. Narayan Reddy for a consideration of Rs. 2,02,616/-. The said amount is yet to be received. The said Company was not having any activity. The further details for the computation as per section 45 of the Income-tax Act, 1961 are as follows:
Shares were allotted in 15/12/03) the particulars are as per the information filed before the Registrar of Companies value taken as on date of allotment Rs. 4,40,000 Sale of shares during the year to S. Nararayan Reddy for a consideration of (Date of transfer 30/7/2005) Rs. 2,02,616 As noticed above the transfer resulted in capital loss of Rs. 2,37,384/- that is entitled to be carried forward for set off in future years."23 ITA No. 292/Hyd/2012 &Ors
Sri S. Ranjith Reddy & Anr.
=====================
29. The contention of the Department is that there is no assessment u/s. 143(3) of the Act for this assessment year 2006- 07 and only return was processed u/s 143(1) and the Assessing Officer is within the jurisdiction of reopening the assessment and there is no change of opinion. The Department to say that there is no change of opinion, it should be incumbent upon the Department to demonstrate that during the course of assessment proceedings for A.Y. 2007-08 some new information had been brought on record, which was not available when the return of income was processed for A.Y. 2006-07 or before the expiry of time limit to complete the assessment for A.Y. 2006-07 in regular course. That indeed is not the case of the Revenue. All the material which was relevant to determine the income were available with the Assessing Officer when the regular assessment was to be completed for A.Y. 2006-07. There is requisite material to complete the assessment, the Assessing Officer has not considered the same and there was no assessment. Consequently, mere formation of another view in the course of assessment proceedings for A.Y. 2007-08 would not justify the Revenue for reopening the assessment for A.Y. 2006-07 though the reopening of assessment has taken place within the period of 4 years. The power to reopen assessment is structured by law. Guiding principles which were laid down by the Supreme Court in the case of Kelvinator of India Ltd. (supra) must be fulfilled. In the present case, there is no tangible material, no new information and no fresh material which came before the Revenue in the course of assessment for A.Y. 2007-08 to justify reopening of assessment for A.Y. 2006-07. The Department Representative taken a plea before us that in view of judgement in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd., (cited supra), the return was processed only u/s.
143(1) of the Act and there is no regular assessment and reopening of assessment is justified. The DR submitted that the 24 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== judgement in the case of Kelvinator of India Ltd. (cited supra) covers cases where the first assessment was made u/s. 143(3) and that it does not apply to cases where the return was processed u/s. 143(1) of the Act. This proposition cannot be acceptable because the Supreme Court was expounding the provisions of section 147 and the words "reason to believe" appearing therein. It was held that schematic interpretation has to be given to these words - failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of a mere change of opinion. It was further held that there is a conceptual difference between the power to review and the power to reassess and section 147 cannot be interpreted in such a manner to give a power of review. The contention of the Department before us is that where no view has been taken as to the correctness of the return in the first instance, the Assessing Officer cannot be said to exercise a power of review when he reopens the assessment which has been earlier passed under 143(1). This argument is similar to the argument that if no opinion can be said to have been formed by the Assessing Officer when the return was merely processed under section 143(1), by issuing notice under section 148 he cannot be said to have changed his opinion. But it needs to be remembered that section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that the reassessment notice issued under section 148 in a case where the original assessment was made under section 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. The reason to believe must have a live link with the formation of the belief that income chargeable to tax had escaped assessment when the return was processed and accepted under section 143(1). To hold that in every case where a return 25 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== was processed and accepted under section 143(1) the Assessing Officer will be free to reopen the same under section 148 even in the absence of a live link between the reasons recorded and the formation of the belief would be to make the conditions of section 147 and section 148 as regards notices of reopening issued in cases where the return was originally processed under section 143(1). There is no exclusion in section 147 to the effect that where the return was earlier processed under section 143(1} it is not necessary for the Assessing Officer to hold or entertain a belief that income chargeable to tax had escaped assessment for the reasons recorded by him. Therefore, the condition that the Assessing Officer must have reason to believe and the further condition that those reasons must have a live link with the formation of the belief is applicable equally to cases where the return was processed under section 143(1) as also to cases where the return was examined and an assessment was made by a speaking order under section 143(3). The only distinction recognized in section 147 between the two is where it is provided by the proviso that where the earlier assessment was made under section 143(3), no action for reopening the assessment can be taken after the expiry of four years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment because of the failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for the assessment. Such an exception has not been provided for in a case where the return has been processed under section 143(1) in which case the proviso will have no application. If it is correct that an intimation under section 143(1) as well as an assessment order under section 143(3) are both amenable to section 147, it should also be conceded that even in a case where the original return was merely processed under section 143(1) the Assessing Officer must have reason to believe that income 26 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== chargeable to tax has escaped assessment. He has also to record reasons under section 148(2) for reopening the earlier assessment made under section 143(1). All that has been excluded is that the assessee, in whose case the return was first processed under section 143(1) cannot challenge the notice of reopening on the ground that it is prompted by a mere change of opinion. Only to this limited extent there is a disability on the part of the assessee to challenge the notice of reopening in a case where his return was earlier processed under section 143( 1) of the Act.
30. The reliance placed by the learned DR on the judgment of the Supreme Court in ACIT vs, Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) would be apposite in all cases where the return was processed under section 143( 1) but later notice was issued under section 148 and the assessee challenges the notice on the ground that it is prompted by a mere change of opinion, In this judgment it was held that there was no assessment under section 143( 1) in the sense that the return is scrutinized and an opinion is formed about the assessee's claims and contentions and, therefore, it is not possible to say that when the Assessing Officer reopens the assessment under section 148, it was prompted by a mere change of opinion. Except to this limited extent, the notice of reopening issued in a case where the return was first processed under section 143(1) is open to challenge on all grounds available to the assessee, including the ground that there was no reason to believe that income chargeable to tax had escaped assessment or that the materials before the Assessing Officer had no live link or nexus with the formation of such belief or that the reasons are based on gossip or rumour or were a mere pretence. This is made clear by the observations of the Court at page 512 of the report where it was held' that "so long as the ingredients of section 147 are fulfilled" the Assessing Officer can reopen the proceedings even where intimation under section 143(1) had been issued. Thus 27 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== fulfilment of the conditions of section 147, including the one that there should be "reason to believe", is essential for the validity of the notice under section 148. It is while expounding the words "reason to believe" that the Supreme Court in the later judgment in CIT vs. Kelvinator of India Ltd. (supra) held that there should be "tangible material" to come to the conclusion that income had escaped assessment. Thus, while resorting to section 147 even in a case where only an intimation had been issued under section 143(1)(a) it is essential that the Assessing Officer should have before him tangible material justifying his reason to believe that income had escaped assessment.
31. The assessee contended before us that there was no such tangible material before the Assessing Officer from which he can entertain the belief that there is transfer u/s 2(47)(v) of the Act resulted in escapement of income chargeable to tax. In the reassessment order the Assessing Officer has stated that originally the return was processed. It was noticed that the assessee has understated its income by non-disclosing the income from capital gains. He has not referred to any tangible material before him, in terms of the judgment of the Supreme Court in CIT vs. Kelvinator of India Ltd. (supra), on the basis of which he entertained the prima facie belief that income chargeable to tax has escaped assessment. Though it is not possible to challenge the action of the Assessing Officer on the ground of a change of opinion because in the present case the return was earlier merely processed under section 143(1), his action can be challenged on the basis of the law declared by the Supreme Court in the aforesaid judgment. In our opinion, on a proper understanding of the judgments of the Supreme Court both in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and CIT vs. Kelvinator of India Ltd. (supra), it is still open to an assessee to challenge the notice under section 148, in a case where the return was earlier processed 28 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== under section 143(1) on the ground that there was no tangible material before the Assessing Officer to enable him to entertain a prima facie belief that income chargeable to tax has escaped assessment. We may also add that before us the Department has not produced any tangible material on the basis of which the reasons were recorded to demonstrate that there was a live link or nexus between them and the requisite belief. Being so, the reopening cannot be held as valid.
32. Same view was taken by the Third Member Mumbai Bench in the case of Telco Dadajee Dhackajee Ltd. vs. DCIT, ITA No. 4613/Mum/2005 dated 12th May 2010 . Further same view was taken by Delhi High Court in the case of CIT vs. Orient Crafts Ltd. (ITA No. 155/12 dated 12.12.2012) and also by Gujarat High Court in the case of Inductotherm (India) Pvt. Ltd. vs. DCIT in Special Civil Application 858 of 2006 dated 6.8.2012. Further, Bombay Bench in the case of Delta Airlines Inc. in ITA No. 3476/Mum/2008 dated 30.11.2012 wherein it was held as follows:
"8. We have considered the rival submissions and perused the material on record. It IS observed that in the return of income originally filed for the year under consideration on 18.10.2001, exemption was claimed by the assessee in respect of interest income as per provisions of Article-7 of Indo-US treaty and this fact was clearly mentioned in the Note (copy placed at page No .16 of the paper book) filed along with the said return. The said return was initially processed by the Assessing Officer u/s. 143(1) on 2.1.2003. Subsequently, he however reopened the assessment for the following reasons recorded u/s. 148(2) "30.9.2005: The assessee filed its return of income on 18.10.2001, declaring NIL income. The return was processed u/: 143(1)(a) of the 1 T Act, 1961 on 2.1.2003, accepting the Nil income declared by the assessee and a refund of Rs. 1,58,701/- was determined and issued to the assessee. The assessee 29 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== has received interest which is not connected with operation of aircrafts but claimed exemption on all income under Article 8 of Indo-US DTAA, and that the interest should be taxed under Article 11 of the DTAA @ 15%. Since no prima facie adjustment can be made under the statutory provisions hence the retuned income was accepted while processing the return.
However, remedial action by reopening the assessment u/s. 148 of the IT Act, 1961 is suggested. The last date for issuing of notice u/ s. 148 is 31.3.2008. Submitted for your kind approval please."
9. As is clearly evident from the reasons recorded by the Assessing Officer as above, there was no new material coming to the possession of the Assessing Officer on the basis of which assessment completed u/s. 143(1) was reopened and this position has not been disputed even by learned Departmental Representative. She however had submitted that the assessments completed in the case of the assessee for the earlier years were available on record before the Assessing Officer and they formed the basis for reopening the assessment. There is however no mention whatsoever to any such assessment in the reasons recorded by the Assessing Officer. It is well settled that the validity of reopening has to be judged on the basis of reasons recorded by the Assessing Officer and the document or material referred to therein and not on the basis of any exterior material which has not been referred to in the reasons recorded. Learned Departmental Representative has also relied upon the decision of Hon'ble Gujarat High Court in the case of Praful Chunilal Patel (supra) in support of the revenue's case on the issue under consideration which has been relied upon by learned CIT(A) in his impugned order. As pointed out by learned counsel, the view expressed by Hon'ble Gujarat High Court in the said case that there is no necessity for the Assessing Officer to have fresh facts coming to his notice subsequent to original assessment to justify reopening has not been subscribed to by the Full Bench of Hon'ble Delhi High Court in the case of Kelvinator of India Ltd. (supra) which has been affirmed by Hon'ble Supreme Court. As held by Hon'ble Delhi High Court, if the contention of the revenue based on the decision of Hon'ble Gujarat High Court in the case of Praful Chunilal Patel (supra) is accepted, the same would confer an arbitrary power upon the Assessing Officer to reopen the proceedings 30 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== only on the slightest pretext, which is not permissible.
10. Learned Departmental Representative has also relied on the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) to contend that the reopening of assessment completed originally ujs. 143(1) is permissible without there being any new material coming to the possession of the Assessing Officer if the reasons recorded for reopening of assessment are otherwise valid. The learned counsel for the assessee, on the other hand, has relied on Third Member decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) stating that a similar issue involved in the said case has been decided by the Third Member in favour of the assessee after taking into consideration the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) relied upon by the learned OR. In the said case, the return filed by the assessee was originally accepted u/s. 143(1). In the said return the assessee had claimed deduction for payment of non-compete fees of Rs. 75 lakhs which included payment of Rs. 15 lakhs to Directors. The assessee had also claimed depreciation of Rs. 1,41,848/ - on lease premises. The Assessing Officer issued notice u/s 148 on the ground that these were not allowable expenses and income chargeable to tax had escaped assessment. He accordingly disallowed both the items in the reassessment order. When the matter reached to the Tribunal, the learned Judicial Member took the view that there was no fresh material to support the formation of the belief of the Assessing Officer that income chargeable to tax had escaped assessment and in the absence of any fresh tangible material, he came to the conclusion that it was not permissible for the Assessing Officer to reopen the assessment. The learned Accountant Member, however, took a different view relying on the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and the matter, therefore, was referred to a Third Member for resolving inter alia, the following point of difference :-
"Whether on the facts and circumstances of the proceedings initiated by the AO u/ s 147 is liable to be confirmed or quashed when there was no fresh material available with the AO and the assessment had been completed originally u/ s 143(1)."31 ITA No. 292/Hyd/2012 &Ors
Sri S. Ranjith Reddy & Anr.
===================== The Third Member agreed with the view taken by the learned Judicial Member relying mainly on the decision of Hon'ble Supreme Court .in the case of Kelvinator of India Ltd. (supra) and Eicher Ltd. 320 ITR 561. It was held by the Third Member that section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that a reassessment notice issued u/s 148 in a case where the original assessment was made u/s 143(1) cannot be challenged on the ground of a mere change of opinion, it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. As regards the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) cited by the Revenue and relied upon by the Accountant Member, the Third Member held that the same was applicable in cases where the return was processed u/s 143(1) but later on notice was issued u/s 148 and the assessee challenges the notice on the ground that it is prompted by a mere change of opinion. The Third Member then referred to the decision of Hon'ble Supreme Court in the case of CIT vs. Kelvinator of India (supra) wherein it was held that there should be "tangible material" to come to the conclusion that income had escaped assessment. Relying on the said decision, it was held by the Third Member that while resorting to section 147 even in a case where only an intimation had been issued u/s 143(1)(a), it is essential that the Assessing Officer should have before him tangible material justifying his reason to believe that income had escaped assessment. Since there was no such tangible material before the AO from which he could entertain the belief that income of the assessee chargeable to tax had escaped assessment, the Third Member held that reassessment proceedings initiated by the Assessing Officer were liable to be quashed on the ground that there was no tangible material before the Assessing Officer even though the assessment was completed originally u/s 143(1). In our opinion, the Third Member decision of the Tribunal in the case of Telco Dadajee Dhackjee Ltd. (supra) is squarely applicable in the present case and respectfully following the same, we hold that the initiation of reassessment proceedings by the Assessing Officer itself was bad in law and the reassessment completed in pursuance thereof is liable to be quashed being 32 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== invalid. We order accordingly and allow ground No. 1 of the assessee's appeal.
11. As a result of our decision rendered above on the preliminary issue quashing/cancelling the assessment made by the Assessing Officer u/s. 143(3) read with section 147, the other issues raised in the appeals of the assessee in respect of addition made in the said assessment have become infructuous and we do not deem it necessary or expedient to decide the same."
33. The facts before us suggest that the information what is considered by the Assessing Officer to reopen the assessment was already on record and if AO fails to consider the same for framing the assessment by issuing notice u/s. 143(2) of the Act he is precluded from considering the same material for reopening of the assessment u/s. 147 read with section 148 of the Act. Accordingly, we are inclined to quash the assessment.
34. Coming to the other grounds raised by the assessee in his appeal, these grounds are not required to be adjudicated by us as we have quashed the reopening of the assessment itself. Even otherwise, similar grounds were raised in ITA No. 290/Hyd/12 in case of Shri S. Narayan Reddy (Assessee's Appeal) and in ITA No. 336/Hyd/2012 (Revenue's appeal) and the findings given by us in these appeals (infra) are to be followed for the grounds raised in ITA No. 292/H/12 relating to treatment of Development Agreement dated 28/02/2006 entered by the assessee with M/s Lumbini Constructions (P.) Ltd. as transfer in terms of section 2(47)(v) of the IT Act.
35. In the result, ITA No. 292/Hyd/2012 is allowed.
ITA No. 290/Hyd/2012 - A.Y. 2006-07 - By Assessee ITA No. 336/Hyd/2012 - A.Y. 2006-07 - By Revenue36. Now, we will take up appeals ITA No. 290/Hyd/2012 (by assessee) and ITA No. 336/Hyd/2012 (by Revenue). These are 33 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== cross appeals arising out of the CIT(A)-I, Hyderabad order dated 30.12.2011 for A.Y. 2006-07.
37. Brief facts of the case are that search and seizure operation u/s. 132 of the I.T. Act was conducted at the residential premises of the assessee on 17-10-2007. Consequent to search, notice u/s. 153A was issued and the assessee filed the return of income for the AY 2006-07 on 10-11-2008 admitting total income of Rs. 11,74,157/-. During assessment proceedings, the AO observed that assessee received 6 acres 4.8 guntas of land along with his family members from his late father Sri S. Hanumanth Reddy. During the period relevant to AY 2006-07, assessee and his family members have entered into development agreement with M/s. Lumbini Constructions Ltd. As per the seized documents of page Nos. 50 to 69 of Annexure A/MALLIFX/1, total 95 independent houses are to be constructed and the entire construction cost is to be borne by the developer. Assessee and his family members are entitled to get 24 independent houses out of the above and assessee's individual share is 10 independent houses. The total construction area of the above houses is 4,500 sq. yards. The land was plotted accordingly and the assessee had sold plot No. 76 admeasuring 366 sq. yards with constructed area of 3057 sq. feet for a consideration of Rs. 62 lakhs vide page Nos. 192 to 212 of A/MALLIFX/1 of the seized documents. Further, AO observed that assessee was in receipt of advances towards sale of houses whereas assessee admitted short term capital gain only in respect of plot No. 5 of Rs. 10,01,250/ - which represents land cost only. The AO was of the view that capital gain should be computed in respect of all the 10 independent houses. He relied on the ratio laid down by the various appellate authorities including this Tribunal in the case of M/s. Shantha Vidyasagar Annam vs. ITO and also Bombay High Court decision in the case of Chaturbhuj Dwarakadas Kapadia (cited supra) and concluded that in the 34 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== present case, assessee was liable to capital gain basing on the development agreement entered into by him with Lumbini Constructions. The AO, basing on the plot (No. 76) measuring 354 sq. yards along with constructed house sold by the assessee for an amount of Rs. 62 lakhs, arrived at the sale value at Rs. 17,000 per sq. yard and applied this figure for 4,500 sq. yards falling to the share of the assessee and arrived at the sale consideration at Rs. 7,65,00,000. From this figure, he deducted the cost of acquisition and further reduced the short term gain already offered and taxed the balance as short term capital gain. The Assessing Officer thus computed the total income of the assessee at Rs. 7,18,60,535/-.
38. On appeal the CIT(A) observed that in this case there is a transaction entered into by the assessee along with his family members with M/s. Lumbini Constructions (P.) Ltd vide document No. 5630/2006 dated 28.2.2006. It is a registered document, as per which the assessee along with his family members holds 6 acres 4.8 guntas of land, and gave for development to M/s. Lumbini Constructions (P.) Ltd who also holds 8 acres 22.2 guntas of land in the same area which is contiguous to the land of the assessee's family. By virtue of this agreement, the assessee and his family members are to receive 24 plots together with houses to be constructed by M/s. Lumbini Constructions (P.) Ltd out of its own funds. In turn, the assessee will receive 9 plots along with constructed houses and 50% share in one of the plot together with house thereon. It clearly reveals that the agreement entered into by the assessee and his family members with the above party is nothing but development agreement wherein the assessee is to receive constructed houses on the plots retained by him in lieu of the foregoing of the land to the township to be developed by M/s. Lumbini Constructions (P.) Ltd. There is extinguishment of right over a portion of the land in lieu of the constructed portion received by the assessee together with other family members and 35 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== they are exclusive owners of such constructed portion along with the land of such houses allotted to the share of the family of the assessee. On its part, M/s. Lumbini Constructions (P.) Ltd obtained the necessary building plan approvals as well as township development sanctions and carried out the construction of the houses as per the plan. Therefore, there is a 'transfer' of land by the assessee and other family members and in lieu of such transfer of land the assessee is to receive the consideration in the form of constructed built up area. Hence, all the ingredients of the transfer as embedded in sec. 2(47)(v) are very much visible in the transaction entered into by the assessee. There is a written agreement in respect of the immovable property owned by the assessee, there is consideration in the form of construction of superstructures, there is handing over of physical possession of the land and there is performance on the part of the developer M/s. Lumbini Constructions (P.) Ltd to carry out the construction activity out of its own funds. In view of satisfaction of all the characteristics of transfer, the case clearly falls u/s. 2(47)(v) of the I.T. Act. As regards the contention of the assessee that it is only a family arrangement amongst the members of the family is concerned, there is no merit in such plea of the assessee. Here, family of the assessee entered into a development agreement with a developer by name M/s. Lumbini Constructions (P.) Ltd. He could not agree with the contention of the assessee that M/s. Lumbini Constructions (P.) Ltd., is part of the family and its efficacy to enter into such family arrangement. This agreement does not speak about the sharing of ownership of properties; and all it talks about is to develop a township and receive the houses in place of portion of land surrendered by them. By any stretch of logic, M/s. Lumbini Constructions (P.) Ltd., can be regarded as member of the family to enter into such family arrangement. There is a separate family arrangement amongst the family members as 36 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== evidenced by the Memorandum of Family Arrangement dated 30- 11-2006 and the same was considered by the CIT(A) in the course of appeal proceedings. The said family arrangement is to distribute the properties to various family members which are held by the family hitherto that agreement. It has nothing to do with the development agreement as entered by the family of the assessee with Lumbini Constructions Ltd to develop the land by constructing the houses. Therefore, the argument of the assessee was rejected by the CIT(A) that it is only a family arrangement.
39. He held that there is a transfer within the meaning of sec. 2(47) r.w.s. 53A of Transfer of Property Act as regards the immovable property transferred by the assessee by virtue of the above cited registered document. Further, he observed that the assessee and his family members had given the immovable property of 29,621 square yards (6 acres 4.8 guntas) for development out of which the land pertaining to the share of the assessee is 11,881 sq. yards. In return, the family-retained 11,229 sq. yards of land and received around 81,135 square feet of built up area. in the form of superstructures on 24 plots on the land admeasuring 11,229 sq. yards. Out of the total of the share relating to family of the assessee, as an individual, the assessee retained 4,504 sq. yards of land along with built up area of 31,819 sq. feet representing superstructure on 10 plots as described in the assessment order. In result, the assessee has foregone 7,377 sq. yards of land (11,881 - 4,504) and in lieu of the same, received built up area of 31,819 sq. feet in the form of 10 houses in the plots bearing numbers as mentioned in the assessment order. Therefore, the sale consideration is received in the form of 31,819 sft and the same should be considered for the purpose of computing short term capital gain on the land of 7377 sq. yards transferred by the assessee by virtue of the above regd. document. The cost of construction of built up area measuring 31,819 sft. to 37 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== be the sale value which was passed on to the assessee in lieu of the land foregone or transferred for the purpose of development. Considering the nature of construction as well as the period under which the construction has been undertaken, the CIT(A) was of the opinion that the cost of construction per sft would be around Rs. 1200/- which is a reasonable estimate. The same was multiplied with the quantum of built up area received by the assessee. i.e. 1200 x 31,819 = Rs. 3,81,82,800. This value represents the consideration received by the assessee in lieu of the land admeasuring 7,377 sq. yards which was transferred by the assessee vide agreement dated 28.2.2006. From this sale consideration, the land cost to the assessee is to be deducted @ Rs. 1170 per sq. yard which comes to Rs. 86,31,090/- (7377 x 1170). Thereby the short term capital gain derived by the assessee in this year is Rs. 2,95,51,710/- (Rs. 3,81,82,800 - Rs. 86,31,090) was determined.
40. The AO has calculated the short term capital gain by taking the land measuring 4500 which represents the land retained by the assessee but not transferred for the development. The ownership on this portion of 4504 (4500 as per AO) is still with the assessee along with the superstructure which was received in lieu of the balance portion of the land. Therefore the short term capital gain is derived on account of the transfer of 7377 sq. yards of land out of total 11,881 sq. yards pertaining to the share of the assessee in this year. The CIT(A) observed that it is not correct on the part of the AO to assess capital gains on the land retained by the assessee i.e., 4,504 sq. yards. Capital gains accrue to the assessee on transfer of the immovable property to the extent of 7,377 sqy which accrues in the current year. Thereafter, as and when the assessee sells or transfers the said plots along with houses received to his share, the sale proceeds have to be computed under two heads. As regards the value to the land 38 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== component, the income is to be assessed under capital gains and the value representing the super structure is to be assessed as business income or income from other sources. While doing so, the cost of the land to the assessee to be taken @ Rs. 1170 per square yard, and the cost of the super structure to be taken at Rs. 1200/- per sft. The difference amounts are to be assessed as income of the assessee in the years in which the sale takes place under two heads as mentioned above. Accordingly, he directed the AO to adopt the value of Rs. 2,95,51,710 as short term capital gain instead of Rs. 7,12,35,000. The CIT(A) directed the Assessing Officer to rework the sale proceeds of the plots already sold in this year as per the above directions under two heads. In the current year, the assessee disclosed, short term capital gain of Rs. 5,48,625 in respect of sale undertaken during the year. The assessee has considered only the land value to arrive at such capital gains and ignored the value of the super structure for the purpose of taxation. But the Assessing Officer should consider the land value for the purpose of capital gain; and value of the super structure as business/income from other sources as the case may be separately and the same should be added while computing the total income of the assessee in addition to the short term capital gain of Rs. 2,95,51,710 as directed above. Against these findings of the CIT(A) both assessee and Revenue are in appeal before us.
41. The contention of the learned AR before us is that the order of the CIT(A) is unsustainable both on facts and in law. He failed to note that the document executed on 28/2/2006 was not a development agreement but an agreement of settlement of rights amongst the legal heirs of Late S. Hanumanth Reddy executed as a consequent to his death and therefore erred in holding to the contrary and the conclusion thereon in holding that there was a transfer within the meaning of Sec. 2(47) of the I.T. Act, 1961. The AR submitted that no municipal sanctions for the development of 39 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== property having been obtained based on the agreement dated 28/02/2006. The Agreement did not contemplate an exchange of properties and therefore the agreement does not by itself constitute a "Transfer" within the meaning of Section 2(47) of the I.T. Act, 1961. He submitted that the CIT(A) failed to note that the concept of Transfer as envisaged in Section 2(47)(v) of the I.T. Act, 1961 did not cover Development Agreement and much less the document in question does not fall under the category of development agreement and, therefore, the CIT(A) erred in holding that there was a "Transfer" in terms of the execution of the said Agreement which in no event is a development agreement that enables the chargeability to capital gains for the assessment year 2006-2007.
42. The AR further submitted that the CIT(A) erred in holding that there was a transfer in terms of Section 2(47)(v) of the IT Act, 1961 and that capital gains was exigible on the date of Execution of Development Agreement. The CIT(A) having found as a matter of fact that the layout permission was sought for the joint development from Hyderabad Urban Development Authority by all the co-owners vide permit No. 6/Layout/CDA/2004 dated 07.07.2004 erred in holding that there was a "transfer" within the meaning of Sec. 2 (47) of the I.T. Act, 1961 on the date of execution of Agreement dated 28th February, 2006 relevant to the assessment year 2006-2007. The CIT(A) failed to note that the rights of the assessee in a Development Agreement was an inchoate right till the project was completed by the Developer and the Built-up area share of the assessee was handed over by the Developer and until the happening of this event no Income much less Capital Gains accrues to the assessee. The AR submitted that the CIT(A) failed to note that if the date of execution of the Development agreement is adopted as the date of transfer the machinery provisions for computation of capital gains fails as the 40 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== full value of the consideration receivable cannot by any stretch of imagination be quantified and therefore erred in holding that capital gains arose during the assessment year 2006-2007.
43. He submitted that the CIT(A) failed to note that as on date of execution of document dated 28/2/2006 and in terms of such document the super structure was not in existence and, therefore, to assess the assessee to capital gains on the date of execution of Development Agreement is erroneous. The order of the CIT(A) in holding that the consideration accruing or arising on the date of execution of the document of 28/2/2006 was Rs. 3,81,82,800/- is unsustainable as the built up area to be allotted to the assessee was non existing on the date of execution of the agreement and, therefore, erred in adjudging the aforesaid sum as consideration while computing capital gains. The order of the CIT(A) in assessing the period of holding of the land as "Short-term" in nature is totally contrary to the facts and evidence on record and is, therefore, clearly unsustainable. The AR submitted that the order of the CIT(A) in computing the short term capital gains at Rs. 2,95,51,710/- and the adoption of cost of acquisition is disputed being contrary to the facts and evidence on record. The assessee denies his liability to be assessed for Interest u/s 234B of the I.T. Act, 1961. The AR relied on the Third Member decision of Tribunal Chennai Bench in the case of Vijaya Productions (P.) Ltd. v. Addl. CIT (134 ITD 19).
44. On the other hand, the learned DR submitted that the concept of land retained by the assessee brought out by the CIT(A) is also ill-founded. Assessee didn't retain any land in the instant case, he had transferred his share of land to the builder and in lieu of that received 10 houses constructed in 4504 sq. yards of land with built up space of 31819 sq. ft. He submitted that the CIT(A) also erred on basic scheme of computation of capital gains 41 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== and ignored the cost of the land received by the assessee and taken only the cost of construction of built up space received by the assessee in computing capital gains arising on account of transfer of land for development. The method of computation of capital gains followed by the CIT(A) is not correct and alien to the spirit of IT Act and known-principles of Accountancy and, therefore, not acceptable. The CIT(A) further erred in coming into conclusion that computation done by the Assessing Officer is wrong. In fact, the Assessing Officer had computed the capital gains correctly by adopting the cost of land as well as construction based on actual sale of house made by the assessee and said document is part of seized material and he relied on the assessment order.
45. We have heard both the parties and perused the material on record. The crux of the argument of the assessee is that there is no transfer u/s. 2(47)(v) of the Act. That being so, there cannot be any capital gain whether short term or long term in the assessment year under consideration and nothing has happened with regard to the landed property in the assessment year under consideration and as such there cannot be any computation of capital gain. The Assessing Officer has come to the conclusion that there was a transfer of property within the meaning of section 2(47) after discussing the issue in the light of the joint development agreement.
46. The crucial instruments relied on by the Assessing Authority to hold that there was a transfer of capital asset are the joint development agreement entered into between the assessee and M/s Lumbini Constructions (P.) Ltd. It is mainly on the basis of the above document that the Assessing Authority has concluded that the assessee-company has transferred its right over the landed property of 6 acres and 4.8 guntas.
42 ITA No. 292/Hyd/2012 &OrsSri S. Ranjith Reddy & Anr.
=====================
47. A transfer provided in section 2(47), for the purpose of this case includes: (i) sale, exchange or relinquishment of the asset, or
(ii) extinguishment of any rights therein .... and (v )any transaction involving the allowing of the possession of any immovable property taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882.
48. The first condition is as to whether there was a sale, exchange or relinquishment of the asset. The assessee has entered into a joint development agreement with M/s Lumbini Constructions (P.) Ltd. in the previous year relevant to the assessment year under appeal, for promoting a joint venture with M/s Lumbini Constructions (P.) Ltd. to construct houses. The contribution of the assessee-company is the land of 6 acres and 4.8 guntas owned by it. In return the assessee-company is getting 50 per cent of the total built up area 31,819 sq.ft. of the undivided right in the landat 4504 sq. yard in pursuance of the above agreement.
49. The joint venture project as far as the impugned previous year is concerned, was only in a nascent stage. As per the agreement, M/s Lumbini Constructions (P.) Ltd. is to construct the building at its own cost. All the above features make out a case of a JV for developing and reconstructing houses by adjusting rights in the immovable properties by providing the vacant land and in return getting a share in the undivided right over the land as well as in the built up area.
50. As far as the previous year relevant to the impugned assessment year is concerned, nothing has happened other than the execution of the agreements. The transfer of an immovable 43 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== property always contemplates transfer of an existing property, i.e. a property in praesenti. The question in the present case is whether there is a property existing to be transferred by the assessee-company. As far as the land of 6 acres and 4.8 guntas is concerned there is only an agreement. The proposed project is still to be born as the offshoot of the assessee. The assessee and M/s Lumbini Constructions (P.) Ltd. were not forming any new company. The assessee is not transferring any right or any property to M/s Lumbini Constructions (P.) Ltd. The assessee- company is assigning its landed property in favour of the M/s Lumbini Constructions (P.) Ltd. by the joint venture agreed into between the assessee and M/s Lumbini Constructions (P.) Ltd. There cannot be a sale to oneself. Nothing is exchanged in the previous year relevant to the assessment year under appeal. No right is relinquished by the assessee in the impugned previous year. It only proposes to redefine the rights There is no extinguishment of any rights therein.
51. The consideration for the contribution made by the assessee-company is not by way of sale consideration. As the assessee is providing its land for the development, the assessee is getting rights in the developed property. The extinguishment of its right over the land is compensated by its right in the built up area. Even if it is considered as a proposed exchange, nothing has been culminated in the impugned previous year. All those things are to happen in the future. The joint venture has not started the construction in the impugned previous year. The housing project was yet a proposed project. As already stated, a transfer is contemplated only in the case of an existing property. In the present case the property is only in the nature of mutual rights. The project and development are yet to happen. Strictly, speaking, the projects and plans may happen or may not happen. That is 44 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== why the parties call the arrangement as agreements. The assessee has not transferred any property as such, either in favour of M/s Lumbini Constructions (P.) Ltd. or in favour of the JV. In these circumstances there cannot be a case that the assessee had sold or extinguished or relinquished any of its assets/rights. The rights of the assessee-company and M/s Lumbini Constructions (P.) Ltd. are with reference to the property to be built in future. Therefore, there cannot be a case of extinguishment of any right in the property held by the assessee.
52. The Assessing Authority has made a fundamental error in knocking down the wholesome business arrangement into independent segments and to treat certain segments as instances of transfer. The Assessing Officer concludes that providing land for the purpose of development is a transfer. It is to be seen that the consent given by the assessee-company to provide its land for developing the housing project is one of the necessary stipulations of the whole scheme. There cannot be an independent agreement per se, in assessee-company permitting somebody to construct a housing project on its land. The provision made for 6 acres and 4.8 guntas to facilitate the implementation of the JV is to be read always along with equally important other stipulations of the agreement.
53. All these matters bring home an important point that the expectations and contemplations incorporated in the agreements are the business propositions made by the concerned parties, which have been deduced into enforceable agreements. Even though the agreements are enforceable, they themselves do not take the character of immovable properties.
54. The execution of the development agreement do not bring into existence any tangible asset that could be transferred between 45 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== the parties. The agreements speak about the intentions of the parties. Their future action plans are based on the agreements. Once the project is completed and all the stipulations are satisfied, the parties may come to declare the final satisfaction of the agreements. Only at that point of time, the question really arises as to whether there was any transfer within the meaning of section 2(47). That too, again, the question will be further enlarged to know that if at all there is a transfer, whether it is between the assessee and M/s Lumbini Constructions (P.) Ltd.
55. Next it is necessary to consider whether this arrangement can be treated as a transfer within the meaning of section 53A of the Transfer of Property Act. In the present case, M/s Lumbini Constructions (P.) Ltd. is not a transferee; M/s Lumbini Constructions (P.) Ltd. has not taken possession of the property. No money consideration has not been discharged. In fact there cannot be a question of handing over possession of the property to anybody. The assessee itself is contemplated a joint venture for the development of housing project. The joint venture is not a new legal entity. It is an extension of the assessee itself. In such circumstances, there cannot be a case of transfer at all and it only to enable its contractual obligations in planning, implementing and executing the project as construed in the joint development agreement. It is for M/s Lumbini Constructions (P.) Ltd. to undertake the construction activities and do each and everything to transform the concept into reality.
56. Contrary to this, the learned DR submitted that vide development agreement dated 28.2.2006 the assessee entered into development agreement along with other co-owners with M/s. Lumbini Construction for construction of 95 independent houses. The entire construction cost was to be borne by the developer.
46 ITA No. 292/Hyd/2012 &OrsSri S. Ranjith Reddy & Anr.
===================== The assessee would get independent houses. The assessee also sold in the assessment year under consideration plot No. 76 measuring 366 square yards (sqy) with constructed area of 3057 square feet (sft) for Rs. 62 lakhs. Similarly the assessee sold plot No. 5 measuring 412 sqy on 30.6.2006 with constructed area of 3199 sft for Rs. 52,49,900. The assessee also received advance in respect of above houses. The sale of land shall be considered as income from short term capital gain as the land was acquired by the assessee on 19.11.2003 and 22.1.2004. The assessee entered into development agreement with M/s. Lumbini Constructions on 28.2.2006. As the period is less than three years, it should be considered as short term capital gains. According to the DR computation of capital gain does not fail. Being so, the judgement of co-ordinate Bench in the case of Dr. Maya Shenoy (supra) and the judgement of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra) has to be applied.
57. In this case, admittedly, assessee's father late Sri Hanumanth Reddy, along with another purchased 6 acres and 4.8 guntas of land. Another piece of land, 8 acres 27/2 guntas, was purchased by M/s. Lumbini Constructions (P.) Ltd. and Sri B. Laxman Reddy. The layout permission was jointly obtained for 14 acres 32 guntas. The development work was undertaken by M/s. Lumbini Constructions. There was a development agreement with these parties vide registered document No. 5630/06 dated 28.2.2006. On the basis of this agreement, the Department took a view that on signing the agreement there was a transfer u/s. 2(47) of the Act. The assessee admitted capital gain on sale of land. The Assessing Officer has computed the capital gain for 4500 sqy at Rs. 17000 per sqy. Gross consideration was worked out at Rs. 7.65 crores. Out of this he has deducted cost of acquisition at Rs. 52,65,000 (total short term capital gain). As the assessee already offered Rs. 5,48,625 as short term capital gain he made an 47 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== addition of Rs. 7,06,86,375. Now, the question before is whether there is any capital gain over and above the capital gain admitted by the assessee in view of the provisions of section 2(47)(v) of the Act. In order to be "transfer" within the meaning of section 2(47)(v) of the Act, there must be a transaction under which the possession of immovable property is allowed to be taken by or retained. Secondly such taking or retention of possession, as is well known, is a facet of the equitable doctrine of part performance of contract falling within the scope of section 53A of Transfer of Project Act. The Legislature advisedly referred to "any transaction"
with a view to emphasise that it is not the factum of entering into agreement or formation of contract that matters but it is the distinct transaction that gives rise to the event of allowing the contractee to enter into possession that matters. That a transaction is identifiable by the terms of agreement itself and takes place within the framework of the agreement. In the present case, the assessee along with other co-owners of the property entered into development agreement with M/s. Lumbini Constructions Pvt. Ltd. on 28.2.2006. This document was found during the course of search. According to the Department there is a transfer u/s. 2(47)(v) of the Act in view of the judgement of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (cited supra) and also order of co-ordinate Bench in the case of Dr. Maya Shenoy (cited supra). Being so, it is necessary to look into the above judgements.
58. Their Lordships of Hon'ble Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. This provision, which covers one of. the modes of deemed 'transfer', lays down that the scope of expression 'transfer' includes "any transaction involving the allowing of, the possession of any immovable property (as defined) to be taken or retained in part performance of a contract of the 48 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== nature referred to in Section 53A of the Transfer of Property Act'. Elaborating upon the scope of Section 2(47)(v), their Lordships observed as follows:
"Under section 2(47)(v), any transaction involving allowing of possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v). That, in order to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under Section 2(47)(v)".
59. Their Lordships, having made the above observations, took note of the fact that Section 2(47)(v) was introduced in the Act w.e.f. asst. yr. 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, Section 2(47)(v) came to be introduced in the Act.
60. There was no dispute on whether or not the conditions of Section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon'ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows:
"If on a bare reading of a contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, 49 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under Section 2(47)(v)."
61. It is important to bear in mind that Section 2(47)(v) refers to 'possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act" and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of Section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under Section 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(47)(v).
62. In order to invoke the principles laid down by the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under Section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference:
Section 53A : Part performance-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or. any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his 50 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== part of the contract then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed thereof by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the, transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than the right specifically provided by the terms of the contract;
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.
(Emphasis, italicized in print, supplied by us now)
63. A plain reading of the Section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in Section 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon'ble Bombay High Court when their Lordships observed as follows:
"That, in order to attract Section 53A, the following conditions need to be fulfilled.
(a) There should be contract for consideration;
(b) It should be in writing;
(c) It should be signed by the transferor;
(d) It should pertain to the transfer of immovable property;
(e) The transferee should have taken possession of property;
(f) Lastly, transferee should be ready and willing to perform the contract".
64. Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla-The Transfer of Property Act" (9th Edn. : Published by Butterworths India), at p. 448, observes that:
51 ITA No. 292/Hyd/2012 &OrsSri S. Ranjith Reddy & Anr.
===================== "The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee's willingness to perform his part of the contract in terms covenanted there under."
Willingness to perform the roles ascribed to a party, in a contract is primarily a mental disposition. However, such willingness in the context of Section 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient.......
In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed........"
65. We are in considered agreement with the views so expressed in this commentary on the provisions of the Transfer of Property Act. It is thus clear that 'willingness to perform' for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have 52 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== 'performed or is willing to perform' its obligations under the agreement.
66. In the light of the above, we have examined the development agreement dated 28.2.2006. As per this development agreement land owner gets his share of plots on construction and consideration is quantified in terms of money. Also the handing over of possession in the development agreement is missing. Both the developer and the assessee having the landed property. They pooled together the landed property along with some other parties who are owners of some other landed property and all parties together given licence to the builder to enter the premises and construct houses. No sale was effected on the date of agreement. No consideration has been passed between the parties on signing the agreement. Further from the date of signing of development agreement dated 28.2.2006 to 31.3.2006 no progress has taken place in the said landed property which is subject matter of development agreement, nothing has been brought on record. Further, there was no consideration in the form of money passed between the parties. There was no construction, whatsoever, taken place during the period 28.2.2006 to 31.3.2006. Even otherwise there was no General Power of Attorney given by the assessee to the developer. In such a situation, it is only the actual performance of transferees obligation which can give rise to the situation envisaged in section 53A of the TP Act. On these facts, it is not possible to hold that the developer has performed its obligation during the period 28.2.2006 to 31.3.2006 in which the capital is sought to be taxed by the Revenue authorities. In our opinion, the condition laid down u/s. 53A of TP Act was not satisfied during the period from 28.2.2006 to 31.3.2006. Once we come to the conclusion that the developer has not performed the stipulation as required by the development agreement during the period under consideration and within the meaning assigned to 53 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== the expression in section 53A of TP Act, its contractual obligation in the previous year relevant to the present A.Y. 2006-07, and it cannot be said that there was a transfer u/s. 2(47)(v) of the Act so as to levy capital gain tax. The judgement in the case of Chaturbhuj Dwarkadas Kapadia by the Bombay High Court undoubtedly lays down a proposition which, more often than not, favours the Revenue but on the facts of this case the said judgement supports the case of the assessee as "willingness to perform" has been specifically recognised as one of the essential ingredients to cover a transaction by the scope of section 53A of TP Act. The Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue's case is devoid of merit. Similar is the position in the case of Dr. Maya Shenoy (cited supra) by the co-ordinate Bench as reported in 23 DTR 140 (Hyd).
67. On the other hand, the assessee's case is supported by the Third Member decision of this Tribunal Chennai Benches in the case of Vijaya Productions Pvt. Ltd. (cited supra) which has same force of a Special Bench decision as held by this Tribunal Special Bench, Mumbai in the case of DCIT vs. Oman International Bank SAOG (100 ITD 285) (SB) (Mum). Same view was taken in the case of Puri (PC) vs. CIT (151 ITR 584). In view of this, we are inclined to hold that during the period from 28.2.2006 to 31.3.2006 (previous year 2005-06 relevant to A.Y. 2006-07) there cannot be any capital gain earned by the assessee on account of the impugned development agreement. Accordingly, we hold that there cannot be any tax on the capital gain on this count. The ground raised by the assessee is allowed. Assessee's appeal in ITA No. 290/Hyd/2012 is allowed.
68. As we have allowed the assessee's appeal in ITA No. 290/Hyd/2012 by holding that there is no capital gain tax on 54 ITA No. 292/Hyd/2012 &Ors Sri S. Ranjith Reddy & Anr.
===================== account of development agreement the ground raised by the Revenue in its appeal becomes infructuous and dismissed accordingly. Revenue appeal in ITA No. 336/Hyd/2012 is dismissed.
69. To sum, assessees' appeals in ITA No. 292/Hyd/2012 and ITA No. 290/Hyd/2012 are allowed and the Revenue appeal in ITA No. 336/Hyd/2012 is dismissed.
Order pronounced in open court on 7th June, 2013.
Sd/- Sd/-
(SAKTIJIT DEY) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 7th June, 2013
tprao
Copy forwarded to:
1. Sri S. Ranjith Reddy, 4-51/L/15, Plot No. 15, Lumbini SLN Springs, Gachibowli, Hyderabad-500 032.
2. Sri S. Ranjith Reddy, c/o. M/s. Sekhar & Co., 133/4, Rashtrapathi Road, Secunderabad.
3. Sri S. Narayan Reddy, 4-51/L/88, Plot No. 88, Lumbini SLN Springs, Gachibowli, Hyderabad-500 032.
4. Sri S. Narayan Reddy, c/o. M/s. Sekhar & Co., 133/4, Rashtrapathi Road, Secunderabad.
5. The Asst. CIT, Circle-6(1), IT Towers, AC Guards, Hyderabad.
6. The Deputy CIT, Central Circle-6, Aayakar Bhavan, FM Road, Hyderabad-500 001.
7. The CIT(A)-IV, Hyderabad.
8. The CIT(A)-I, Hyderabad.
9. The CIT-III, Hyderabad .
10. The CIT (Central), Hyderabad.
11. The DR - 'A' Bench, ITAT, Hyderabad.
55 ITA No. 292/Hyd/2012 &OrsSri S. Ranjith Reddy & Anr.
=====================
1. ‡ãŠâ¹¾ãî›À ¹ãÀ Ñãì¦ã ‡ãŠãè ãä¦ããä©ã Date of Dictation 23.05.2013
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3. ã䪶ããâ‡ãŠ •ãºã ‚ã¶ãì½ããñã䪦㠽ãÔããõªã ÌããäÀÓŸ ãä¶ã•ããè ÔããäÞãÌã ‡ãŠñ ¹ããÔã ‚ãã¾ãã ý Date on which approved draft comes to Senior PS 4 ã䪶ããâ‡ãŠ •ãºã ¹ãŠñ¾ãÀ ‚ãã¡ÃÀ Ñãì¦ãÊãñŒã¶ã ªñ¶ãÌããÊãñ ÔãªÔ¾ã †Ìã⠂㶾ã ÔãªÔ¾ããñâ ‡ãŠñ ¹ããÔã ¼ãñ•ãã Øã¾ãã ý Date on which the fair Order is placed before the dictating Member and other Member 5 ã䪶ããâ‡ãŠ •ãºã ¹ãŠñ¾ãÀ ‚ãã¡ÃÀ ÌããäÀÓ› ãä¶ã•ããè ÔããäÞãÌã ‡ãŠñ ¼ãñ•ãã Øã¾ãã ý Date on which fair Order goes to the Sr.PS 6 ã䪶ããâ‡ãŠ •ãºã ¹ãŠãƒÃÊã Ìãã¹ãÔã ºãñâÞã ãäÊããä¹ã‡ãŠ ‡ãŠñ ¹ããÔã ¼ãñ•ããè Øã¾ããè ý Date on which the file goes to the Bench Clerk 7 ã䪶ããâ‡ãŠ •ãºã ¹ãŠãƒÃÊã ½ã쌾ã ãäÊããä¹ã‡ãŠ ‡ãŠñ ¹ããÔã ¼ãñ•ããè Øã¾ããèý Date on which file goes to the Head Clerk 8 ã䪶ããâ‡ãŠ •ãºã ¹ãŠãƒÊã ÔãÖã¾ã‡ãŠ ¹ãâ•ããè‡ãŠãÀ ‡ãŠñ ¹ããÔã ¼ãñ•ããè Øã¾ããè ý Date on which file goes to the AR 9 ‚ããä£ã‡ãŠÀ¥ã ‡ãŠñ ‚ããªñÍã ‡ãŠñ ¹ãÆñÓã¥ã ‡ãŠãè ãä¦ããä©ã ý Date of the dispatch of the Tribunal Order