Income Tax Appellate Tribunal - Delhi
Finian Estates Developers Pvt. Ltd., ... vs Assessee on 15 September, 2006
Fit for publication
sd/- AM sd/-JM
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "B" DELHI)
BEFORE SHRI A.D. JAIN AND SHRI SHAMIM YAHYA
ITA No. 2361(Del)2011
Assessment year: 2007-08
Income Tax Officer, M/s. Finian Estates Developers Pvt. Ltd.,
Ward 11(2), New Delhi. V. 1-E, Jhandewalan Extn., New Delhi.
ITA No. 1953(De.)2011
Assessment year: 2007-08
M/s. Finian Estates Developers Pvt. Ltd. Income Tax Officer,
1-E, Jhandewalan Extn., New Delhi. V. Ward 11(2), New Delhi.
(Appellant) (Respondent)
Department by: S/Shri Pradeep Dinodia&R.K.Kapoor, CA
Assessee by: Shri Krishna & Shri S.K. Sharma, CIT/DR
ORDER
PER A.D. JAIN, J.M.
ITA No. 2361(Del)2011:
This is Department's appeal for the assessment year 2007-08, taking the following grounds:-
"1. On the facts and in the circumstances of the case and in law, the order of the CIT(A) is wrong and against the provisions of law which is liable to be set aside.2 ITA Nos. 2361 &
1953(Del)2011
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting addition of ` 58,03,59,600/- made on account of accrued income on grant of development rights ignoring that -
a) the said addition of ` 58.03 crores was strictly made in accordance with the development agreement dated 15.09.2006 entered with M/s. DLF Commercial Projects Corporation (Developer). The said agreement (Article 2.1) provides for grant of an exclusive licence to the developer from the date of purchase of the land by the assessee and Article 5.1 provides that in consideration of the assessee transferring the exclusive development rights over the property the developer shall pay to the assessee the consideration within two years from the effective date sum of ` 2.25 crores per acre.
b) The AO has pointed out in clear cut terms that the impugned agreement is skewed heavily in favour of the developer as it has unlimited rights under the agreement - to enter upon the property, to build and construct option to purchase the property upon its failure to obtain licence from the authorities without any opposition from FEDPL, right to enter into agreement with purchases/lessees of the developers plots without any objection from FEDPL. The exclusive right to name the building, right to assign all the right to any entity or company without any consent from FEDPL. Thus it cannot be denied that the assessee company has parted completely with all rights of development in favour of the developer.
c) The non-obtaining of permission by the developer to undertake development activities from the Director, Town & Country Planning, Chandigarh is merely a subsequent procedural step in the development of the property and more importantly, it was not a condition precedent to the agreement to come in force.
d) As per the terms of the agreement, the intention of the parties was for the agreement to come into force as soon as 3 ITA Nos. 2361 & 1953(Del)2011 the assessee obtained legal title to the property in question at which point of time the consideration became payable and the development rights transferred, irrespective of the date on which the consideration was actually paid or development actually commenced.
e) Where one party to the agreement has performed its obligation under the agreement, the mere possibility of a future contingency preventing the other party from performing its obligation cannot have the effect of postponing the date of the agreement coming into force or the date of accrual of consideration of the agreement, especially when such a condition is not recognized as a condition precedent in the agreement between the parties themselves.
f) The assessee had received a substantial part of the consideration under the guise of interest free deposit though the income accruing to it was the consideration ` 2.25 crores per acre of the property acquired by
g) the AO has aptly cited the decisions in the cases of "CIT v.
Syndicate Bank", 159 ITR 464(Kar); "Keshav Mills Ltd. v. CIT", 23 ITR 230; "Francis Joseph v. ITO", 64 ITD 456(Mad)' "R.V. Pandit v. ACIT", 70 ITD 1(Mum);
"Lakshmi Narayan Films v. CIT", 244 ITR 344(Mad) while making the said addition on accrual basis."
2. Ground No.1 is general.
3. Apropos ground No.2, the facts are that the assessee firm was formed in 1984-85. Since then, it was engaged in the business of development of real estate. The assessee filed return of income for the year, showing loss of ` 12,375/-. The AO assessed the income of ` 58,03,39,900/- making an addition of ` 58,03,59,600/-, holding it as accrued income from sale of 4 ITA Nos. 2361 & 1953(Del)2011 development rights by the assessee to M/s. DLF Commercial Project Corporation(the Developer).
4. The AO observed that Finian Estates Developers Pvt. Ltd. ("FEDPL"), entered into a development agreement dated 15.9.06 with DLF Commercial Project Corporation, i.e., the developer. It received ` 58.69 crores as interest free performance deposit from the developer. The AO observed that the agreement was skewed heavily in favour of the developer, who had unlimited rights under the agreement, i.e., to enter upon the property, to build and construct, option to purchase the property upon its failure to obtain licence from the authorities without any opposition from FEDPL, the exclusive right to name the building, right to assign all the rights to any entity or company without any consent from FEDPL. The AO observed that FEDPL had parted completely with all rights of development; that even on the failure of the developer to obtain the township license, FEDPL is bound to agree to the sale of its property at the fixed rate of consideration payable; that it had no right whatsoever to terminate the agreement, except in the event of the developer not obtaining the license and also not offering to purchase its property; that its consent was not required even where the developer assigned all of the development rights to any other entity; that FEDPL was also under an obligation to offer the development 5 ITA Nos. 2361 & 1953(Del)2011 rights in any future acquisition of land made by it in the vicinity of the scheduled property; that the assessee had parted with valuable development rights in lieu of which consideration amounting to ` 58.03 crores had become payable to it and actually it had also received money from the developer during the year under the nomenclature of "interest free performance deposit" amounting to ` 58.03 crores; that the assessee contended that income from the transaction should be recognized only when the developer obtained the license from DTCP. The AO put the assessee to query as to whether the consideration payable to the assessee by the developer accrued on the effective date, i.e., the date on which the assessee acquired land with full title, as provided in the agreement, or as contended by the assessee, in view of the uncertainty involved in completion of the transaction, the income would be recognized upon issue of the license ty DTCP.
5. On considering the assessee's reply, the AO concluded that the agreement provided for exclusive and irrevocable grant of development rights of the assessee from the developer for a consideration of ` 2.25 crores per acre of the property on the date on which such property is acquired by the assessee and the other terms to be completed after the agreement comes into force were not material in adjusting the issue regarding acquisition of 6 ITA Nos. 2361 & 1953(Del)2011 the assessee under the Development Agreement; that therefore, the consideration of ` 2.25 crores per acre of the property had accrued to the assessee during the year under consideration, as the property was acquired, during the year itself; that since the property acquired by the assessee during the year amounted to 25,79376 acres, a total consideration of ` 58,03,59,600/- had accrued to the assessee during the year under consideration. The AO, as such, treated this amount as the assessee's income on account of transfer of development rights in the land.
6. By virtue of the impugned order, the ld. CIT(A) deleted the aforesaid addition made by the AO.
7. Aggrieved, the Department is in appeal.
8. Challenging the impugned order, the ld. DR has contended that the ld. CIT(A) has erred in deleting the addition rightly made; that while doing so, the ld. CIT(A) has failed to take into consideration the facts, as taken note of by the AO; that the assessee company has parted with all its rights of development completely; that even on the failure of the developer to obtain township licence, the assessee was bound to agree to the sale of its property at the fixed rate of consideration payable, having no right to terminate the agreement, except in the event of the developer in obtaining licence and also not over its property to purchase, no sign of the assessee of the assessee was 7 ITA Nos. 2361 & 1953(Del)2011 required even where the developer assigned all the development rights to any other entity; that the assessee was also under an obligation to offer the development rights in any future acquisition of land made by it in the vicinity of the scheduled property; that the assessee had only tried to justify the amount received as interest free advances and not its income ; and that the development agreement was, in fact, not looked into by the ld. CIT(A).
9. Reliance has been placed on the following case laws:-
1. "CIT v. Syndicate Bank" 159 ITR 464 (Kar);
2. "Keshav Mills Ltd. v. CIT", 23 ITR 230(SC);
3. "Ansal Properties & Industries Ltd. v. DCIT", 115 ITD 443(Del);
4. "Suraj Prakash Soni v. ACIT", 303 ITR 366(Jodhpur);
5. "CIT v. Dhir And Co. Colonisers P.Ltd.", 288 ITR 561(P&H); and
6. "CIT v. Punjab Bone Mills", 251 ITR 780(SC).
10. The learned counsel for the assessee, on the other hand, has strongly supported the impugned order. It has been contended that the ld. CIT(A) has rightly taken into consideration all the relevant articles of the Development Agreement and has analyzed the same; that it has rightly been completed; that without acquisition/approval, it cannot be decided as to what exact development the assessee is authorized to make on the raw land purchased by it, since numerous legal requirements still remained to be complied with before grant of development right qua the property for 8 ITA Nos. 2361 & 1953(Del)2011 commercial use of the assessee; that the land owners might even be denied the licence; that as such, till the time of grant of licence to develop the property, no right to develop the property comes into existence and that being so, no development right being inexistence on the effective date, there cannot be any question of transferring the same; that therefore, mere act of entering into the Development Agreement does not give the assessee the right to receive the sale consideration for the transfer of any development right and that the right under the Development Agreement is merely a contingent right which might or might not fructify into an absolute right. The ld. DR has contended that none of the case laws relied on by the Department are applicable, since the facts therein were altogether different.
11. We have heard the parties and have perused the material on record. The ld. CIT(A), while deciding the issue in favour of the assessee has observed as follows:-
4. Finding on Ground of Appeal No. 1.1 to 1.5: -
The issues to be decided with reference to the above grounds of appeal can be identified as under:
a) Whether income for Rs. 58,03,59,600/- has accrued to the assessee on entering into the impugned agreement with the developer and from the effective date as defined in Article 1.1 thereof which is date of completion of purchase of property including mutation in the name of assessee in revenue records.9 ITA Nos. 2361 &
1953(Del)2011
b) Linked with the issue of the date of accrual of income is as to the appellant could have in it's own right legally claimed the receipt on sale of development right, from the developer from the effective date as defined Article 1.1 or whether such right to legally claim in the income vest only on the date requisite approval/license for development is granted by DTCP in favour of the appellant.
The answer to the above questions are dependent on a composite reading of all the clauses of the agreement in totality and not reading the provisions of the agreement in parts. On this proposition the appellant has relied on the observations of the apex court in cases of Union of India vs. Cosalia Shipping P. Ltd. 113 ITR 307 (SC); Controller of Estate Duty Vs. Aloke Mitra 126 ITR 599 (SC). On this issue it is observed that there can be no two opinion that in order to understand the true import of an agreement all the provisions thereof would have to be read in conjunction and in totality.
The assessee has also filed a separate legal note distinguishing all the judgments relied upon by the AO (on the issue of accrual of income) and has advanced its own arguments and case laws on the proposition as to when can an income be stated to have accrued to an assessee. As the facts in no two cases can be identical and rather the facts in cases relied upon both by the AO & the appellant are not identical similar to the appellant's facts therefore, it would be appropriate to highlight the legal position as to when an income can be said to have accrued to an assessee. The basis principle enunciated in several decisions of the Hon'ble Courts some of are as below:
In E.D. Sasson and Co. Ltd.'s case [1954] 26 ITR 27 (SC) it was explained that the words "arising" or "accruing" described a right to receive profits and that there must be a debt owed by somebody. It was observed that it cannot be said that an assessee has acquired a right to receive the income or that income has accrued to him unless and until there is created in favour of the assessee a debt due by somebody.10 ITA Nos. 2361 &
1953(Del)2011 On the connotation of the word "debt", in Kesoram Industries and Cotton Mills Ltd. Vs. CWT [1966] 59 ITR 767, the apex court observed as follows:-
"A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in prasenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened."
In CIT Vs. Ashokbhai Chimanbhai [1965] 56 ITR 42, the Supreme Court observed that the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it actually reaches the assessee's hands, but short of receipt, when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. If income accrues or arises, it may become liable to tax. It is, therefore, manifest that if an assessee acquires a right to receive income, the income can be said to accrue to him, though it may be received later on.
In the case of Lakshmi Narayan Films Vs. CIT 244 ITR 344, the Madras High Court has following the order of Supreme Court in case of CIT Vs. Gajapathy Naidu 53 ITR 114 has laid down the principle that there is no right to receive the amount accrued to an assessee unless the assessee performs its part of the obligation stipulated in the agreement. The agreement is no doubt a valid agreement in the sense that the consideration for the agreement can be past consideration or future consideration, but on that account, it cannot be assumed that the right to receive the payment had accrued in favour of the assessee on the date of agreement.
Some of the other judgments, which confirm the proposition that unless the right to receive the income is vested in the assessee, the same cannot be said to have accrued or arisen to the assessee, are CIT Vs. Govind Prasad Prabhu Nath, 171 ITR 417 (All.); Seth Pushalal Manisinghka (P) Ltd. Vs. CIT (1967) 66 ITR 159 (SC); Seth Madan Lal Modi Vs. CIT (2003) 261 ITR 49 (Del.).
11 ITA Nos. 2361 &
1953(Del)2011 The Supreme Court and the jurisdictional Delhi High Court have also consistently reiterated the principle in law that only real income and not notional income can be brought to tax. Some of the decisions in which this principle has been discussed are CIT Vs. Shoorji Vallabhdas & Company (1962) 46 ITR 144 (SC); CIT Vs. Birla Gwalior P. Ltd. (1973) 89 ITR 266 (SC) Morvi Industries Ltd., 82 ITR 835, Godhra Electricity Co. Ltd., Vs. CIT (1997) 225 ITR 746 (SC); Bokaro Steel Ltd. 236 ITR 315 (SC); CIT Vs. Modi Rubber Ltd. 230 ITR 817 (Del.); Devsons P. Ltd. Vs. CIT 329 ITR 483 (Del.).
On the basis of above legal principles about "accrual of income" as settled by various judicial pronouncements, it is observed that in order to come to the conclusion that whether the appellant had become entitled to the right to receive the payment from the developer in the instant year it is the terms and conditions stipulated in the agreement which are the most vital documents to be interpreted. It would be required to be seen as to when the right to the income becomes vested in the assessee. It would also have to be examined as to whether the assessee/appellant has performed his part of the obligation contemplated in the agreement, which would be the initial step taken on part of the assessee in order to vesting of the right to receive the income.
In order to decide this matter in the light of aforesaid settled legal principles, the clauses in the agreement dated 15.09.06 have to be carefully analyzed which to my mind are absolutely necessary.
Article 1 of the said agreement has been categorized as definitions and interpretation which defines amongst others approvals buildings effective date encumbrances Power of Attorney, sanctioned plan and scheduled property. Two of the definitions which have a bearing to decide this issue are being produced hereunder:
12 ITA Nos. 2361 &
1953(Del)2011 "Effective Date" means date of the completion of the purchase of the Scheduled Property including mutation thereof in favour of FEDPL in revenue records and the vesting of the right, title and interest in the Scheduled Property in favour of FEDPL, which shall be communicated in writing to the Developer by FEDPL.
"Scheduled Property" means all that piece and parcel of agricultural land fit for development situated in District Gurgaon, State of Haryana.
"POA" means the special irrevocable power of attorney in favour of the Developer substantially in the form of Appendix A. Article 2.1 of the agreement states that the assessee has granted to the developer from the effective date an exlcusive license to enter the scheduled property and develop the same in terms of the agreement.
Article 2.2 clarifies that the assessee shall remain the owner of the scheduled property and the developer shall have only permission to enter upon the scheduled property for carrying out development work.
Article 2.3 clarifies that on the effective date the assessee shall execute and deliver a Power of Attorney in favour of the developer.
Article 2.4 clarifies that the developer shall be responsible for obtaining all the approvals including the license from the Director, Town and Country Planning, Chandigarh, Haryana for the township development and the scheduled property and its upon receipt of the sanctioned plan and all approvals, the developer shall commence the development and construction on the scheduled property and complete the development and construction of the building. Therefore, there are other articles which define the other eventualities of what has to happen if no approval is received or if no other options and covenants of the agreement are completed.13 ITA Nos. 2361 &
1953(Del)2011 2.5 It is specially agreed between the parties that the Developer shall made best efforts and shall be responsible for obtaining the license for township development on the Scheduled Property ("Township License") within 2 years from the Effective Date or within such extended time as the Parties may mutually decide. The Developer shall be responsible for informing company on the expiry of the said period of 2 years from the Effective Date about the receipt or non-receipt of the Township License, as the case may be.
2.6 In case, the Developer fails to obtain the Township License within the specified time or extended time, if applicable, for reasons not attributable to company, the Developer, shall have the right, but not he obligation, to offer to purchase the Scheduled property at the price of Rs. 2.25 crores acre. The Developers shall inform the assessee of his intention to purchase the scheduled property within 60 days from the date of notice specified in sub-article 2.5 above, in which case, assessee company shall be under an obligation to sell the Scheduled Property to the Developer and of its affiliate or nominees.
2.7 In the event the Developer elects not to exercise its option to purchase the Scheduled Property within the specified time, assessee company shall have the right, but not the obligation, to terminate this Agreement forthwith in the manner stipulated under Article 8.
2.8 In case, the Developer fails to obtain the Township License due to reasons attributable to assessee company the time period of 2 years shall automatically stand extended by further period of 1 year.
Article 3 clarifies as to who will bear the cost and expenses in relation to insuring the absolute marketable title of schedule property and the cost of development/construction on the schedule property and as to which of the parties is required to 14 ITA Nos. 2361 & 1953(Del)2011 obtain approvals and bear the necessary expenses upon such approvals.
Article 4 pertains to the interest free performance deposit; to be given by the developer to FEDPL as a security for the performance of developer obligation under this agreement.
Article 5 states that in consideration of FEDPL transferring their exclusive development rights over the schedule property, the developer shall pay to FEDPL the consideration within 2 years from the effective date and that upon receipt of the consideration FEDPL shall immediately refund outstanding interest free performance deposit to the developer.
Article 10 talks about development rights and inter alia states that the developer shall be entitled to undertake the development and construction work on the scheduled property in such manner it deems fit and always in accordance with the applicable laws. The parties have agreed that a fixed consideration is payable for the grant of development rights.
Article 12 defines the obligations of FEDPL in as much as FEDPL shall extend necessary/cooperation to the developer and do all such acts, deeds and sign/execute/deliver all such documents, deed, statements, affidavits as may be required for the development of the scheduled property in accordance with the agreement including taking of all approvals. FEDPL shall upon execution of the said POA, not do an act any or deed that may have the effect of canceling or revoking the POA or in any manner prejudicing or effecting the power/authority vested in the developer.
Upon careful consideration of the findings of the AO as well as the various submissions and arguments of the appellant's AR my specific finding on the issue are as under: -
On a literal reading of the above articles of the argument, it may appear on the face of it that the appellant is entitled to receive the consideration on sale of development rights on the 15 ITA Nos. 2361 & 1953(Del)2011 very date on which the appellant becomes the owner of scheduled property, the mutation of which is done in revenue records in their favour. This is because of the definition of "effective date" in the terms of agreement. However, since in substance the sale consideration is related to the sale of development rights, by the appellant in favour of DCPC, it would be required to be seen as to whether these development rights had in the first place, come in existence on the date of mutation of scheduled property in appellant's name or whether such development right comes in existence on the date of grant of development license by DTCP. It is apparent that till such time the license is not granted there is no right in existence to develop the scheduled property in any manner either by the appellant or by the developer. Rather it can be said that without the license/approval it is not yet decided as to what exact development the appellant is authorized to make on the raw land purchased by it. For such purpose a lot many legal requirements are still to be complied with before the appellant is granted the right to develop the property for commercial use. Possibility also exists that such license may even be denied to the land owner or its power of attorney holder. Therefore, uptill the time the license to develop the property is not granted by the Director, Town and Country Planning there can be no question of the existence of the right to develop the property by either the land owner or to any other party to whom such development right have been sold. Since on the effective date there is no development right attached with this land therefore holding that the development right have also been sold/transferred on the same date would be against the general legal proposition that one can only transfer a right/property which is in existence on such date and which is also owned by the transferor. Consequently, the right to receive the sale consideration on account of transfer of such nonexistent development rights, has also not accrued in favour of the appellant, merely on entering the impugned agreement, which to my understanding is in the nature of a contingent contract in terms of sec. 32 of the Indian Contract Act, 1872 which would become enforceable by law on the happening of the event envisaged in such contract viz. grant of license/approval as 16 ITA Nos. 2361 & 1953(Del)2011 defined in Article 1 of the agreement. In this connection it is observed that in Article 2.1of the agreement there is a mention that the assessee has granted to the developer, from the effective date, an exclusive license to enter the scheduled property and to develop the same in terms of the agreement. Now, while on the face of it, it may appear that the developer has already been vested with the exclusive license to enter the scheduled property and to develop the same from the effective date as per the agreement, but in reality the developer actually becomes vested with this exclusive license to develop the property only from the date when the license is granted by the DTCP. That without the license having been granted by the DTCP the developer has got no legal authority/ sanction to develop the property. This position further becomes evident on a reading of article 2.4 of the agreement which states that it is the responsibility of the developer to obtain all approvals (as defined in Article 1) from DTCP and only upon receipt of the sectioned plan and the approvals the developer shall commence the development and construction on the scheduled property. It is a fact on record as noted from the assessment order as well as the appellant's P&L A/c and balance sheet as on 31.03.07 and three subsequent years that no development work has been undertaken on the said land during these years. Moreover the AO has also not brought anything on record to establish that the necessary approvals including license for development of scheduled property has been granted in favour of the appellant or to the developer during the year. Now since these administrative approvals, which apparently are not mere procedural formalities, have not been granted during the year therefore, there can be no sale of development right and as a corollary no accrual of income in favour of the appellant for sale of such development rights. To reiterate what the agreement has created is a valid but contingent contract which becomes alive the moment the development rights are granted by DTCP in favour of the appellant through DCPC. Further the right to receive the consideration would also instantly arise in favour of the appellant who now becomes legally vested with the right to receive the consideration. In this connection reliance is placed on the propositions emerging from the 17 ITA Nos. 2361 & 1953(Del)2011 decisions referred to above in this para, the crux of which is that income is said to accrue only when the right to receive the income gets vested in the assessee.
It is noted that the AO has in his order made an observation that the amount of Rs. 58.69 crores received during the year from the developer represents substantial part of the consideration in the guise of "interest free performance deposit", though the income accruing was the consideration @ Rs. 2.25 crores per acre of property. On this issue it has been submitted by the appellant that the said interest free performance deposit is a refundable amount and would be refunded to developer on receipt of the consideration for sale of development rights to DCPC (Refer to Article 4.1, 5.1 & 5.2 of the agreement) that this amount in terms of Article 4.1 represents security lying with the appellant for the performance of developer's obligations in the agreement. In this regard, it is observed that the inference drawn by the AO on this issue are not appropriate. The terms of the agreement has to be given it's plain and normal meaning and the apparent has to be treated as real unless proved otherwise. There is no material on record to suggest that the "interest free performance deposit" represents part of the sale consideration towards sale of development rights, which as already held above would come into existence only on granting of approval/license by the DTCP. Even if it is assumed for argument sake that the said interest free deposit represents part of sales consideration, the appellant is not legally entitled to have a vested right on this amount till such time the license/approval for development of land is granted by the DTCP in favour of appellant or developer. To put it differently, uptill the grant of license/approval, this amount would remain as deposit with the appellant, which as per the agreement the later is required to refund back in case the license is not granted and the developer does not opt to purchase the property.
I, therefore, hold that AO was not justified in holding that income has accrued to the assessee and the additions made by 18 ITA Nos. 2361 & 1953(Del)2011 the AO on this account amounting to Rs. 58,03,59,600/- is hereby directed to be deleted."
12. From the above, it is evincible that the ld. CIT(A) has duly taken into consideration all the relevant articles of the Development Agreement entered into by the assessee with the developer. Now, obviously, even as per the agreement, no development right comes into existence till the licence is granted. Indisputably, till such time, the nature of the exact development is to be carried out on authorizing the assessee to do the same, is undecided. Till such time, the land purchased remains raw land only. The right under the Development Agreement, therefore, is merely a contingent right, depending on the grant of licence or approval, as provided for Article I of the Agreement. It is only from the date of grant of licence from the DTCP, the developer would actually be vested with the licence to develop the property. Prior to such development, all approvals as enumerated in Article I of the Agreement are to be obtained from DTCP and it is the responsibility of the developer to do so. It is only when the sanctioned plan and the approvals are obtained, that the developer can commence the development on the scheduled property. Moreover, this is on record by way of the assessee's profit and loss account and balance sheet as on 31.3.2007 and for the three subsequent years, that no development work was undertaken in the 19 ITA Nos. 2361 & 1953(Del)2011 said years. The necessary approvals/licence for development have also not been shown to have been granted either to the assessee or the developer during the year. Sans these approvals/licence obviously, no development could have been carried out . Without these approvals/licence , it cannot be said that any development rights came into existence at all. The contingent right under the Agreement has not been established to have been fructified into a vested right.
13. Apropos the interest free performance deposit, this has not been shown to be representing part of sale consideration for the development rights. It cannot do so, since, as observed, no such development rights came into existence during the year.
14. All the above facts have correctly been taken into consideration in the right perspective by the ld. CIT(A) while deciding the issue in favour of the assessee.
15. Apropos the case laws relied on by the Department, none of them are applicable to the facts present here. In all those cases, there was actual physical parting of possession in favour of the developer which is not so herein.
16. In view of the above, finding no error whatsoever with the order of the ld. CIT(A), we uphold the same rejecting the grievance sought to be raised 20 ITA Nos. 2361 & 1953(Del)2011 by the Department by way of ground of appeal taken. This grievance of the Department, hence, rejected.
ITA No. 1953(De.)2011
17. This is assessee's appeal for the assessment year 2007-08, taking the following grounds:-
1. That the impugned order dated 08.03.2011 passed by the ld.
Commissioner of Income Tax (Appeals)-XII, New Delhi is bad in law and wrong on facts.
2. That on the facts and circumstances of the case, the ld. Commissioner of Income Tax (Appeals)-XII has erred in law in upholding the action of the AO in making disallowance u/s 40(a)(ia) of the Income Tax Act, 1961 amounting to Rs. 4,20,15,681/- (correct amount is Rs. 1,24,33,376/-) paid by the assessee to the consolidator for transfer of rights.
2.1. That on the facts and circumstances of the case, the ld. CIT(Appeals)-XIII has erred in holding that the consolidator was working as an agent of the assessee and hence the assessee ought to have deducted TDS on amount paid to the consolidator u/s 194h of the Income-tax Act, 1961."
18. Ground No. 1 is general.
19. Apropos ground No.2, from the Purchase Deed of the land, the AO observed that the land price had been inflated by ` 4,20,15,681/-, the amount paid by the assessee to M/s. Vikram Electric Equipment P. Ltd., the 21 ITA Nos. 2361 & 1953(Del)2011 consolidator appointed by the assessee to acquire consolidated land holdings. The AO held that as per the assessee's MOU with the consolidator, the payments to be made to him would accrue only in the year after 27 acres of land would be acquired. The AO thus disallowed this amount out of purchases and also reduced it from the closing stock shown by the assessee.
20. The ld. CIT(A) confirmed this action of the AO, which has accrued the assessee, bringing it in appeal before us.
21. Challenging the impugned order, the learned counsel for the assessee has contended that the ld. CIT(A) has erred in confirming the action of the AO; that the AO had wrongly adopted the figure of ` 4,20,15,681/-, whereas the actual amount involved and paid/payable to Vikram Electric Equipment P. Ltd. as consolidator charges during the year, was of ` 1,24,33,376/-; that the ld. CIT(A) has erred in observing that it is not correct that the excess amount of ` 124.33 lakhs paid by the assessee to Vikram Electric Equipment P. Ltd. is not in the nature of remuneration which will be paid as may be mutually agreed after promoting the entire 27 acre as per MOU; that the ld. CIT(A) has gone wrong in stating that the remuneration is a fixed percentage of cost of land in each case of land transfer and that the 22 ITA Nos. 2361 & 1953(Del)2011 transaction is not on principle to principle basis but on the basis of principle and agent, for which, the agent is to receive payment and which payment has actually been made; that the ld. CIT(A) has erred in observing that the amount of ` 124.33 lakhs constitutes brokerage or commission or fee for professional services, subject to deduction of TDS u/s 194 H of the Act and that since no TDS has been deducted thereon, this amount is not deductible as expenditure as per the provisions of section 40(a)(ia) of the Act; that it cannot be doubted that the assessee must be claimed some expenses allowable under sections 30 to 38 of the Act; that in fact, the assessee has claimed no expenditure, as available from page 3 of the assessee's paper book ('APB' for short), which is a copy of the assessee's profit and loss account for the period from 31.3.06 to 31.3.07; that as per this profit and loss account, an amount of only ` 19,700/- has been claimed as expenditure and no expenditure has been claimed regarding purchase of land, due to which, the provisions of section 40 (a)(ia) of the Act are not applicable; that further, even as per the MOU entered into by the assessee with the Consolidator (APB 8-14), 2% of every registration of land is to be paid; and that as per the details of land purchased during the year under consideration (APB-16), it is only 2% of every registration which has been actually paid. 23 ITA Nos. 2361 &
1953(Del)2011
22. The ld. DR, on the other hand, has strongly relied on the impugned order in this regard. It has been submitted that the ld. CIT(A) has correctly decided this issue against the assessee; that the remuneration has indeed been fixed at a fixed percentage of cost of land in each case of the land transferred; that therefore, the consolidation charges paid by the assessee to Vikram Electric Equipment P. Ltd., i.e., the consolidator, squarely falls within Explanation (1) to section 194H of the Act; that a perusal of MOU entered with the consolidator reveals that the services had been rendered by Vikram Electric Equipment P. Ltd. to the assessee, acting on behalf of the assessee; that even otherwise, on its own, Vikram Electric Equipment P. Ltd. would not have acquired the land or consolidated it, in the absence of directions in this regard to Vikram Electric Equipment P. Ltd. from the assessee, in terms of the MOU; that therefore, the relationship of principle and agent does stand established; that therefore, the ld. CIT(A) has correctly held that the payment is payment of "brokerage or commission or fee for professional services", which is the subject of deduction of TDS u/s 194 H of the Act; that the provisions of section 40(a)(ia) of the Act have correctly been held as applicable, in the absence of deduction of tax at source; that therefore, the grievance of the assessee in this regard is entirely untenable and is liable to be rejected; and that therefore, there being no merit therein, 24 ITA Nos. 2361 & 1953(Del)2011 the appeal of the assessee be dismissed while maintaining the order passed by the ld. CIT(A).
23. We have heard the parties and have perused the material on record. The AO observed that the assessee had shown purchases and closing stock of land at ` 60,23,16,022/-. This included a sum of ` 4,20,15,681/- paid by the assessee to M/s. Vikram Electric Equipment P. Ltd. M/s. Vikram Electric Equipment P. Ltd. had been appointed by the assessee as a consolidator to acquire and consolidate the land holding. It was observed by the AO that as per the MOU with Vikram Electric Equipment P. Ltd., payments were to accrue to Vikram Electric Equipment P. Ltd. only on acquisition of a minimum of 27 acres of land. Observing that the consolidator, i.e. , Vikram Electric Equipment P. Ltd. had not consolidated the requisite minimum 27 acres of land during the year, the AO disallowed the amount out of purchases. Accordingly, he also reduced the closing stock by a similar amount. The closing stock was thus determined at ` 54,03,00,341/-.
24. Before the ld. CIT(A), the assessee contended that the amount involved was not of ` 4,20,15,641/-, since Vikram Electric Equipment P. Ltd. had been paid only ` 1,24,33,376/-. It was on this contention of the 25 ITA Nos. 2361 & 1953(Del)2011 assessee that the ld. CIT(A) directed the AO to verify the actual amount involved.
25. It has been maintained by the assessee all through that the payment to Vikram Electric Equipment P. Ltd. was on account of transfer of certain rights of Vikram Electric Equipment P. Ltd. in the lands transferred to the assessee and was not towards any services rendered. As a consolidator, Vikram Electric Equipment P. Ltd. was to contact the local farmers in and around Gurgaon, who were willing to sell their land. Vikram Electric Equipment P. Ltd. was making payments from its account to the farmers and thereto have certain rights in the land. On the ultimate transfer of land to the assessee through Vikram Electric Equipment P. Ltd. , the final payment was to be made to the farmers. Towards the right of Vikram Electric Equipment P. Ltd., 2% of the cost of land (in some cases, even a higher amount) was to be paid to Vikram Electric Equipment P. Ltd., as mutually agreed. This was the mutually agreed price. Vikram Electric Equipment P. Ltd. worked for land acquisition and after scrutiny of the concerned documents of the land, Vikram Electric Equipment P. Ltd. would suggest the appropriate land for purchase by the assessee. Vikram Electric Equipment P. Ltd. thus acted with the farmers on its own account rather than for and on behalf of the assessee, on principle to principle basis, with the farmers on the 26 ITA Nos. 2361 & 1953(Del)2011 one hand and the assessee on the other. The assessee contends that this being so, the provisions of neither section 194 C , nor section 194 H get attracted to the payment made by the assessee to Vikram Electric Equipment P. Ltd. The payment along with payment made to the farmers directly represented the purchase of the cost of land and had been correctly treated as such in the assessee's books of account. It has been contended that alternatively, in any case, the payment made to Vikram Electric Equipment P. Ltd. has not affected the taxable profits of the assessee during the year. The total purchases were lying as closing stock, as observed by the Taxing authorities also and the effect of adjustment with regard to the amount paid to Vikram Electric Equipment P. Ltd. would arise only on and in the instances of sale of land by the assessee . It is as such that it has been claimed that no disallowance u/s 40(a)(ia) of the Act is called for, much less any consequential action u/s 201 of the Act. It has been contended that Vikram Electric Equipment P. Ltd. had an important role to play as a consolidator, since the assessee required contiguous land holdings in order to develop a colony. In case any land which was agreed to be acquired by Vikram Electric Equipment P. Ltd. was not found to be suitable, it was Vikram Electric Equipment P. Ltd. which would have to bear the consequences, indicating that Vikram Electric Equipment P. Ltd. was not 27 ITA Nos. 2361 & 1953(Del)2011 acting as an agent on behalf of the assessee, but was working on a principle to principle basis, independently.
26. The stand of the Department, on the other hand, has been that MOU signed by the assessee and Vikram Electric Equipment P. Ltd. lays down that Vikram Electric Equipment P. Ltd. was acting as an agent of the assessee, rendering services, for which, the provisions of section 194 H of the Act are applicable and it is correctly applied by the ld. CIT(A).
27. In this regard, it is seen that clause 3.2 of the MOU between the assessee and Vikram Electric Equipment P. Ltd. makes it clear that Vikram Electric Equipment P. Ltd. or its agent agreed to assign their rights to purchase the land in favour of the assessee. It would be appropriate to reproduce here, the said clause 3.2:-
3.2 In consideration of the consolidator or its agent/nominee assigning its rights to purchase the land in favour of the Buyer Company and causing the Land Owners to execute the Sale Deeds directly in favour of the Buyer Company, the Buyer Company shall pay the Consolidator such sum as may be mutually agreed.
However, it is specifically agreed by the Consolidator that no sum shall accrue to it on this account till it procures 27 acres of land for the Buyer Company (unless 28 ITA Nos. 2361 & 1953(Del)2011 the Buyer Company decides to procure less than 27 acres through the Consolidator) and all the issues relating to possession and mutation f such land are settled to the satisfaction of the Buyer Company."
28. The above clause also makes it evident that unless the assessee decided to procure less than 27 acres of land through Vikram Electric Equipment P. Ltd., Vikram Electric Equipment P. Ltd., was to procure 27 acres of land for the assessee, failing which, no payment was to be made by the assessee to Vikram Electric Equipment P. Ltd.
29. This clearly shows that Vikram Electric Equipment P. Ltd. was transacting on a principle to principle basis and it cannot be said that the payment was made by the assessee to Vikram Electric Equipment P. Ltd. for rendering of any service. The provisions of section 194 H of the Act are, therefore, not at all applicable.
30. Moreover, the amount paid to Vikram Electric Equipment P. Ltd. was duly reflected by the assessee in the purchases closing stock. No sales had been made during the year under consideration. It has not been shown to be otherwise. In such a scenario, in our considered opinion, no disallowance is called for.
29 ITA Nos. 2361 &
1953(Del)2011
31. Further still, the chart at page 16 of the assessee's paper book shows that almost 2% of the sale value was being paid by the assessee to Vikram Electric Equipment P. Ltd. as consideration for transferring Vikram Electric Equipment P. Ltd.'s rights. This was in terms of the afore-mentioned clause 3.2 of the MOU between the assessee and Vikram Electric Equipment P. Ltd. It has not been shown if such payment is not a fair compensation paid by the assessee to Vikram Electric Equipment P. Ltd. which, anyhow, is not an impediment in holding, as above, that the transactions between the assessee and Vikram Electric Equipment P. Ltd. are on a principle to principle basis, not attracting the provisions of section 194 H of the Act.
32. Pertinently, no addition having been made for the year by the AO, the alternate contention of the assessee to the effect that no addition can be made during the year, stands accepted by both the Authorities below.
33. The provisions of section 40(a)(ia) of the Act in any case do not apply, the assessee having not claimed any deduction for any expenses on account of payment to Vikram Electric Equipment P. Ltd. , either in its profit and loss account or in the computation of taxable income filed. It was only that the AO recorded a loss of ` 19,700/-. This obviously, did not include any addition of either ` 4.02 crores or ` 1.24 crores. 30 ITA Nos. 2361 &
1953(Del)2011
34. In view of the above discussions, the grievance of the assessee is found to be correct and is accepted as such.
35. In the result, the appeal filed by the Department is dismissed, whereas that preferred by the assessee is allowed.
Order pronounced in the open court on 05.10.2011.
Sd/- sd/-
(Shamim Yahya) (A.D. Jain)
Accountant Member Judicial Member
Dated: 05.10.2011.
*RM
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
True copy
By order
Deputy Registrar