Income Tax Appellate Tribunal - Mumbai
Shakti Insulated Wires Ltd. vs Joint Commissioner Of Income Tax on 31 January, 2002
Equivalent citations: [2003]87ITD56(MUM), (2003)79TTJ(MUM)796
ORDER
S.V. Mehrotra, A.M.
1. This appeal by the assessee, for the asst. yr. 1996-97, is directed against the order of learned CIT(A)-XXXIX, Mumbai, dt. 28th Jan., 2000.
2. The first ground of appeal is that the learned CIT(A) erred in upholding the decision of the Jt. CIT in treating the development rights as capital assets chargeable to capital gains instead of treating them as stock-in-trade.
3. The facts of the case in brief are that the assessee-company is engaged in. the business of manufacturing of insulated copper wire. The AO noticed that the assessee had sold development rights for Rs. 5.95 crores during the asst. yr. 1996-97 in respect of the property which was converted into stock-in-trade in the asst. yr. 1995-96. The facts in regard to the sale of development rights are that the assessee had acquired land some time in 1963 at village Magathana, Dattapada Road, Borivli (E), Mumbai, admeasuring 44,858.60 sq. mts. This land was covered by the provisions of Urban land Ceiling Act, 1976, However, out of the said property the assessee had obtained no objection certificate under Section 20, whereby it was permitted to use the excess vacant land for its own purposes. An area of 19,508.42 sq. mtrs. was within the exemption limit. Out of this exempted property, the assessee converted the 9,797 sq. mtrs. into stock-in-trade as on 1st April, 1994, in the asst. yr. 1995-96, and sold development right for the built-up area on FSI of 3,676,83 sq. mtrs. at the rate of Rs. 1,501 per sq. ft. to Suashish Diamonds Ltd. for a total consideration of Rs. 5,94,06,277 vide development agreement dt. 29th March, 1996. As the assessee had treated this land into stock-in-trade it had returned the sale of development rights as its business income and had claimed set off against the carried forward losses, whereas the Department invoked the provisions of Section 45(2) and sought to tax the market value of development rights as capital gains on the date of conversion of land into stock-in-trade in accordance with the provisions of Section 45(2). The AO has, in detail considered the various aspects and held that development right was the capital asset and conversion of land into stock-in-trade amounted to transfer and was chargeable to capital gains under Section 45(2). Since the AO had invoked the provisions of Section 45(2), he had to determine the fair market value of the development rights as on 1st April, 1994 in order to determine the capital gains. For determining the fair market value he resorted to backward interpolation by applying cost inflation index to the sale consideration of Rs. 5.94 crores and arrived at the figure of Rs. 5,47,55,251 as on 1st April, 1994, In this regard, he also pointed out that the prices of immovable properties had reached its peak in March, 1995 and thereafter the prices started falling down in the market. Thus, in order to justify the fair market value as computed, he observed that the fair market value of the development right as on 1st April, 1994, should have been actually higher than the sale consideration of such development rights in March, 1996. However, for computing the cost of acquisition of this development rights, he accepted the assessee's valuation which was based on the value of land as was existing prior to 1st April, 1981. He accordingly deducted Rs. 2,38,075 as cost of acquisition of this development rights and computed the capital gains at Rs. 5,45,17,176. After reducing this capital gains from the sale consideration of development rights, he arrived at business profits at Rs. 48,89,101.
4. Before the learned CIT(A) the following propositions were advanced by the assessee :
1. The land was covered under Urban Land Ceiling Act and was not transferable;
2. The assessee could develop the properties for which approval from its shareholders had been obtained by the assessee-company to do such business for which the assessee had to convert the land into stock-in-trade.
3. The development rights were not the capital assets but were trading assets at the time of their sale i.e., 29th March, 1996.
4. The cost of acquisition of vacant land as on 1st April, 1981, was Rs, 25 per sq. mt. and after applying the indexed cost factor the cost of acquisition of the converted land would come to Rs. 64.75 per sq. mt. and thus a capital loss would occur when the converted land was sold.
5. The method of backward interpolation of cost inflation index to the sale consideration of Rs. 5.94 crores to arrive at its value as on 1st April, 1994, was arbitrary and without approval by any authority.
6. If the method of backward interpolation was upheld for finding the fair market value of development rights as on 1st April, 1994, then the same method should be applied to find out the fair market value as on 1st April, 1981, and the same should have been adopted by the assessee.
7. The cost of acquisition of development rights could not be ascertained, and, therefore, the capital gains could not be taxed as per the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC).
8. Since the development rights had been held for more than 3 years, the tax ought to have been calculated by applying the rates applicable to long-term capital gains instead of those applicable to short-term capital gains. The assessee has also placed reliance on the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC), for claiming set off of business losses.
5. The learned CIT(A) held that transfer of development rights would amount to transfer of capital asset liable to capital gains tax and the cost of land would comprise of cost of development rights and the cost of residuary right of ownership. He further held that since the development rights (possession of industrial gala over land) were transferable, it was the most valuable part whereas the residuary right of ownership was of negligible value as after the transfer of development rights what was left with the appellant was to arrange for the conveyance by the developers which the assessee was bound to do so on their behalf under the agreement. The learned CIT(A) after considering the recitals of the development agreement held that the provisions of Section 45(2) were squarely applicable to the facts of the case and upheld the order of the AO. In regard to the fair market value of the development right as computed by the AO at Rs. 5,47,55,251 as on 1st April, 1994, by backward interpolation of the sale consideration of Rs. 5,94,06,277 from the asst. yrs. 1995-96 to 1996-97 (relevant to the date of conversion of development rights into stock-in-trade i.e., 1994), the learned CIT(A) upheld the order of the AO and observed that the same was fair and reasonable. He, however, rejected the contention of the assessee that the same method should have been adopted for determining the fair market value of the property as on 1st April, 1981, as the same would negate the provisions of Section 48 inasmuch as forward interpolation of the value of property as on 1st April, 1981, as determined in this fashion would give indexed cost of acquisition as on the date of transfer equal to the sale consideration received. He also negatived the contention of the assessee that if the fair market value of the land as on 1st April, 1981, was taken at Rs. 25 per sq. yd. the same should be interpolated to arrive at its fair market value as on 1st April, 1994, because that would result far away from the reality of the situation inasmuch as the sale consideration received by the assessee was much more than the indexed cost of acquisition. Thus, in effect, he upheld the computation made by the AO wherein he accepted the assessee's valuation for indexing the cost of acquisition from 1st April, 1981, on the basis of its valuation on 31st March, 1994, at the rate of Rs. 25 per sq. ft. as determined by the valuer. He also upheld the rate of short-term capital gains applied by the AO. The learned CIT(A) also rejected the argument of the assessee that long-term capital gains arising on transfer of the development rights should be set off against brought forward business loss in view of the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra) and inter alia, observed that the provisions of Section 45(2) were not there when the apex Court had pronounced the aforesaid judgment.
6. The learned counsel for the assessee submitted that the land which was converted into stock-in-trade was with various restrictions as per the Urban Land Ceiling Act. He submitted that the development rights which were granted to the assessee under the Government policy was business asset. The learned counsel for the assessee referred to the chronological chart of events which are as under:
7. The assessee acquired the land in 1963, On 19th Sept., 1981, exemption under Section 20 of the Urban Land Ceiling Act was granted to the assessee in pursuance of which the assessee was permitted to use excess vacant land for its own use for industrial purposes. On 4th May, 1993, there was change in Industrial Location Policy, in pursuance of which the assessee was permitted construction of industrial estates on an open land to have non-poluting high-tech industries. On 19th Jan., 1994, the assessee applied the Municipal Corporation of Greater Bombay for sub-division of plot and for approval to the proposed layout. On 27th Jan., 1994, the Municipal Corporation of Greater Bombay the Municipal Corporation of Greater Bombay granted its approval to the proposed sub-division and layout. On 1st April, 1994, land was converted into stock-in-trade. This was done vide Board Resolution dt. 17th May, 1994, converting the land into stock-in-trade w.e.f. 1st April, 1994, on 15th April, 1994, an application for amendment to Urban Land Ceiling order was filed to allow construction of industrial estate. On 1st July, 1994, the Urban Land Ceiling Order was amended and construction of new industrial estates subject to necessary permission/clearance (only development and not transfer of galas) was allowed. On 13th July, 1994, the assessee received NOG from the Directorate of Industries granting NOG for construction of industrial estates. On 16th Oct., 1995, Government Resolution No. ULC/1094/5500/ULC was passed by virtue of which the assessee was permitted to transfer industrial galas after construction. The condition was imposed for applying afresh for amendment for Urban Land Ceiling Exemption Order. Accordingly, on 4th Feb., 1996, application was made for fresh ULC clearance for construction of industrial estate, in view of Government Resolution dt. 16th Oct., 1995. On 14th Feb., 1996, ULC Exemption Order was amended and the assessee was permitted to transfer the industrial galas after construction. On 29th Feb., 1996, the assessee received IOD issued by the BMC. Finally, the assessee entered into a development agreement with Suashish Diamonds Ltd. on 29th March, 1996, and transferred the developments rights for a total consideration of Rs. 5,94,06,277.
8. The learned counsel for the assessee referred to p. 3 of the assessment order and pointed out that the assessee-company had fully offered to tax as business income the development rights sold during the year 1996-97. He referred to the order of the learned CIT(A) particularly in paras 2.5 and 2.6 which brings out the real issue. The learned counsel for the assessee also referred to the assessment order for the asst. yr. 1995-96 contained at pp. 194 to 205 of the paper book and pointed out that the AO has observed that the assessee has converted a part of its investment in immovable property into stock-in-trade. The necessary copy of the Board resolution along with necessary documents to this effect were also submitted and examined during the assessment proceedings. The learned counsel for the assessee also in regard to the valuation of the land, referred to p. 10 of the assessment order and pointed out that the land transferred to stock-in-trade was the land covered by ULC Act with full of restrictions and limitations and was having a negligible value of Rs. 25 per sq. mt. as per the valuation report. The learned counsel submitted that the development rights sprouted from the land and it was a trading asset from the very beginning, so there is no question of applicability of Section 45(2), He submitted that Section 45(2) will apply only when the land is transferred. In this regard, the learned counsel for the assessee referred to Section 2(14) which deals with capital asset and pointed out that the stock-in-trade has specifically been excluded from the term 'capital asset'. The learned counsel for the assessee referred to the exemption order under Section 20 of the Urban Land Ceiling Act and pointed out there was specific condition imposed under the Exemption Order that the exempted land could be used by the assessee for his own benefit for the purpose of industry and for no other purpose. It was also a condition that the assessee will not transfer the exempted land or any part thereof to any other person by way of sale, mortgage, gift, lease or otherwise. It was also a condition that if the assessee desired to transfer the exempted land then State Government's prior permission for such transfer was necessary and the State Government would impose a condition that the transferor shall deposit with the State Government the difference between the market price of the land so exempted under Exemption Order and the price at which it would normally had been acquired under the said Act. Thus, the learned counsel for the assessee submitted that this land had many depressing factors and the assessee could not transfer the ownership under any circumstances. Only development rights could be transferred for which permission was received on 16th Oct., 1995, in pursuance of Government policy. The necessary amendment to the Urban Land Ceiling Exemption Order for construction of industrial estate on ULC exempted land was received on 1st July, 1994, which is placed at p. 130 of the paper book. The learned counsel submitted that, land per se was converted into stock-in-trade on 1st April, 1994, and at that time developmental rights were not there. The transfer of developmental, right was controlled by Development (Control) Regulation) Act, 1991, the regn. 34 of which dealt with transfer of development right. This transfer was subject to permission. He submitted that it was only by fiction of law that the transfer of the development right was permitted which could not be extended beyond that contemplated by fiction. He submitted that development rights were marketable rights as is apparent from Clause 3 of the agreement. He submitted that the land was capital asset but developing rights were business assets and marketable commodity, He submitted that development rights arose after conversion of land into stock-in-trade and the Government resolution permitting transfer of industrial galas was also received on 16th Oct., 1995, i.e., after the conversion of land into stock-in-trade. He submitted that development rights are altogether separate from the land. The permission could be rejected for transfer of the industrial galas. Therefore, it cannot be said that the development right was embedded in land. Since, it was not a capital asset, therefore, Section 45(2) could not apply. In the alternative, the learned counsel submitted that the AO wrongly resorted to backward interpolation of the sale consideration for arriving at the fair market value as on 1st April, 1994, which is clearly against the principles laid down in Jogat Mohan Kapur v. WTO and Ors. (1995) 211 ITR 721 (Cal). The learned counsel for the assessee further submitted that if the AO resorted to backward interpolation then the same method should have been applied for computing the fair market value as on 1st April, 1981. He submitted that the assessee had filed the valuation report from the approved valuer. Therefore, the AO was to either adopt this valuation or should have referred the matter to the valuation officer as he was not an expert in this field. In this regard he relied on the decision of the Karnataka High Court in the case of CIT v. S.P.C. Murthy (1991) 191 ITR 189 (Kar). He submitted that for the purpose of valuation restrictions and depressing factors have to be considered. For this purpose he relied on the decision in the case of CIT v. P.N. Sikand (1977) 107 ITR 922 (SC) (At p. 928). He also referred to the decision in Gouri Prasad Goenka & Family (HUF) v. CWT (1993) 203 ITR 700 (Cal) (at p. 703) and pointed out that restrictions of Urban Land Ceiling Act must be considered.
9. In regard to guest-house expenses, the learned counsel referred to p. 239 of the paper book wherein particulars of expenses relating to Delhi office are contained. It was the contention of the assessee that the premises was not to be considered as guest-house and the provisions of Section 37(4) were not applicable; expenses were covered under Sections 30 and 31 and, therefore, should have been allowed. The learned counsel for the assessee referred to p. 217 of the paper book and pointed out that the CIT(A) has allowed 40 per cent of the expenses for office use and, therefore, for the purposes of consistency 40 per cent should have atleast been allowed. He, however, further submitted that in view of the decision of the Third Member in the case of Mahindra & Mahindia Ltd. v. Dy. CIT (1997) 58 TTJ (Mumbai) (TM) 567 : (1997) 61 ITD 129 (Mumbai) (TM), the expenses being in the nature of alleged repairs are covered under the provisions of Section 30 and 31 and should have been allowed.
10. The assessee has raised the following additional grounds stating that the same be admitted as it involves question of law which can be decided from the facts already on record.
"The learned Jt. CIT earred in levying interest under Sections 234B and 234C without application of mind."
11. The learned Departmental Representative submitted that the business of the assessee was manufacturing of insulated copper wires. The learned Departmental Representative also submitted that the assessee was in possession of total land of 44,858.60 sq. mtrs. together with the building standing thereon, out of which 19,508.42 sq. mtrs. was permitted to be used for industrial purposes, for which necessary NOG under Section 20 of the ULC Act was obtained. The assessee out of the said exempted property converted a total area of 9,797 sq. mtrs. in stock-in-trade and subsequently out of the said stock-in-trade sold development rights for the built-up area on FSI of 3,676,83 sq. mtrs. at the rate of 1,501 per sq. ft. to Suashish Diamonds Ltd. He submitted that Section 45(2) was correctly invoked by the AO because before the date of conversion land was a capital asset in which the development rights were embedded. The assessee was absolute owner of the property and, therefore, all the necessary implications of ownership which carried with its development rights were also with the assessee. He submitted that the property was not encumbered in any manner. He also supported the mode of computation of fair market value as on 1st April, 1994, by the AO by resorting to backward interpolation and submitted that the same was a scientific method. In regard to the argument of the learned counsel for the assessee that the same method should be adopted for computing the cost of acquisition on 1st April, 1981, he pointed out that the property was encumbered and we have to see the nature of property in the asst. yr. 1981-82. In this regard he relied on the decision CWT v. Smt. Ballash Kumari of Bagsuri (1986) 51 ITR (Raj) 210 : (1986) 160 ITR 945 (Raj) and submitted that for fair market value on 1st April, 1981, depressing factors have to be taken into consideration, The learned Departmental Representative further submitted that we have to see whether development rights could at all be segregated from the land before coming into force of Development Control Regulation Act, 1991. He submitted that these development rights were embedded in land and by virtue of Development Control Regulation Act, this could be separated in the form of transferable development rights. The learned Departmental Representative referred to various clauses of the agreement between the developed and the assessee contained at p. 148 of the paper book. He referred to para 2 of the said agreement and pointed out that assessee had entered into the business of real estate w.e.f. 1st April, 1994. By that date the assessee had submitted the plans of lay out/sub-division of the said immovable property as per Development Control Rules and the BMC by its letter dt. 27th Jan., 1994, had approved the same. The learned Departmental Representative then referred to para 5 and pointed out that the owner had applied to the Urban Land Ceiling authorities and Directorate of Industries for grant of NOG for construction of industrial estate in Zone I to 1/3 and the Directorate of Industries had given vide its letter dt. 4th July, 1994, permission for construction of new industrial estate in the said immovable property for bona fide use with a condition that in Zone 1/3 such estate shall house only designated Schedule I industries and also subject to the condition that permission from BMC was to be obtained for constructing the new industrial estate and new NOG was also to be obtained by the owners/developers from the Directorate of Industries before commencement of construction. The learned Departmental Representative then referred to para 6 and pointed out that barring internal roads all benefits were given to the developer. The developer could claim that right, title or ownership for rest of the place i.e., area between internal roads. He submitted that though the ownership of the said internal road remained with the owner but the effective use of the land comprising of such internal roads was given to the developer and the owner could transfer the internal road to any third party subject to the right of way thereon of the developer and its successor-in-title and/or assigns to the said plot. The learned Departmental Representative referred to para 8 of the agreement and pointed out that it is evident from the said para that the policies were framed much before 1st April, 1994, in pursuance of which the development rights were a marketable commodity which could be exploited by the owner and the benefit thereof was capable of being transferred by the owner. The learned Departmental Representative submitted that the development rights were already there which were only recognized/declared by the State Government. The learned Departmental Representative referred to the clause No. 14 at p. 24 of the agreement and pointed out that developer had right to enter into agreement to sell on ownership basis units in the said industrial estate on its own account and not as agent of the owner. The developer was entitled to appropriate to itself all the consideration monies received from the purchasers of units and was also entitled to put such purchasers in possession of their respective units on receipt of the relative occupation certificates from BMC. He also referred to Clause 15 of the agreement to demonstrate that the developer could deal with and dispose of the industrial estate in his own right as ownership of the said industrial estate was with the developer. He pointed out that the developer could let out to any one of the said industrial galas on such terms and conditions as determined by the developer. The learned Departmental Representative in sum and substance submitted that development right could not be there without land and was a valuable asset on which all the rights inherent with ownership were available.
12. We have considered the rival submissions and have perused the records of the case. The facts of the present case are not disputed. The broad issues to be decided in the present appeal are whether--
(a) the development rights were there on 1st April, 1994, when the land was converted into stock-in-trade;
(b) the development right was a capital asset within the terms of the definition as contained in Section 2(14) of the Act;
(c) if the development right is held to be a capital asset then how the capital gains is to be computed under s, 48 of the IT Act;
(d) the rate of tax to be applied; and
(e) whether long-term capital gains arising on transfer of the development rights should be set off against brought forward business loss.
Before dealing with these issues it would be useful to refer to some important facts which had taken place by 17th May, 1994, when the Board resolution was passed converting the land into stock-in-trade w.e.f. 1st April, 1994. The assessee had been granted exemption under Section 20 of the Urban land Ceiling Act on 19th Sept,, 1981, on the condition that the exempted land was to be used by the assessee for his own benefit for the purpose of industry and not for any other purpose. This purpose was to be achieved by constructing buildings on the exempted land. The assessee as per exemption order was required to commence building construction within the period of one year from the date of the exemption order and had to complete the construction within a period of 5/10/15 years from the said date, failing which the exemption was deemed to have been withdrawn. A further condition was there which prohibited the assessee from transferring the exempted land to any other person except as mentioned in Section 19 of the Urban Land Ceiling Act. In case the assessee infringed the condition in respect of transfer he had to deposit with the State Government the difference between the market price of land so exempted and the price at which it would have been acquired under the said Act.
13. On 4th May, 1993, the Government passed an order and amended the industrial location policy of the Government of Maharashtra. This industrial location policy was amended in the wake of liberalised industrial policy announced by Government of India, the emphasis on containing pollution and the need for generating employment opportunities to take care of the declining employment in Bombay and its suburbs. In pursuance of the policy, the industries were classified under various schedules and the assessee was entitled for using Schedule I Industries only as it was in Zone I of the classification made in the policy. In pursuance of the policy, the assessee had to take approval from various authorities. At p. 110 of the paper book is a letter from the architect to the Executive Engineer, Building Proposals, Kandivli Office, Municipal Corporation of Greater Bombay, dt. 19th Jan., 1994, wherein he has referred to the letter No. CHE/1569/LOR, dt. 15th Jan., 1994, of the said Executive Engineer and also to the drafts of the undertaking and the terms and conditions of the layout and forwarded with the said letter pay order for Rs. 6,19,800 in favour of the Municipal Corporation, seven copies of the registered undertaking, seven copies of the registered terms and conditions, seven copies of the plan for approval with two copies of canvas and sought approval to the layout. The Municipal Corporation of Greater Bombay, through its Dy. Chief Engineer (Buildings & Proposals) replied vide letter dt. 27th Jan., 1994, and pointed out that the layout/sub-division was as per Development Control Rules and subject to the terms and conditions registered under No. 275/94 dt. 18th Jan., 1994. The final approval was to be given after the road was constructed including lighting, drainage, sewerage, etc. and recreation/amenity spaces were developed by levelling and adequate number of trees were provided. From this it is clear that the layout/sub-division was submitted in pursuance of Development Control Rules, 1991. At this juncture, we may refer to Regulation 34 of the Development Control Regulations which reads as under :
"34. Transfer of Development Rights--In certain circumstances, the development potential of a plot of land may be separated from the land itself and may be made available to the owner of the land in the form of Transferable Development Rights (TDR). These Rights may be made available and be subject to the Regulations in Appendix VII hereto."
From the bare reading of this clause it is clear that legislature has clearly made a distinction between the development potential of a plot of land and land itself. This development potential was treated as a distinct right which could be made available to the owner of the land in the form of transferable development right, These were subject to various regulations. These regulations were existing when the assessee had applied to Municipal Corporation of Greater Bombay for sub-division of the plot. Thus, the assessee had reasonable belief that it could acquire the valuable right. In this regard, it would be relevant to refer to certain provisions of the Urban Land Ceiling and Regulation Act, 1976. Section 20 gives the State Government the power to exempt even the vacant land in excess of ceiling limit from the provisions of Chapter III of the Act. Section 20 starts with a non-obstante clause viz., notwithstanding anything contained in any of the foregoing provisions of this Chapter (i.e., Sections 3 to 19). Section 3 provides that no person shall be entitled to hold any vacant land in excess of the ceiling limit on and from the commencement of the Urban Land Ceiling Act. However, Section 20 makes an overriding provision which gives the State Government the power to allow a person to continue to hold even vacant land in excess of ceiling limit. While granting such exemption, the State Government imposed such conditions as it deemed fit.
14. Section 20(1)(a) allows the State Government to grant exemption in public interest while Section 20(1)(b) permits the State Government to grant exemption in cases of undue hardships. In the present case, we are concerned with Section 20(1)(a) where keeping in view the public interest, the State Government granted exemption for the purposes of industry. The assessee taking into consideration the letter dt. 27th Jan., 1994, from the Municipal Corporation of Greater Bombay, wherein also the assessee had been assured of approval for layout/sub-division as the same was as per Development Control Rules decided to convert the land into stock-in-trade and enter into this business. The assessee knew it that it could not transfer the land in view of the exemption order under Section 20 of the Urban Land Ceiling Act. But, it could acquire transferable developmental rights in view of Development Control Rules. These development rights were valuable rights which the assessee had acquired. It is also pertinent to note that in the letter dt. 1st July, 1994, from the Directorate of Industries contained at p. 130 of the paper book, the assessee's letter No. UDV/KDV/349, dt. 15th April, 1994, in ULC clearance for construction of an industrial estate have been referred to. The assessee had converted the land into stock-in-trade vide its resolution dt. 17th May, 1994, w.e.f. 1st April, 1994. The dates of two letters referred to above clearly show that the assessee had converted the land into stock-in-trade and had intention of constructing new industrial estate on ULC exempted land. This construction was considered as bona fide industrial use as per instructions received from the Government, Industries, Energy and Labour Department, vide letter dt. 7th Sept., 1993, as mentioned in letter dt. 1st July, 1994, at paper book p. 130.
15. From these facts, it is clear that the assessee had converted the land into stock-in-trade as the developmental rights which were transferable as per Development Control Rules could also be exploited as business assets as the same were segregatable from the land. The assessee's contention that these developmental rights were non-existent when the land was converted into stock-in-trade cannot be upheld because these rights were part and parcel of ownership of land and were valuable property rights.
16. In order to examine whether these development rights were capital asset or not, we have to examine the concept of ownership of property and effect of increasing regulations of the State on the concept of absolute ownership of property. The terms 'property' can be defined as a thing which can be owned or right to goods and land. The property must be definable and identifiable by the third parties capable in the nature of assumption by third parties and have some degree of permanence or stability. In National Provincial Land v. Arinsworth (1965) AC 1175, the property was held as a foundation of expectation of deriving certain advantages from the things said to be possessed. It is also defined as an aggregate of rights having money value. It includes money and all other property real or personal including things in action and other intangible property. Thus, property, in sum and substance can be defined as a bundle of rights. Section 2(14) defines the capital asset also property of any kind held by the assessee and only excludes from its realm, certain properties mentioned in the section. Thus, it takes into its conspectus all the rights associated with the land, which will. essentially include the developmental rights which were only identified by Development Control Rules. In this regard reference to various case laws by the AO needs to be reproduced:
"The expression 'capital asset' has an all embracing connotations and include every kind of property as generally understood except those that are exclusively excluded from the definition. Thus, it includes every conceivable thing, right or interest or liability. This view has been held by the Kerala High Court in the case of Syndicate Bank Ltd. v. Addl CIT (1985) 155 ITR 681 (Ker). In another judgment, the Bombay High Court in the case of CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom) has held that the right to obtain conveyance of immovable property falls within the expression 'property of any kind' used in Section 2(14) and is consequently a capital asset. Further, right of conveyance has been held as capital asset [CIT v. Tata Services Ltd. (1980) 122 ]TR 594 (Born)]; Lease right is a capital asset as held in the case of Bawa Shivcharan Singh v. CUT (1984) 149 ITR 29 (Del) and tenancy right is again held as a capital asset [A. Gasper v. CIT (1979) 177 ITR 581 (Cal)). In similar fashion, development right of ULCA Land needs to be held as capital asset and therefore, is chargeable to capital gains."
The concept of ownership implies the right to the exclusive enjoyment of something based on rightful title. Pollock has defined the term ownership as the entirety of the powers of use and disposal allowed by law, Austin has defined it as a right indefinite in the point of user unrestricted in a point of disposition and unlimited in the point of duration, over a determinate thing.
The ownership may be absolute or restricted, corporal or incorporal, legel or equitable, vested or contingent. In essence, it is based on a relationship de jure so that possession of the thing is not necessary. There may be many rights over the land. The rights depend on the existence of the land, but the rights of the owner are the most extensive. The full rights of the owner can be summarised as under:
(a) The power of enjoyment (such as a determination of the use to which the land is to be put, the power to deal with the rights as the owner pleases, the power to destroy;
(b) possession which includes the right to exclude others;
(c) power to eliminate inter-rivals or to charge as security;
(d) power to leave the thing.
Every owner does not possess of the rights set out above, a particular owner's powers may be restricted by law or by agreement he has made with another; as in the present case, the assessee's power of enjoyment of the property was restricted due to Urban Land Ceiling Act circumscribing the user of land for specific purpose. There are many rights which a person may possess. Ownership is the name given to hurdle of rights. It is not always necessary that there should be a material object which is the subject-matter of ownership e.g., copyright, patent, etc. In modern times when the land is a scarce commodity, the old concept of ownership of having all the rights to remain vested in one person has to be modified. If the test of ownership is absolute power over the property, there would be a few owners in civilised States today. The powers of an owner are unlimited and indefinite save insofar as there is a specific legal regulation or specific right outstanding in third party. From the aforementioned discussion, it is clear that ultimate ownership may be with a different person but the rights of present enjoyment of the land may be with others. Thus, an assessee had these developmental rights embedded in its ownership of land and were only recognized by Development Control Rules. These were valuable rights inherent in the ownership of land. The increasing interference by the State with the rights of owners are modifying the notion of absolute control over the property and reeling to the theory that the property is a social responsibility. Now one cannot deal with the property in the manner he so likes as his rights are subscribed by various welfare regulations. In the present case also the land was subject to various social laws which is Urban Land Ceiling Act and Development Control Rules etc. Therefore, the developmental rights which were recognized as distinct from the land could not be said to have cropped up after the assessee got the permission to transfer the industrial galas vide letter dt. 14th Feb., 1996. This amendment was granted in continuation of the amended ULC exemption order for construction of industrial estates vide letter dt. 1st July, 1994, or when the IOD was received from BMC vide letter dt. 29th Feb., 1996. These developmental rights existed on 1st April, 1994, and the encumbrances imposed upon those rights were only removed by various amendments brought out by various orders. These developmental rights constituted valuable capital asset within the meaning of Section 2(14) of the IT Act. It is pertinent to mention that in the whole development agreement the assessee described itself as the owner and had also obtained the necessary permission from Central Bank of India as is mentioned in Clause 10 at p. 8 of the agreement contained at p. 154 of the paper book. Assessee had also submitted to the Appropriate Authority as constituted under Chapter XX-C of the IT Act, 1961, for obtaining necessary NOG under Section 269UL(3) of the IT Act. It is also pertinent to mention that for obtaining this NOG, the assessee had entered into a Memorandum of Intent dt. 29th June, 1995, with the developer as is mentioned in Clause 11 contained at pp. 8 and 9 of the agreement. Under the Memorandum of Intent the owner had agreed to grant to the developer the development rights. No objection certificate was also issued by the Appropriate Authority in pursuance of the Memorandum of Intent. Chapter XX-C of the IT Act, deals with the purchase by Central Government of immovable properties in certain cases of transfer. Thus, the assessee himself treated the development rights as immovable property and took necessary clearance from the Appropriate Authority. It follows, therefore, that the contention of the assessee is contrary to its own stand. Under these circumstances, we are of the opinion that the development rights constituted capital asset and the provisions of Section 45(2) were applicable to the transaction as this capital asset was converted into stock-in-trade along with land on 1st April, 1994, which was transferred on 29th March, 1996, to developer.
17. Now we will deal with the computation of capital gains in accordance with the provisions of Section 45(2) of the Act. Section 45(2) reads as under;
"45. Capital gains:
(1)......
(2) Notwithstanding anything contained in Sub-section (1) the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the pervious year in which such stock-in trade is sold or otherwise transferred by him and, for the purposes of Section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."
The assessee sold the development rights on 29th March, 1996, and, therefore, in terms of the provisions of Section 45(2) the capital gains and business income was to be computed in the asst. yr. 1996-97. For the purposes of computation of capital gains the fair market value of development right as on the date of conversion of property into stock-in-trade, i.e., from 1st April, 1994, was to be determined from which cost of acquisition of those development rights was to be deducted. The AO resorted to backward interpolation for working out fair market value on 1st April, 1994. The working made by the AO is as under:
Description Asst. yr.
Cost inflation index Sate price Rs.
Development right 1996-97 281 5,94,06,277 Fair market value 1995-96 259 5,47,55,251 In support of his valuation, the AO also observed that the prices of immovable properties reached its peak in March, 1995, and thereafter the prices started falling in the market. Thus, he observed that fair market value of the development right as on 1st April, 1994, should have been actually higher than the sale consideration of such development right in March, 1996.
18. The learned counsel for the assessee has strongly relied on the decision of the Calcutta High Court in Jogat Mohan Kaput (supra) which was rendered with reference to wealth-tax proceedings. The facts of the case were that in the asst. yr. 1993-94 the assessee applied for Section 230A clearance showing the intended sale price of the property situated at Greater Kailash, Part II, New Delhi, at Rs. 57.25 lakhs. Thus, the WTO on the basis of this declaration of price sought to reopen the wealth-tax assessment for earlier years applying the cost inflation index backwards. Under these facts, the Court observed that cost inflation index could be applied only to forward figures in time, i.e., the inflation is to be calculated by appropriately inflating the cost of acquisition of the capital in accordance with the declared index. It was observed that there is no warrant for reversing the operation of the cost inflation index and treating it in a reversed manner as a shrinkage index for the purpose of computing past land value. Thus, assessee's contention is that AO was not justified in resorting to backward interpolation of sale consideration with reference to cost inflation index.
19. The assessee's alternate contention is that if AO's action in regard to computation of fair market value as on 1st April, 1994, is to be upheld the same system should be applied for computing the fair market value as on 1st April, 1981, and than the cost inflation index should be applied on that value. The assessee has also submitted the computation in this regard and has pointed out that the capital gains if so computed would be nil. In our opinion, the assessee's contentions are well founded. We would like to refer to the following observations of Lord Asquith of Bishopstone in East End Wettings Co. Ltd. v. Finshbury Botough Council (1952) AC 109 as reproduced in the case of SAL. Narayan Row and Anr. v. Ishwailal Bhagwandas and Anr. (1965) 57 ITR 149 (SC) (at p. 162) :
"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it."
However, the argument of the learned counsel that same system applied for determining value as on 1st April, 1994, by the AO should be applied for determining the value as on 1st April, 1981, will not meet the desired object. Here, the object is to arrive at the capital gains and if by resorting to backward interpolation by applying the cost inflation index to sale consideration, we reach certain figure and then applying the same cost inflation figure forward then by simple mathematics we will get the same figure on 1st April, 1994, again. The assessee's suggestion is that first divide the figure and then multiply the resultant with the same figure. The AO's action of backward interpolation of sale consideration also cannot be sustained in view of the decision of Hon'ble Calcutta High Court in the case of Jogat Mohan Kapur v. WTO & Ors. (supra).
In the present circumstances, we are of the opinion that the matter be set aside to the file of the AO with direction to refer the matter back to the Departmental valuer for valuing the fair market value of the development rights as on 1st April, 1981, in the form of non-transferable rights. While doing so, the valuer should take into consideration the effect of all the depressing factors on the value of land as prevailed on 1st April, 1981. The valuer will also take into consideration the fact that actual right to transfer industrial galas was received by the assessee as on 14th Feb., 1996, and thus, there was some clog on the rights of the assessee on 1st April, 1994, which could be construed to be a depressing factor. The DVO is directed to ascertain the value after providing discount on account of the depressing factor.
20. In regard to the additional ground raised by the assessee, we find that the issue is concluded by the decision of the Hon'ble Supreme Court in the case of CIT v. Anjum M.H. Ghaswala and Ors. (2001) 252 ITR 1 (SC) wherein it has been held that Sections 234B and 234C are mandatory.
21. As regards ground No. 4 raised by the assessee in respect of non-allowability of set off of capital gains against brought forward business loss, we do not find any infirmity in the order of the learned CIT(A) contained at p. 11 (para 2.15), wherein he has pointed out that when the Hon'ble Supreme Court rendered its judgment in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra) the provisions of Section 45(2) were not there, which were introduced w.e.f. 1st April, 1985, by Taxation Laws (Amendment) Act, 1984. The income was assessable under capital gains and provisions of Section 71 specifically prohibits set off of income from capital gains against the business income. This ground is dismissed as such.
22. The next ground is in respect of guest-house expenses. The AO observed from the tax audit report that the assessee-company had spent Rs. 2,00,571 on the maintenance of guesthouse at Delhi. The assessee had offered the disallowance of 55 per cent of the total expenses excluding the rent expenses. The AO has observed that the said disallowance was made without prejudice and the claim of the assessee that the assessee's accommodation was a rental accommodation at Delhi which provided residential accommodation for officers and staff members visiting Delhi on official work. Therefore, the same could not be considered as guest-house and the provisions of Section 37(4) did not apply. In regard to rent, it was contended that payment of rent was not disallowable expenditure under Section 30 and other expenses like electricity and water charges, telephone charges, etc., were allowable under the IT Act. The AO however, did not agree with the above contentions and made an addition of Rs. 2,00,571. He also relied on the decision of the Hon'ble Bombay High Court in the cases of:
(i) CIT v. Ocean Carriers Ltd. (1995) 211 YTR 357 (Bom)
(ii) Raja Bahadur Motilal Poona Mills Ltd. v. CIT (1996) 212 ITR 175 (Bom) The learned CIT(A) confirmed the order of the AO.
23. The learned counsel for the assessee referred to p. 239 wherein the details of expenses relating to the Delhi office are contained, wherein, it was, inter alia, pointed out that out of 7 rooms, 3 rooms were exclusively used for office purposes and, therefore, no disallowance can be made in respect of expenses relating to these three rooms. He also referred to p. 217 of the paper book and pointed out that the CIT(A) in asst. yr. 1995-96 has held 40 per cent of the total expenditure on the Delhi premises as a business expenditure since the premises were partly used as office of the company and 60 per cent of the expenditure should be considered as attributable to the guest-house. He submitted that the same proportion may be followed. The learned counsel for the assessee referred to the decision of the jurisdictiorial High Court in the case of CIT v. Chase Bright Steels Ltd. (1989) 177 ITR 124 (Bom) and the Tribunal decision in the case of Mahindra & Mahindra Ltd. v. Dy. CIT (supra). He submitted that the assessee would be satisfied if 40 per cent of the total expenses are allowed treating the same as office expenses.
The learned Departmental Representative however, relied on the order of the learned CIT(A).
24. Having heard both the parties, we are of the opinion that since it is not disputed that the accommodation was partly used for office purposes 40 per cent of the total expenditure should be allowed as business expenditure and the rest be treated as guest-house expenses and disallowed under Section 37(4) of the Act.
25. In the result, the appeal is partly allowed for statistical purposes.