Income Tax Appellate Tribunal - Chennai
Anand Citi Centre Holdings P. Ltd., ... vs Assessee
IN THE INCOMETAX APPELLATE TRIBUNAL: C- BENCH:CHENNAI
(Before Shri Hari Om Maratha, Judicial Member
& Shri Abraham P George, Accountant Member)
ITA No.1100 / Mds/2010
Asst. year 2007-08
M/s Anand Citi Centre vs The ITO (OSD)
Holdings P.Ltd. Media Cir.I,
Successor of Anand Theatres Chennai
(Firm),
10&11 Chennai Citi Centre,
Radhakrishnan Salai,Mylapore,
Chennai-600004
PAN AAAFA7457M
(Appellant) (Respondent)
Appellant by: Sri T.Banusekar &
Sri B.Ramakrishnan
Respondent by: Sri Tapas Kumar
Dutta(CIT-DR)
ORDER
PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER--
In this appeal, which is directed against the order dated 25th June, 2010 of the CIT(A)-VI, Chennai for the assessment year 2007- 08, assessee has raised 12 grounds in toto. Assessee has later filed ITA NO 1100/Mds/10 2 a concise set of grounds of appeal consisting of eight grounds.We are proceeding to dispose of this appeal based on the concise grounds filed. Grounds 1 and 8 are general in nature and need no adjudication. In its grounds 2 and 3, grievance of the assessee is that order of the AO was without jurisdiction. According to the assessee, assessment was bad in law as it was completed in the name of "Anand Theatres", in a status as "firm", whereas assessee as on the date of assessment was a joint stock company called "Anand Citi Centre Holding P. Ltd."
2. Short facts relating to this ground are that the assessee had for the impugned assessment year filed a return of income on 31-10-2007, in which its' status was shown as "firm". Case of the assessee was selected for scrutiny assessment and notice under sec.143(2) of the Income-tax Act 1961 (in short "the Act") was issued on 8-9-2008 and after a number of hearings, the assessment was finally completed on 31-12-09. As aforesaid, return of income was filed by the assessee in the status as a "firm". However, assessee had based on a memorandum of association entered on 5- 12-2007, applied for incorporation under Part IX of the Companies ITA NO 1100/Mds/10 3 Act 1956, as a joint stock company relying on Sec. 565 (1) (b) of that Act. It was granted registration as a company incorporated under Part IX of the Companies Act 1956, on 12-12-2007 by the Registrar of Companies, Karnataka. The factum of the conversion of the partnership firm as a joint stock company was duly noted by the AO in the assessment order at para-8 which is reproduced hereunder:
"The firm was converted into the Private Limited Company on 12-12-2007. All the partners of the firm become the shareholders of the company and three of the shareholders were the directors of the company."
However, when the assessment was completed by the AO it was done in the name of "Anand Theatres" in a status as "firm".
3. Assessee had taken a ground assailing the validity of the assessment done in the name of a "firm" which was not in existence, before the CIT(A), as a specific ground in its appeal. However, the ld. CIT(A) did not adjudicate this particular issue. ITA NO 1100/Mds/10 4
4. Now before us, the ld. counsel for the assessee, submits that the AO was very well aware that the firm was succeeded by a company incorporated under Part IX of the Companies Act 1956 and it was clearly noted in the assessment order. Despite noting it, assessment was completed on a non-existing firm. Ld. counsel pointed out that the date of incorporation of the company was 12- 12-2007 and even at the point of time of notice dated 08-09-2008 under sec. 143(2) of the Act was issued, assessee was already a joint stock company. According to the ld. AR, assessment completed was by an AO of Chennai, whereas the Company was registered in Bangalore and the AO did not even transfer the case to the Company Circle before completing the assessment. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Texpin Engg. & Mfg. Works (263 ITR 345) for contending that an assessment on a non-existent firm was not valid. According to the ld. AR, all the assets of the firm were vested in the limited company, when it registered as a limited company under Part IX of the Companies Act 1956, and such vesting was not consequential or incidental to any transfer. Ld. counsel pointed out that there was a difference between dissolution of a firm and ITA NO 1100/Mds/10 5 conversion of a firm to a company under Part IX of the Companies Act. Pointing out sec.565 of the Companies Act, 1956, particularly cl.(b) of sub-sec.(1), ld. counsel argued that a firm constituted according to law could register under Companies Act as a company and such registration was always valid. Relying on the decision of Coordinate Bench of this Tribunal in the case of Sivaganga Investment Ltd. V. ACIT (ITA No.114/Mds/2000 dated 26-9-2001), ld. counsel submitted that even where there was an amalgamation of a company with another company, the transferee company could not be proceeded against by the AO. As per the Ld. counsel, the firm was not in existence when the assessment was completed and, therefore, the assessment done on a non-existent firm was void.
5. Per contra, the ld. DR submitted that during the relevant previous year the firm was very much in existence and according to him, conversion to joint stock company was done after the relevant previous year. Relying on sec. 189 of the Act, ld. DR pointed out that an assessment could be made on a firm even if business of the firm had discontinued or where a firm was dissolved. Therefore, according to him, the AO was very well justified in completing the ITA NO 1100/Mds/10 6 assessment in the name of the firm itself. In any case, as per the ld. DR, the issue had to go back to the ld. CIT(A) since he had not adjudicated on it.
6. In reply, ld. AR submitted that sec. 189 of the Act would apply when there was a dissolution of the firm and here there was no dissolution but only conversion of the firm into a joint stock company. He also submitted that there was no discontinuation of business since assessee had entered into a joint development agreement on 10-11-2008 with M/s ETA Star Property Developers Ltd. (paper book Vo. I page 64). For his contention that even a dissolution would not always result in discontinuation of business, reliance was placed on the decision of the Hon'ble Apex Court in the case of Sakthi Trading Co. v. CIT (250 ITR 871).
7. We have heard the contentions and perused the orders. Undisputed facts are that assessee had filed its return in the status of firm on 31-10-2007 and assessment was completed on 31-12-2009 in the same status and in the same name. The name mentioned in the assessment order is "Anand Theatres". Assessee had converted ITA NO 1100/Mds/10 7 itself into a joint stock company on 12-12-2007 and the certificate of incorporation placed at paper book Vol.II page 52 clearly mentions that such incorporation was done under Part IX of the Companies Act 1956. Part IX of the Companies Act 1956 is captioned "Companies authorized to register under this Act". Sub-sec. (1) of sec.565 falling in this Chapter reads as under:
"S.565. Companies capable of being registered.--(1) With the exceptions and subject to the provisions contained in this section-
(a) any company consisting of seven or more members, which was in existence on the 1st day of May, 1882, including any company registered under Act XIX of 1857 and Act VII of 1860 or either of them or under any laws or law in force in a Part B State, corresponding to those Acts or either of them; and
(b) any company formed after the date aforesaid, whether before or after the commencement of this Act, in pursuance of any Act of Parliament other than this Act or of any other Indian law (including a law in force ion a Part B State); or of any Act of Parliament of the United Kingdom or Letters Patent in force in India, or being otherwise duly constituted according to law, and consisting of seven or more members.
may at any time register under this Act as unlimited company, or as a company limited by shares, or as a company limited by guarantee; and the registration shall not be invalid by reason only that it has taken place with a view to the company's being wound up:"
ITA NO 1100/Mds/10 8
8. Memorandum of the assessee, copy of which is placed at paper book Vol. II pages 53 to 75 is very relevant in this regard. The heading itself mentions it as a company under Part IX of the Companies Act 1956 and the main object of the company is taking over of the business of the partnership firm. The AO was very well aware that the assessee firm had converted itself into a joint stock company under Part IX of the Companies Act 1956 as evidenced by his own noting in the assessment order, which has been verbatim reproduced at para-2 above. Despite such knowledge the AO chose to complete the assessment in the name of the firm Anand Theatres. Conversion of a firm into a company under Part IX of the Companies Act 1956, can only be construed as occasioned by operation of law. There is no transfer on conversion of a firm into a company under Part IX pf the Companies Act 1956. There is no dissolution of the firm when a firm is converted into a company under Part IX of the Companies Act. As admitted by the AO himself, the partners of the firm were shareholders of the joint stock company. As per sec.565 of ITA NO 1100/Mds/10 9 the Companies Act any company consisting of seven or more members, formed under any Indian law may at any time register itself under that Section as a company limited by shares and by operation of Sec.575 of that Act, all the properties shall vest in such Company. The Registrar is bound to give a certificate of registration under sec.574 of that Act and this is a conclusive proof of its incorporation. When there is a statutory vesting of all properties from the previous firm in the newly incorporated company, what happens is that the firm, as it was earlier known, becomes a company. From the scheme of Part IX of the Companie Act 1956, it is clear that the partners who were registered as a firm can register themselves as Companies. There is no case for the Revenue that the firm was not registered under the Partnership Act 1932. History of the firm from 01-04-1971 and various reconstitutions done therein are, in fact, depicted by the AO vividly at para-5 of his order. The entities before and after conversion are not different but nevertheless the entities do not exist simultaneously. The firm comes to an end and the company takes over it. Thus, upto 11-12-07 the partners were registered under the Partnership Act 1932, whereas from 12-12- ITA NO 1100/Mds/10 10 07 they are registered under the Companies Act, 1956. There is no dissolution of the firm. The conversion of the firm into the company being in accordance with the provisions of the Companies Act 1956, it was done well within the framework of law and could not be taken as a colorable device. Especially so, since the conversion took place well before the assessment was completed. When a firm is converted into a company under Part IX of the Companies Act 1956, the firm sheds its character as a firm and adores a new role as a limited company. The moment the company takes birth, firm dies. But nevertheless, neither there was any dissolution nor any discontinuation of business. As pointed out by Ld. AR, assessee was still continuing business even on 10-11-2008 as evidenced by the joint development agreement entered into by it with two other parties, copy of which is placed at paper book Vol. I at pages 64 to 86. As per para-7 of the assessment order, a codicil to partnership was made on 18-10-2007 whereby the change the name of the firm from Anand Theatres to Anand Citi Centre Holdings and change of the nature of business as purchase, sell, divide, consolidate any land and plots, construct, promote shopping malls, multiplex ITA NO 1100/Mds/10 11 theatres, information technology buildings, commercial and residential buildings including hotels and service apartments for sale, rent lease or both on instalment or otherwise was made. The firm had seven partners in it at the time of its' conversion to a joint stock company under Part IX of Companies Act 1956. When the firm got converted to a joint stock company, not only was there no transfer, but there was continuity in business as well. There was continuation with change in form. The firm was never dissolved, neither was its business discontinued. Sub- sec.(1) of sec.189 of the Act relied on by the ld.DR reads as under:
"189(1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the (Assessing) Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment."
9. No doubt, if the assessee firm was dissolved or its business was discontinued, sub-sec. (1) of sec. 189 could have ITA NO 1100/Mds/10 12 been invoked for making an assessment in the name of the "firm". But here there was no discontinuation of business and the firm was not dissolved and therefore, sub-sec.(1) of sec.189 would have no application. That conversion of a firm to a company under Part IX of the Companies Act 1956 was not to be treated as a dissolution was clearly held by the Hon'ble Mumbai High Court in the case of CIT vs. Texpin Engg. & Mfg. Works (supra). Their Lordships held that when a firm was treated as a company under Part IX of the Companies Act, it was similar to transmission. Hon'ble Mumbay High Court was dealing with an issue regarding application of sec.45(4) of the Income-tax Act 1961 on conversion of partnership firm into joint stock company under Part IX of the Companies Act. But nevertheless, the principle evolving out of the decision is clear in that conversion of a firm to a company, by virtue of its incorporation as a joint stock company under Part IX of the Companies Act, will not be a dissolution of the firm.
10. On the date when the assessment was completed, the firm Anand Theatres was not existing. Neither was it dissolved ITA NO 1100/Mds/10 13 nor had its business been discontinued. The AO, after having noted the conversion of the firm into a limited company, made a fatal error in doing an assessment in the status of "firm" under the old name "Anand Theatres". No doubt, as pointed out by the ld. DR, CIT(A) had not adjudicated on this issue though assessee had raised a specific ground. There is also a pleading by the ld. DR that the issue should be sent back to the CIT(A) since it was not adjudicated by him. However, we are of the opinion that such a reversion is not necessary since assessee is questioning the very validity of the assessment and all the facts relevant are on record. It does not call for any fresh investigation into facts. Rule 11 of Income-tax Appellate Tribunal Rules even permit an additional ground to be taken. Hon'ble jurisdictional High Court in the case of CIT vs. G.Rajendran has held in TCA Nos.313&314/2010 dated 3-3-2010 that an assessee could always question the jurisdiction before the Tribunal and the Tribunal is entitled to take a view on the issue. We are of the opinion that in the instant case, assessment was done on a non-existent assessee, despite noting that the name and status of the assessee ITA NO 1100/Mds/10 14 had changed. Such assessment is void and is quashed. In the result, grounds 2 and 3 of the assessee are allowed.
11. Grounds 4 to 6 assails the addition on account of capital gains. According to the assessee there was no transfer of property in the relevant previous year at all.
12. Short facts relating to the issue are that assessee in its' return filed for the impugned assessment year had declared total income of Rs.12,11,933/- and it did not include any capital gains. According to the AO the main business of the assessee was exhibition of motion pictures. M/s Anand Theatres was started in the year 1962 as a sole proprietorship concern of one Shri G.Umapathy. In 1965 it was convered into a partnership firm by admitting Shri U.Prakasham, eldest son of Shri G.Umapathy as a partner. There was a reconstitution of the firm on 01-04-1971 whereby four persons were inducted, which included a minor named U.Balashanmugam. The assets of the firm were revalued as on 31-3-1971. On 02-03-1972 the firm was again reconstituted, whereby Shri G.Umapathy retired. On ITA NO 1100/Mds/10 15 15-4-1979 Shri U Balashanmugam who was a minor became a full-fledged partner and thereafter on 01-08-1986 three more family members were admitted to the firm. There was a revaluation of the assets of the firm on 31-3-1986 also. On 14- 4-92 the partnership was again reconstituted and its' capital structure was changed and provision made for remuneration to working partners as well as interest on capital. Thereafter also there were some supplementary deeds, whereby either capital was increased and/or remuneration for working partners were changed. On 24-2-2007 it seems a reconstitution was necessitated on account of death of one of the partners U.Neelavathi on 23-08-2006 . When M/s Anand Theatres was a sole proprietory concern, its assets included 19 grounds and 2255 sq.ft. acquired by Shri G. Umapathi in 1962, at Anna Salai formerly known as Mount Road, Chennai and this property became the property of the partnership firm when the partnership firm was originally formed in 1965 by admitting Shri U.Prakasham. Out of 19 grounds and 2255 sq.ft. land, 3 grounds and 961 sq.ft was settled by Shri G.Umapathy, founder in favour of his wife Smt.U.Neelavathy in 1967. This piece of ITA NO 1100/Mds/10 16 land also was brought back in to the partnership firm by Smt.Neelavathy when it was reconstituted in 1971. The partners also entered into a codicil on 18-10-2007 when the name was changed to M/s Anand Citi Centre Holdings P. Ltd. and the nature of business was also changed, so as enable it to carry on the business of purchasing, constructing, selling of land, plots, shopping malls, multiplex etc.
13. On 5-6-2006 the firm entered into a Memorandum of Understanding (MOU) with one M/s ETA Star Property Developers P.Ltd. (M/s ETA for short). As per this MOU, copy of which has been placed at assessee's paper book Vol.I pages 1 to 15, the firm M/s Anand Theatres (referred to in the MOU as party of the first part) agreed to discontinue its business of exhibition of films and obtain vacation of the premises leased to various parties and develop the properties described in Schedule A to H thereto, into a shopping/office complex. The MOU had eight Schedules giving description of the properties covered by it. The properties described in Schedule E to H were to be purchased by M/s ETA (referred to in the MOU as party of ITA NO 1100/Mds/10 17 the second part) from the respective owners. In other words, assessee's ownership was limited to properties mentioned in Schedule A to D. Consideration for properties mentioned in Schedules E to H were to be paid by M/s ETA to the respective owners. Consideration agreed for Schedule A to D properties was Rs.20 crores to be paid by M/s ETA to the assessee as non refundable advance and 10,000 sq.ft. of fully completed marketable constructed area, alongwith car park proportionate to this area. A sum of Rs.1 crore out of this sum was paid by M/s ETA to the assessee on the date of MOU. Balance of Rs.19 crores was to be paid as mentioned below:
"(a) On the Party of the first part handing over vacant possession of the properties described in Schedule A to C hereto i.e. 16 grounds 1204 sq.ft. and the originals of the title deeds and parent documents, including latest receipts for payment of Property Tax, water tax, electricity and telephone alongwith the existing car-park areas to the Party of the Second Paert, which shall be on or before 6-7-2006 - Rs.4,00,00,000/- (Rupees four crores only).
(b) On the Party of the First Part handing over vacant possession of the office premises of Mr.U.Karunakaran, M/s Hansa Pictures and Mr. Balashanmugam, which shall be on or before 15-9-2006, ITA NO 1100/Mds/10 18 to the Party of the Second Part - Rs.3,00,00,000/- (Ruipees Three crores only).
(c) On the Party of the First Part handing over vacant possession of the building leased to state Bank of India before 31st December 2006, to the Party of the Second Part Rs.2,00,00,000/- (Rupees Two crores only).
(d) On the Party of the First Part handing over the original Title Deeds of the property, more fully described in Schedule -D hereto, admeasuring 3 Grounds and 961 sq.ft., which shall be on or before 31st March 2007 to the Party of the Second Part - Rs.10,00,00,000/- (Rupees ten crores only)"
The MOU contained various other clauses which demarcated the duties of respective parties. The duty to purchase properties mentioned in Schedule E to H of the MOU was with M/s ETA. They were also required to obtain all necessary approvals from competent authorities for the proposed construction, and this was to be done within six months from handing over of vacant land possession to them. Vacant land possession was to be by M/s Anand Theatres after demolition of all super structures. M/s Anand Theatres also agreed to pay all taxes, rates and outgoings till the handing over of the vacant possession. The original documents and ITA NO 1100/Mds/10 19 title deeds were to be in the safe custody of one Mr.PHM Syed Ismail, who was a director of M/s ETA.
14. Thereafter on 26-9-2007 a supplementary MOU was entered between the same parties, wherein, after referring to the original MOU the parties expressed certain other understandings, some of which modified the terms of the original MOU. This MOU recognized and acknowledged payment of Rs.10.80 crores by M/s ETA to the assessee. It also mentioned that M/s ETA had acquired four contiguous properties on 22-2-2007, which all fell within the relevant previous year. It also acknowledged that corporation permission for demolition of the theatre building was obtained on 17-10-2006. The properties acquired by M/s ETA, included a property from M/s. Seethakathi Trust numbered as 35/148 in Block No.6, Nungambakkam Division, measuring about 2328.16 sq. ft. Through the second MOU the parties agreed to convert the firm 'Anand Theatres' into a company under Part IX of Companies Act, 1956. This MOU also acknowleged, assessee handing over 16 grounds and 1294 sq.ft. mentioned in Schedule A of the original MOU to M/s ETA. Nevertheless it also noted that 3 grounds and 961 sq.ft. ITA NO 1100/Mds/10 20 mentioned in Schedule D of the original MOU was to be handed over to M/s ETA only when they paid Rs. 4 crores as per revised payment schedule. The consideration was also revised to Rs.10.8 crores along with part of constructed areas which was in turn dependent on the construction sanctioned by the competent authorities. In addition to this sum of Rs.10.8 crores, M/s ETA was to advance Rs.7.2 crores to the assessee if the documentation pertaining to 3 grounds and 961 s.ft. mentioned in Schedule-D of the original MOU was completed and title deed handed over to M/s ETA within a period of thirty days. Certain revised documentation requirements were also specified. There was also a specific clause in second MOU whereby the latter was given primacy if there were any conflict between the two MOUs. But for this the original MOU was to continue in force.
15. The AO, after going through the MOUs and payments made by M/s ETA, came to the following conclusion:
(i) The transaction of a transfer of property was complete in the relevant previous year since key ingredient of possession and handing over had taken place based on the first MOU and prior to the second MOU dated 26-9-2007.ITA NO 1100/Mds/10 21
(ii) Conversion of the firm into company was an afterthought and colorable device.
(iii) Second MOU, where it was stated that partners of the firm and their family members would be provided 20800 s.ft.
built up area proved that the assessee was the settler.
(iv) From second MOU dated 26-9-2007 it was clear that approximately 20 grounds were transferred to M/s ETA and substantial part of the consideration coming to Rs.10.80 crores was also received by the assessee in the relevant previous year. Assessee had also given possession of the property in the relevant previous year..
(v) Transfer of property was complete on 15-12-06 when the possession was handed over.
(vi) There was a relinquishment or exchange of land of approximately 19 grounds as evidenced from demolition of old structures by the assessee firm, handing over of possession, closing down of business of Anand Theatres, demolition certificate dated 17-10-2006 and receipt of substantial part of the consideration.
Thus he was of the opinion that there was incidence of capital gains during the relevant previous year. The capital gains was worked out by the AO as under:
". Sale consideration:
Rs.
(i) Cash component received 18,30,00,000/-
(ii) Value of 20800 sq.ft of built-up area
@ Rs. 22,421 as per SRO letter dated
18-12-2009 46,63,56,800/-
ITA NO 1100/Mds/10 22
(iii) Value of undivided share of land
5236 s.ft. @ Rs.22,421/- 1,20,17,656/-
66,13,74,456/-
Less: Cost of construction -
Value of land as per balance sheet
for A.Y 2007-08
(in the absence of any other
Value as on 1-4-1981) 1,69,06,967/-
Long term capital gain: 64,44.67,489/-"
16. In its' appeal before the CIT(A), argument of the assessee was that it had never parted with possession but entered into a joint partnership with M/s ETA. According to the assessee there was no colorable device and there was a total misinterpretation of the agreements between the assessee and M/s ETA. Assessee argued that M/s ETA had withdrawn from the project as they could not take up a project that was not compliant with Foreign Direct Investment (FDI) guidelines. According to the assessee FDI guidelines required development of a minimum 5,80,000 sq.ft. of built up area. Therefore, as per the assessee, it had, after converting itself into a joint stock company decided to develop the property itself with equity partnership from M/s ETA. ITA NO 1100/Mds/10 23
17. Ld. CIT(A) required the AO to submit a remand report since new evidence were produced by the assessee in the form of a letter from M/s ETA wherein M/s ETA had expressed its inability to undertake the project. In his remand report it was stated by the AO that the assessee had not produced any evidence for cancellation of the MOUs with M/s ETA and letter from M/s ETA was only an afterthought. According to the AO, contention of the assessee that no transfer had taken place in the relevant previous year could not be accepted. He was of the opinion that the assessee had given vacant possession of land measuring 19 grounds and 2255 s.ft to M/s ETA in the relevant previous year. AO also requested the CIT(A) to enhance the capital gains based on guideline value of the property as per sec.50C of the Act.
18. After considering the submission of the assessee and the remand report of the AO, the ld. CIT(A) was of the opinion that both the parties had fulfilled the primary conditions for application of sec.53A of the Transfer of Property Act 1882. According to him, assessee had received part consideration and there was handing over of possession of scheduled property during the relevant ITA NO 1100/Mds/10 24 financial year and hence, there was a deemed transfer, coming within the meaning of sec.2(47)(v) of the Act. Ld. CIT(A) was of the opinion that the demolition certificate obtained by the assessee dated 28-3-2008 had no evidentiary value since the assessee had already transferred the property alongwith title deeds before obtaining such certificate. According to the ld. CIT(A), the second MOU did not cancel the first MOU and conversion of Anand Theatres into a company was only a subsequent development, after M/s ETA had withdrawn from the project due to non compliance with FDI guidelines. Ld. CIT(A) also noted that as per the second MOU it was confirmed by the assessee that it had delivered possession of Schedule A and B properties to M/s ETA. CIT(A) concluded that even before the parties had gathered the knowledge that the project would not be possible to be taken up by M/s ETA, on account of FDI norms, assessee had transferred the land to them. Ld. CIT(A) further opined that the conversion of the firm into a company was only a colorable device and he approved the reliance placed by the AO on the decision of the Hon'ble Apex Court in the case of M/s Mc.Dowell &Co. Ltd. vs. CTO (154 ITR 148). He, therefore, upheld the order of the AO in assessing the capital gains in the impugned ITA NO 1100/Mds/10 25 assessment year. Ld. CIT(A) also held that the AO was right in recommending invocation of sec.50C of the Act for enhancing the capital gains by adopting guideline value of Government of Tamilnadu, as fair consideration.
19. Now before us the ld. AR strongly assailing the orders of the authorities below submitted that there were three agreements between assessee, first one dated 5-6-2006, second one dated 26-
09-2007 and the last a joint development agreement dated 10-11- 2008,in which M/s Seethakathi Trust was also party. Taking us through the relevant clauses of the first MOU he pointed out that page 4 thereof (paper book Vol.I page 4) clearly mentioned that assessee had decided to discontinue the business of exhibiting films in Anand Theatres. According to the ld. AR the duty of the assessee as per this clause was to demolish the old building whereas M/s ETA had agreed to develop the property described in the Schedule thereto. Taking us through para-2 of the first MOU (paper book Vol.I page 5), ld. Counsel submitted that Schedule A to D properties could be developed only if properties mentioned in Schedule E to H were purchased by M/s ETA from respective owners. According to ITA NO 1100/Mds/10 26 him, para-3 of the first MOU clearly mentioned that assessee's role vis-à-vis such purchase was only as a facilitator. Ld. Counsel further submitted that it was the duty of M/s ETA to obtain all necessary approvals from competent authority within six months of handing over of the vacant possession. Ld. Counsel also pointed out that as per para-13 of the first MOU (paper book Vol.I page 8), the proposed construction could start only after demolition of the existing structures by the assessee and handing over the possession. Referring to para-17 (paper book Vol. I page 9), ld. Counsel submitted that assessee was to cooperate with M/s ETA for construction of the structure and was also liable to pay all the taxes, rates and outgoings in respect of properties mentioned at Schedule A to D till the date of handing over of vacant possession. Ld. Counsel pointed out that properties mentioned at Schedule A to D alone were owned by the assessee. There were properties mentioned at Schedule E to H owned by other parties and these were to be acquired by M/s ETA. He was at pains to point out that there was nothing to show any possession being handed over to M/s ETA. To a query paused by the Bench, it was submitted by the ld. AR that both the authorities below had come to a conclusion ITA NO 1100/Mds/10 27 regarding handing over of possession based on a clause in the MOU wherein deposit of title deeds were specified to be made to Shri PHM Syed Ismail, who was also a director of M/s ETA. Thereafter, the ld. Counsel took us through supplementary MOU dated 26-09- 2007 (also referred as second MOU) and submitted that through this second MOU assessee had agreed to convert itself into a company under the Companies Act, 1956. According to him, the second MOU clearly mentioned certain properties which were neither owned either by the assessee or M/s ETA. Ld. Counsel further submitted that one of the properties belonging to M/s Seethakathi Trust, mentioned in the original MOU could not be acquired as envisaged therein, even by the time the supplementary MOU was entered into. Finally he took us through the joint development agreement dated 10-11-2008 between, assessee, M/s ETA and M/s Seethakathi Trust under which the factum of each of owners of the property having absolute possession and enjoyment ( paper book Vol. I page
65) over the respective properties and their intention to reconstitute the properties as a single integrated unit were specified. Ld. Counsel pointed out that joint development agreement dated 10-11-2008 could not be stated to be an ITA NO 1100/Mds/10 28 afterthought. Ld. Counsel then pointed out the demolition order dated 28-3-2008 from Corporation (paper book Vol. I pages 39 to 40) to bring home his contention that vacant possession was never handed over. Ld. Counsel also referred to the extract from permanent land register (paper book vol.I pages 60 to 63) signed by Tahsildar, Egmore, Nungambakkam Taluk for arguing that even after 24-7-2008 assessee was holding the patta as owner. Finally according to him, the building permission obtained from CMDA was in the name of Anand City Centre Holdings P. Ltd. (paper book Vol.I pages 87 to 90). Thus according to him, there was no question of any possession being given to M/s ETA.
20. Explaining the reason why original development plan could not be proceeded with, ld. counsel submitted that M/s ETA was a company where there was foreign direct investment and Press Note No.2 of 2005 (paper book Vol.I pages 154 to 155) clearly disabled M/s ETA from executing a development project of this type. Therefore, according to him, there was proper reason for the assessee to promote the project in joint venture with M/s ETA and M/s Seethakathi Trust, and the transactions were not at all sham. ITA NO 1100/Mds/10 29 Thereafter ld. Counsel drew our attention to letter dated 02-11-09 from the assessee to CMDA (paper book Vol.2 page 1), which, according to him proved receipt for the payment of fee for plan approval. Ld. Counsel also pointed out to the contract entered into between assessee and M/s DFS Foundations & Structures P.Ltd. on 31-08-2009 (paper book Vol.II pages 8 to 11) for arguing out that it was the assessee company which had initiated the work of the project. Great stress was placed by the ld. Counsel on a letter of State Bank of India addressed to the assessee sanctioning Rs.50 crores to the assessee on 04-08-2009 (paper book Vol.II page 12), for the construction of the complex. According to him, the security given was the same land for which assessee was being fastened with a capital gains tax liability, even without an effective transfer. Insofar as the adjustment of money received from M/s ETA was concerned, ld. AR pointed out that the assessee had filed Form No.2 with Registrar of Companies for increase of share capital and for allotment of shares. Attention was drawn to the annual return filed by assessee in its' status as a company, with the Registrar of Companies (paper book Vol.II pages 34 to 42) for arguing that land was still shown as an asset of the assessee company in its balance ITA NO 1100/Mds/10 30 sheet. In a nutshell, according to him all these evidence clearly demonstrated that there was no transfer of land made by the assessee either in fact or in law. He therefore, submitted that there was no accrual of any capital gains at all.
21. Per contra, ld. DR pointed out that the first MOU dated 05-06- 2006 clearly showed handing over possession even prior to receipt of consideration of the first instalment of Rs.4 crores. According to him, the sum of Rs.4 crores was paid by M/s ETA on 17-07-2006 and therefore, assessee would have given possession of the land to M/s ETA in the relevant previous year itself. Ld. DR then pointed out that the approval for demolition of part of the building was obtained in the relevant previous year itself. Specifically he pointed out page 11 of the assessment order wherein it was stated that assessee had handed over title deed and possession to M/s ETA. There was a query from the Bench to the DR as to the basis on which the AO came to the conclusion that possession was handed over. In response it was submitted by the ld. DR that clause 11 of the supplementary MOU dated 26-09-2007 (paper book Vol.I page
30) clearly proved delivery of possession of Schedule A and B ITA NO 1100/Mds/10 31 properties was made to M/s ETA. Reliance was placed by the ld. DR on the decision of the Hon'ble jurisdictional High Court in the case of Smt. D.Kasturi v. CIT (323 ITR 40)to buttress his contention that even if a part performance was completed, a transfer could be deemed to have been made as envisaged in sec.2(47)(v) of the Act. According to the ld. DR, it could not be imagined that M/s ETA would have given substantial sum to the assessee without getting possession of the property. According to him, the supplementary MOU dated 26-09-2007 placed at paper book Vol. I page 16 to 38 clearly mentioned at para 8(xi) that the delivery of possession of Schedule A and B property was made to M/s ETA. Ld. DR submitted that the use of the word "today" in such clause was redundant since it was not physically possible to hand over the possession on a single day and therefore, according to him, the transfer of the property was complete, for application of sec.2(47)(v) of the Act. He therefore, submitted that capital gains was rightly assessed in the impugned assessment year.
22. We have perused the records and heard the rival submissions. The primary issue is whether there was a transfer of ITA NO 1100/Mds/10 32 capital asset being immovable property owned by M/s Anand Theatres and/or its successor company to M/s ETA. No doubt, by virtue of sec.2(47)(v) if possession was handed over, in part performance of an agreement, by application of sec.53A of Transfer of Property Act 1882, a transfer could be said to have happened. The issue that needs to be addressed therefore is whether a transfer as specified in sec. 53A of the Transfer of Property Act 1882 was there. Sec.53A of the Transfer of Property Act 1882 requires certain conditions to be satisfied for application thereof. Such condition were spelt out by various Courts including the Hon'ble Apex Court Court in Nathulal vs. Phoolchand AIR 1970 (SC)
546). They are as under:
"(i) there must be a contract to transfer for consideration any immovable property;
(ii) the contract must be in writing, signed by the transferor, or by someone on his behalf;
(iii) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained with reasonable certainty;ITA NO 1100/Mds/10 33
(iv) the transferee, in part -performance of the contract, take possession of the property, or of any part thereof, or if the transferee is already in possession, he must continue in possession in part-performance of the contract;
(v) the transferee must have done some act in furtherance of the contract;
(vi) the transferee must have performed, or be willing to perform, his part of the contract."
Insofar conditions (i), (ii) and (iii) mentioned above are concerned, they have been satisfied here, without doubt. The question that remains to be answered is whether conditions (iv) to (vi) mentioned above have been satisfied. These require transfer of possession of property or atleast any part thereof and some act to be done by the transferee in furtherance of the contract. Most importantly, the transferee must have performed or should be willing to perform his part of the contract. If we look at the first MOU and the second MOU, the schedule of the properties mentioned differed. There were items of properties in second MOU which were in addition and different from those mentioned in the first MOU. The consideration ITA NO 1100/Mds/10 34 mentioned also changed. Consideration mentioned in the first MOU was Rs.20 crores and 10000 sq.ft. of constructed area, whereas in the second MOU this came down to Rs.10.80 crores and constructed area varying in accordance with the permissions received from CMDA. Consideration as per the first MOU was never paid in full. AO himself at para 12.17 of the assessment order refers to that part of the revised documentations required as per the second MOU. This para 12.17 of the assessment order is reproduced hereunder":
"Revised documentation requirements:
(i) Family arrangement in respect of Schedule A and Schedule B properties.
(ii) Reconstitution deed in respectg of firm, Anand Theatre.
(iii) Memrandum and Articles of Association of Par IX company
(iv) Power of Attorney by ANAND THEATRES in favour of ETA
(v) Agreement for the built up area to be g iven to the parties alongwith lthe undivided share of land."
This clearly implies that the power of attorney in favour of M/s ETA was not given atleast upto 26-9-2007 being the date of the second MOU. Ld. CIT(A) while accepting the finding of the AO, nevertheless also accepted that assessee had given sufficient evidence to prove, ITA NO 1100/Mds/10 35 M/s ETA to be a FDA company. Ld. CIT(A) has also given a finding that the project could not be taken up by it on account of restrictions as per FDI norms. From the assessment order as well as the order of the CIT(A) and on the basis of submissions made by the ld. DR, one safe conclusion that can be drawn is that the transfer was deemed as completed and assessment of capital gain done on a sole reasoning that possession was handed over by the assessee to M/s ETA as per original MOU dated 05.06.2006, in the relevant previous year. One of the reason for coming to this conclusion seems, was from a clause in the said MOU, wherein it was mentioned that possession was to be handed over by the assessee to M/s ETA when Rs. 4 crores was paid by M/s ETA. No doubt more than Rs.4 crores was paid by M/s ETA to the assessee in the relevant previous year. However, there is nothing in the assessment order nor in the submissions of the ld. DR or any material placed before us to show that the possession was in fact handed over by the assessee to M/s ETA, in accordance with that stipulation. The only other reason that the AO might have had for deciding that possession was handed over would be clause 8(xi) of the second ITA NO 1100/Mds/10 36 MOU dated 26-9-2007 placed at paper book vol.I pages 16 to 38. The said clause is received hereunder:
"The parties of first part and third part have already delivered the procession of the Schedule A and B property today to ETA"
First we have to presume that the term 'procession' used in the above clause denote 'possession' and this was only a typing mistake. Now the question is whether we can ignore delivery of possession, specifically mentioned to have been given "today" to ETA. It is to be noted that the supplementary MOU was dated 26-09- 2007 and delivery 'today' to ETA could only mean a delivery made on 26-09-2007.We do not find any merit in the argument of the ld. DR that the word "today" was redundant. It was a commercial agreement between parties and it would be naïve to assume that words would have been used by them just for fun. Date 26-09-2007 falls in previous year 2007-08 relevant to assessment year 2008-09 and not the impugned assessment year. We are therefore, unable to agree with the contention of the ld. DR that there was any handing over of possession when, Rs. 4 crores was paid by M/s ETA to ITA NO 1100/Mds/10 37 assessee as per the original MOU dated 05-6-2006. The evidence suggest otherwise. We cannot take a presumption that one party had performed his part of the contract and therefore the other party also would have performed. There was no act done by M/s ETA in furtherance of the first MOU so as to bring the project to its logical conclusion. M/s ETA had intimated their inability to perform their part of contract on account of FDI regulations and this position remained unrebutted. It is also noted that the second MOU was executed on 26-9-2007prior to the issue of notice u/s 143(2) of the Act on 8-9-2008. Therefore, it would not be reasonable to deem such a document to have been made by the parties with an intention to evade tax. There was a substantial change in the respective obligations of the parties between first and second MOUs. Once one of the parties had expressed its difficulty in continuing with the project and there was no sufficient performance from them, in our opinion, it cannot be stated that the conditions for application of sec.53A of the Transfer of Property Act 1882 was satisfied. Agreements and documents have to be taken as a whole in arriving at a conclusion whether there was transfer by way of possession. As already mentioned by us, we are not in ITA NO 1100/Mds/10 38 agreement with the contention of the ld. DR that the word "today' used in clause 8(xi) of the Supplementary MOU had to give way to the word "already" in the same clause and therefore, possession was already handed over in the relevant previous year. At the best we can say that 'today' only meant a part of the same day prior to the signing of the second MOU. We are also not in agreement with the contention of the Revenue that the handing over of original document would constitute handing over of possession. No doubt, such title deeds were handed over to the director of M/s ETA, but, nevertheless, such handing over as mentioned in cl. 22 of the original MOU (paper book vol.I Page 10) contemplates its return as well. In our opinion, all the documents and agreement have to be considered as a whole and not piecemeal. Such a consideration would lead to an irresistible conclusion that the property in question was never transferred by the assessee firm or assessee company to M/s ETA. The development of the property was to be jointly done by the assessee with M/s ETA and M/s Seethakathi Trust. Neither was there any constructive handing over nor any actual handing over of possession in part performance. Neither did M/s ETA do any act in furtherance of first MOU nor was it willing ITA NO 1100/Mds/10 39 to perform its part of the contract. The inevitable conclusion that can be reached is that there was no transfer of possession of property by the assessee company or its predecessor firm to M/s ETA at any time and in any case not in the relevant previous year. As for the decision of the Hon'ble jurisdictional High Court in Smt.D.Kasturi's case (supra), relied on by the ld. DR, there a power of attorney was executed by the seller, whereas here as mentioned by ld. AO himself at para 12.17 of the assessment order, power of attorney was not executed even at the time of entering into the second MOU on26-9-2007. We are therefore, of the opinion that there was no transfer exigible to levy of capital gains. Grounds 4 to 6 of the assessee are allowed.
23. Vide its ground No.7 grievance of the assessee is that the CIT(A) accepted the recommendation of AO to consider the value based on the guideline value of State Government for computing the capital gain.
24. Since we have already decided that there was no transfer which warrant a levy of capital gains tax, this ground has become infructuous.
ITA NO 1100/Mds/10 40
25. In the result, appeal of the assessee stands allowed. Order pronounced in the Open Court on 22-10-2010 Sd/- Sd/-
(HARI OM MARATHA) (ABRAHAM P. GEORGE)
Judicial Member Accountant Member
Chennai: 22nd October , 2010
Nbr"
Cc: Assessee/ Assessing Officer/ CIT(A)/ CIT/ D.R/ Guard File.