Income Tax Appellate Tribunal - Mumbai
General Glass Co. (P) Ltd. vs Deputy Commissioner Of Income Tax on 7 December, 2006
Equivalent citations: (2007)108TTJ(MUM)854
ORDER
Pramod Kumar, A.M.
1. This appeal requires our adjudication on two main issues - first, validity of the reassessment proceedings in this case, and, - second, ascertainment of the correct assessment year in which capital gains on sale of plot of land are to be taxed on the facts of this case. So far as merits of the case are concerned, there is no dispute about the chargeability of capital gains on sale of plot of land in question. The dispute is confined to the assessment year in which the capital gains are to be taxed, and, to be more specific, whether or not the capital gain in question can be taxed in the assessment year before us. The appeal is filed by the assessee and is directed against the order dt. 8th Nov., 2004 passed by the CIT(A) in the matter of assessment under Section 143(3) r/w Section 147 of the IT Act, 1961, for the asst. yr. 1996-97. Grounds of appeal, as set out in the memorandum of appeal, are as follows:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding the reopening of assessment under Section 147 of the IT Act, 1961, was proper and thereby erred in confirming the reopening of assessment.
Looking to the facts and in the circumstances of the case and in law, the appellant submits that CIT(A) ought to have held that reopening of assessment is bad in law and void, and ought to have quashed the assessment.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 5,27,13,079 on account of alleged capital gains on the sale of plot of land.
Looking to the facts and circumstances and in law, the appellant submits that learned CIT(A) ought to have held that the additions made by the AO is incorrect and invalid and ought to have deleted the same.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not adjudicating upon the ground that the amount of capital gain, as computed by the AO, is highly excessive and ought to be reduced substantially.
Looking to the facts and in the circumstances of the case and in law, the appellant submits that the learned CIT(A) ought to have held that the addition made by the AO was highly excessive and ought to have reduced the same substantially.
2. To adjudicate on this appeal, only a minimal reference to the undisputed facts and some of the documents is required. The assessee company, along with Shamvik Glass (P) Ltd., jointly owned the land adjoining its factory premises at Mulund. The share of the assessee company in this property was 37.5 per cent. Vide memorandum of understanding dt. 20th Nov., 1994. the assessee company decided to sell its 37.5 per cent undivided interest in the said property for a lumpsum consideration of Rs. 5,30,00,000. The assessee received a sum of Rs. 30,00,000 as earnest money at the time of signing of the MoU and the balance was to be paid in instalments. These instalments were not, however, paid in terms of the MoU. The intending buyer pleaded financial difficulties. Subsequent to entering upon this MoU, the assessee company moved an application to the appropriate authority, in Form 37-1, for clearance, and upon obtaining the said clearance, gave an irrevocable power of attorney to the intending buyer. In the meantime, however, the instalments agreed upon remained unpaid and the assessee company entered into a supplemental MoU for, inter alia, rescheduling the instalments. The intending buyer, however, gave an undertaking vide letter dt. 12th Oct., 1995 (copy placed before us at p. 51 of the paper book) which reads as follows:
We confirm that the licence to enter upon the property as per your letter dated today in this behalf shall ipso facto stand terminated in the event of our default in payments of the instalments of the purchase price, with interest, and the agreement is terminated as mentioned in the MoU executed with you.
3. The rescheduled instalments, as evident from relevant portion of the supplemental MoU at p. 100, were as follows:
Amount Original Revised
(Rs.) due date due date
30,00,000 Paid on signing of MoU N.A.
50,00,000 30.9.1995 15.1.1996
1,00,00,000 30.11.1995 15.2.1996
1,00,00,000 30.11.1995 15.3.1996
1,00,00,000 31.12.1995 15.4.1996
1,00,00,000 31.1.1996 15.5.1996
50,00,000 On conclusion 31.5.1996
4. All the above payments were to be made along with the interest for delays in payments, as agreed to by the parties. The supplemental agreement, whereby the payments were rescheduled, also, inter alia, provided as follows:
The said Lok Housing (i.e. intending buyer) have issued postdated cheques, in favour of said Shamvik and the said General Glass (i.e. the assessee before us) for the payment of the instalments of the purchase price as also for payment of interest calculated upto the revised dates of payments as per particulars mentioned hereinabove. The said Lok Housing gives a warranty to the said Shamvik and the said General Glass that ail the said postdated cheques may be presented by the said Shamvik and the said General Glass for encashment on the respective due dates and that the cheques will be honoured on presentation. Further that the Lok Housing will not issue stop payment instructions in any circumstances nor put forward any excuses of any type to avoid presentation and consequent encashment of the said cheques on their respective due dates. Further encashment of the said cheques on presentation shall be as of the essence of the contract.
(Emphasis by underlining, italicised in print, and words in brackets are supplied by us)
5. However, even this revised schedule was not adhered to by the Lok Group. It is evident from the following extracts from the letter dt. 7th March, 1996 placed at pp. 52 and 53 of the paper book:
Please recall our meeting on 2nd Feb., 1996 wherein you were kind enough to agree to accommodate us by rescheduling the instalments due on 15th Jan., 1998 and 15th Feb., 1996 and the balance sum of Rs. 31,61,088 out of the instalment due on 15th Dec, 1995 owing to severe liquidity crunch being faced by us. As you are aware, the balance amount of instalment due on 15th Dec, 1995 has already been paid by us.
With regard to instalment due on 15th Jan., 1996 to Shamvik as well as General Glass, postdated cheques were issued by us as per the reschedulement agreed upon. During the meeting, it was also assured that after payment of the balance amount of the instalment due on 15th Dec, 1995 in the month of February 1996, we shall further reschedule the instalment due on 15th Jan., 1996, if it became necessary. Please note that cheques dt. 1st March, 1996 for Rs. 8,76,478 each to Shamvic and General glass were honoured by us on presentation. Looking into the present situation and the continued liquidity crunch, it would; be difficult for us to make payments against two cheques dt. 8th March, 1996 of Rs. 8,78,478 each to Shamvic and General glass and therefore would request you to please respect our earlier proposal and allow further reschedulement of the instalments. What we propose now is that instead of your simultaneously depositing cheques issued to Shamvic and General glass on revised due dates, we request you to deposit only one cheque either of Shamivk or General glass on that1 particular due date and the other cheque on the next due date (i.e. one cheque in a week). This pattern could continue till the last cheque is deposited. This reschedulement would make us comfortable in honouring the payments.
We would like to inform you that Financial Institutions and Banks have already sanctioned financial assistance to us to the tune of Rs. 21 crores way back in January, 1996. However, due to the prevailing market situation, no money has been disbursed, by them. Certain land disposal deals are also finalised and substantial amounts are receivable on execution of agreements for the same. We are vigorously following up both these avenues and we are hopeful to get substantial funds in a near future. In the event of our getting these funds, we shall definitely inform you and prepone the instalment payments. With regard to additional interest payable by us due to the suggested reschedulement, the same shall be paid separately.
We hope, you will understand the difficulties and will accommodate us by accepting our proposal for further reschedulement of the instalments as suggested in this letter and oblige. In case you feel necessary, we shall sit together tomorrow and finalise the rescdhedulement.
Meanwhile you are requested to present only one of the two cheques dt. 8th March, 1996 as mentioned above and to deposit the second cheque after a week.
6. The fact that group did not discharge its payment obligations is also evident from the following extracts arbitration petition No. 48 of 2001, as General Glass Co. (P) Ltd v. Lok Housing & Construction Ltd., filed by the assessee before the Hon'ble Bombay High Court-a copy of which is placed before us at pp. 150 to 186 of the paper book (relevant portion at pp. 153 to 156). In the said petition, after making a reference to the supplemental MoU dt. 12th Oct., 1995, it was stated that:
Here again, the Respondent failed and neglected to fulfil its financial commitments and, inter alia, pleaded a liquidity crunch. The respondent thus continued to commit defaults in making payment, and from time to time they called upon the petitioner to reschedule the various instalments which the petitioner did in the spirit of co-operation and good faith and with the hope that the respondent would ultimately fulfil its financial obligations. Though the respondent agreed to pay interest at the rate of 36 per cent per annum on the delayed payment, however, the respondent has, with a view to defeat the petitioner's rights, mala fide and deliberately not only not constructed and/or not started construction of the flats in the complex known as 'Lok Everest', in respect of which 'Agreements for Sale' have been deposited, but the respondent has also unauthorisedly and in blatant violation of the agreements proceeded to give allotment letters in respect of the flats to be constructed on the petitioner's said property, i.e. "Lok Nisarg". Despite non-payment of the petitioner's dues, in clear breach of trust and in total violation of the said MoU the respondent invited the public to book their choice flats in a complex known as "Lok Nisarg" to be constructed on the petitioner's said property.
Under the MoU dt. 10th May, 1995 the respondent was prevented from selling or disposing of and/or otherwise transferring the flats which were charged as security. Under the supplemental MoU dt. 12th Oct., 1995 the respondent was provided rescheduling of dates for making the payments with interest at the rate of 24 per cent per annum. The respondent was required to pay the last instalment of Rs. 50,00,000 by 31st May, 1996. This supplemental MoU also provided that the agreements for sale in respect of flats in a complex known as "Lok Everest" were to be treated as security and the respondent was only entitled to deal with or dispose of the flats on payment of the last instalment after which the agreements would stand cancelled. On the respondent's failure to do so, the agreements for sale were to become operational. Along with the supplemental MoU dt. 12th Oct., 1995 the respondent had also given letter by way of an undertaking whereby they undertook that in the event of default of payment of the purchase price instalments the licence to enter the property was to stand ipso facto terminated as well as the supplemental MoU dt. 12th Oct., 1995. The respondent also undertook not to part with possession of the tenements constructed by them under the aforesaid licence till the full purchase price along with interest had been paid. It is clear from the above that, the respondent has acted mala fide and consequently failed to act in good faith in making the payment due and payable by them to the petitioner the respondent had failed and neglected in fulfilling, its financial obligations, liabilities and commitments. The respondent by its conduct/act of refusing to bring into existence the aforesaid security, viz. the flats at "Lok Everest" has resulted in depriving the petitioner of its security. The respondent has also committed breaches of its payment obligations under the supplemental MoU dt. 12th Oct., 1995, the petitioner is therefore desirous of referring to Arbitration all the aforesaid differences and disputes pursuant to Clause (31) of the MoU, dt. 10th May, 1995 entered into between them and the respondent, as aforestated.
Since the respondent is now trying to create third party rights by exploiting, the said property, despite above breaches on its part, it is necessary, to protect the interest of the petitioner, that, pending appointment of arbitrators and making of an award in such arbitration proceedings, the respondent be restrained by an order and injunction of this Hon'ble Court form doing any such act, deed or thing which is likely to frustrate the petitioner's right.
As evident from the Acts set out at p. 176 of the paper book, Lok Group continued to default in making payment and the agreed interest was also not paid despite the fact that there was an undertaking by the Lok Group to pay the interest. As on 5th Aug., 1997, the assessee called upon the Lok Group to pay principal amount of Rs. 4,01,30,100 with interest @36 per cent thereon. Lok Group once again requested to rescheduling the payments as they were "expecting to finalize another deal and would be in a position to make substantial payment". Nothing materialized, however, and the Lok Group continued to be in default. On 5th Oct., 2000, the Lok Group advertised for sale of flats at the proposed housing complex in the plot owned by the assessee (copy of the advertisement placed at p. 186 of the paper book), and this advertisement also triggered off legal action by the assessee. The assessee was of the view that unless the payments are made for the plot of land, Lok Group cannot proceed to sell and allot the property to be built in assessee's plot. The matter thus travelled to Hon'ble Bombay High Court in arbitration petition under Section 9 of the Arbitration and Conciliation Act, 1996. The matter was settled vide minutes of the order dt. 16th July, 2001 (Coram : Justice Rebello) wherein yet another revised schedule of payment and other terms and conditions were worked out. These conditions were as follows:
(1) The respondent agrees and undertakes to pay to the petitioners Rs. 7,00,00,000 (Rupees seven crores only) net in full and final settlement of all their claims under the supplemental MoU dt. 12th Oct., 1995 r/w the MoU dt. 10th May, 1995 and the supplemental MoU dt. 12th Oct., 1995 r/w the MoU dt. 28th Dec, 1994, in the manner set out hereunder.
(a) The respondent has today paid to the petitioners a sum of Rs. 15,00,000 (Rupees fifteen lakh only) by Pay Order No. 465441 dt. 12th July, 2001 issued by State Bank of India, Marol Branch, Mumbai, in favour of the petitioner, General Glass Co. (P) Ltd.
(b) In addition to the above payment, the respondent has today handed over to the escrow agent M/s DSK Legal, 3 (three) postdated cheques, viz. (1) Cheque No. 774618 dt. 16th Aug., 2001 for Rs. 35,00,000, (2) Cheque No. 77420 dt. 31st Dec, 2001 for Rs. 50,00,000 and (3) Cheque No. 774622, dt. 30th June, 2002 for Rs. 1,00,00,000, respectively, all drawn on State Bank of India, Marol Branch, Mumbai, in favour of the petitioner, General Glass Co. (P) Ltd., for a total value of Rs. 1,85,00,000 (Rupees one crore eighty five lakh only), to be held in escrow and released in the manner more specifically spelt out in the escrow agreement entered into by and between M/s Shamvik Glasstech Ltd., General Glass Co. (P) Ltd., M/s Lok Housing Construction Limited and M/s DSK Legal dt. 16th July; 2001; a copy of which is attached hereto as Annexure D (hereinafter referred to as "escrow agreement").
These cheques have been duly signed by Mrs. Meena Merchant and Mr. Uni Krishnan and the respondent undertakes and declares that Mrs. Meena Merchant and Mr. Uni Krishnan are duly authorised to sign these cheques for and on behalf of the respondent. The respondent undertakes to honour the aforesaid 3 (three) cheques on their presentation on the respective dates mentioned above, and it shall not issue any "stop payment" orders to its aforesaid bankers in respect of any of the aforesaid cheques.
Without prejudice to the above, the respondent may, not later than 10 days prior to the cheque date request DSK Legal - the escrow agent, not to release the postdated cheques relevant to that date. Any letter to this "effect shall be addressed by respondent to escrow agent and copy thereof shall be sent to the relevant petitioners. Upon such request escrow agent shall defer the release of the concerned cheque from escrow for a maximum period of 30 days only, after which the same will be released and handed over by the escrow agent to the relevant drawee petitioner. Only one1 such request for deferment can be made against each cheque. In case of such deferment, interest @15 per cent per annum shall be added to the amount then due. This interest shall be paid on the expiry of 30 days aforesaid by an independent cheque/pay order. Failure to pay such interest shall constitute default and all consequences of default shall follow.
(2) The balance payment of Rs. 5,00,00,000 shall be made in instalments and shall be secured by duly constructed flats and 15 (fifteen) postdated cheques all of which have been signed by Mrs. Meena Merchant and Mr, Uni Krishnan who are duly authorised to sign these cheques for and on behalf of the respondent. These postdated cheques have been kept in escrow with the escrow agent M/s DSK Legal, to be released in the manner set out more particularly in the said escrow agreement. The parties have set out in Annexure-A hereto a statement showing the instalment amounts, their dates of payment and number of flats in buildings 'B-T to 'B-5' in the building complex/project known as "Lok Nisarg" situated on a portion of the property bearing CTS 3, 3/1 to 8 of Village Mulund Taluka Kurla, Mumbai Suburban District, which are of the same value as each stage of the aforesaid instalment plan. By way of illustration, if on 30th Sept., 2002 a sum of Rs. 50 lakhs is due, then flat Nos.003, 006, 104, 405 and 605 in building B-l aforesaid shall be considered of equal value. The parties agree that this statement is accurate and undertake to this Hon'ble Court to challenge or dispute the same.
(3) It is further certified and accepted by the respondent that the valuation of the said flats has been done at the rate of Rs. 1,500 per sq. ft. built up area. This value shall remain constant irrespective of what the price may be on 30th June, 2002 and at every stage thereafter. The respondent expressly undertakes to this Hon'ble Court not to raise any dispute or the grounds that prices of flats have risen subsequently. Similarly the petitioner undertakes not to raise any such dispute if the prices should fall below Rs. 1,500 per sq. ft.
(4) On or before 30th June, 2002 the respondent shall construct and deliver vacant possession to the petitioner 30 (thirty) flats fully completed in 'ready to use' condition, viz. 8 (eight) flats in building 'B-l' bearing flat Nos. 003, 006, 104, 405, 605, 703, 705, 706, 3 (three) flats in building 'B-2' bearing flat numbers 001, 104, 403, 4 (four) flats in building 'B-3' bearing flat numbers 001, 002, 203, 304, 11 (eleven) flats in building 'B-4' bearing flat Nos. 001, 004, 005, 006, 403, 501, 801, 701, 703, 704, 706 and 4 (four) flats in building 'B-5" bearing flat Nos. 001, 002, 004, 304 more particularly set out in Annexure-A hereto, to the petitioner together with their respective keys. This is intended to secure the petitioner in the sum of Rs. 3 crores at the rate of Rs. 1,500 per sq. ft. built up area. Provided however, that such transfer of possession should not be construed as transferring title or ownership in any of the above said flats, to the petitioners subject to the conditions hereunder.
(5) For this purpose the respondent expressly undertakes to this Hon'ble Court that as on date there is no charge, lien, claim whatsoever on these flats and that there are no third party rights created thereunder. The respondent also expressly undertakes that they shall not create any charge, lien, claim or third party rights whatsoever in these flats. The respondent declares and undertakes that these flats have not been sold, nor shall they sell the said flats till the terms of this order have been fulfilled and subject to them only.
(6) In pursuance of the above, the respondent has today handed over to the escrow agent, M/s DSK Legal, 30 (thirty) sale agreements in respect of each of the 30 flats referred to in Annexure-A, duly executed by the person authorised to do so, such deposit being made as per the terms and conditions of escrow agreement. The respondent undertakes to this Hon'ble Court that they shall not at any stage raise the contention that the aforesaid executing authority was not properly authorised or that the said sale agreements are not valid or are not otherwise enforceable.
(7) From 30th June, 2002 to 30th June, 2005, the respondent company also undertakes and is directed to make all payments pertaining to any society charges, municipal tax or other outgoing taxes on all these fiats whatsoever on the relevant due dates. For securing this payment in case of respondent's failure the escrow agent shall retain the two cheques, viz. cheque dt. 31st Dec, 2003 for Rs. 30,00,000 and the cheque dt. 30th June, 2004 for Rs. 30,00,000, upon the terms and conditions of escrow agreement. These cheques may be encahsed if for any of the above years the said payment is not made on due date, by the respondent. The balance amounts if any, shall then be refunded to. the respondent.
(8) In the event that possession of flats has been handed over as abovementioned on 30th June, 2002, the escrow agent shall forthwith return to the respondents the 6 (six) postdated cheques for the period including and subsequent to 30th Sept., 2002 of the value of Rs. 2,60,00,000 (Rupees two crores sixty lakhs only) as spelt out under the escrow agreement.
(9) Therefore, the respondent undertakes to this Hon'ble Court, that, the respondent shall pay to the petitioner the amount of each instalment on the date they fall due as per Annexure-A for the exact amount in each instance. The respondent may however request 30 days' extension from due date if such an application is made in writing to the escrow agent, and a copy thereof is. sent to the petitioners not later than 10 days prior to any of the stipulated due dates, in the manner as spelt out under the escrow agreement. Only one extension can be asked for or granted per scheduled date of payment. In all such cases, the respondent shall, along with the payment of instalment, also pay interest for the extended period at the rate of 15 per cent (fifteen percent) per annum. On each cheque/payment being thereafter duly cleared/made by the petitioners bankers, the escrow agent shall return the sale agreements of the exact number of flats set out in Annex. A aforesaid as corresponds to the money value of the paid up instalments in the manner spelt out in the escrow agreement.
(10) Upon delivery of the said flats on or before 30th June, 2002, if, for any reason whatsoever, the respondent fails to pay any of the instalment on due dates specified in Annexure-A or on request with a maximum period of 30 days thereafter the number of flats proportionate in value to the default shall vest absolutely in the petitioner and the petitioner shall be the sole, undisputed, rightful owner of the said flats. Any duties levies, statutory outgoing, including but not limited to, payment of stamp duty, pertaining to such transfer of ownership in the name of the relevant petitioner shall be paid entirely by the respondent within 2 weeks of the relevant stamp duty being or becoming payable. The respondent hereby agrees and undertakes to the Hon'ble Court that within 7 days of the filing of this memorandum of the Order with the Hon'ble Court, the respondent shall deposit with the escrow agent, 16 PDCs bearing the same dates as the PDCs enumerated in Annexure A and B, and each cheque shall be of an amount equivalent to 10 per cent of each of the, 5 instalments as appearing in Annexure A and B hereto, being the amounts payable towards the relevant applicable stamp duty in respect of the 50 sale agreements as appearing in the said Annexures A and B hereto. Upon payment of each instalment on its due date or after the extended period of 30 days as contemplated herein, the escrow agent shall return to the respondent, the cheque representing the amount of stamp duty payable corresponding to the relevant instalment. The cheques pertaining to the payments sought to be made in respect of the stamp duties payable, shall be handed over to the petitioner only after the expiry of the period of exercise of option for repurchase of the relevant flats, by the respondent. The intention being that the respondent has to pay the applicable stamp duty only once. The petitioner shall however offer the said flats which then come to their ownership under this clause to the respondent to exercise a first option to buy them back. This option of repurchase if exercised and actually paid for within one month of the aforesaid instalment date shall be at the rate of Rs. 1,600 per sq. ft. and if within two months at the rate of Rs. 1,700 per sq. ft. The essence of this option, is not merely the intent to buy but the actual payment. Thus if despite expressing a desire for the option the. respondent does not actually make payments at the above rates and within the above stipulated time, the petitioners shall be forthwith released of any further obligation to the respondent in this behalf and may then sell the said flats in the open market and at market rates without further reference to the respondent. The respondent undertakes to this Hon'ble Court that in case they do not repurchase the said flats in the time specified above they shall not raise any objection or create any obstruction to the open market sale of the said flats by the petitioners.
(11) If despite the above undertakings the respondent defaults in giving ready possession flats to the petitioners as abovementioned on or before the 30th June, 2002, then the respondent undertakes that till the next payment becomes due, i.e. 30th Sept., 2002 he will not part with possession of any flats whatsoever in the said Project to any other party or person either on 30th Sept., 2002 if the said flats are still not constructed and handed over. The petitioner may, at their discretion give further time for delivery of possession. In such event also no possession shall be given by the respondent, of any flat whatsoever, in the Project to any other party or person till possession is first given to the petitioner. Alternatively the petitioner may encash the postdated cheques for Rs. 50,00,000 either on 30th Sept., 2002 aforesaid or at any point during the, extended period of 30 days. In the latter event the escrow agent, M/s, DSK Legal, are hereby authorised to release to the petitioners the necessary cheques relating to that step in the payment schedule, in the manner spelt out in the escrow agreement.
(12) The same procedure shall be followed at every stage of the instalment schedule if the said flats are not delivered.
(13) Without prejudice to all that is mentioned hereinbefore, it is further agreed by and between the petitioners and the respondent that in the event the respondent fails to complete the construction of the said buildings B-1 to B-5 and hand over the same to the petitioners on due dates and if in the meanwhile it commences the construction of any of the towers which are proposed to be constructed on the suit property, then, in such event, the petitioners may, instead opt for flats totalling 20,000 sq. ft. built-up area in any of the said towers in lieu of the aforesaid flats in the aforesaid buildings 'B-1' to 'B-5', at a fixed rate of Rs. 1,500 per sq. ft. only, to which the respondents hereby agree. On exercise of such option and delivery of possession of these tower flats, the escrow agent shall return the cheques referred to it in Annexure A above and all the provisions relating to the respective rights and obligations of parties hereto set out in respect of the said flats in Buildings 'B-l' to 'B-5' shall apply to these tower flats, mutatis mutandis. For the purpose of this clause, it is made clear that it is the non-delivery of the said 'B-1 to 'B-5' flats on the specified date that creates this option, irrespectively of the stage of construction of buildings, No. 'B-1' to 'B-5' as the case may be.
(14) It is specifically agreed by and between the petitioners and the respondent that if, however, due to any act of God or natural calamity or if by reason of any injunction of any competent Court of Law in India the work on the entire project called 'Lok Nisarg' wherein the said buildings 'B-1' to 'B-5' and 'B-7' being subject matter of these minutes is being constructed, physically stops, and the respondent is directly as a consequence thereof not in a position to arrange for the amount as mentioned in the aforesaid postdated cheques on their respective due dates, then, and in that event only, the respondent and/or its directors shall not be held liable and responsible for any criminal liabilities including criminal proceedings under Section 138 of the Negotiable Instruments Act. The respondent shall forthwith intimate to the petitioner the fact of any litigation civil/criminal being initiated against them as regards the said project.
(15) The balance liability then outstanding, if any, shall remain and the respondent shall continue to acknowledge the same in writing so as to save limitation, until the same is paid. The petitioners shall, in any such case retain their option to recover the aforesaid liability by any other legal process available to them at law.
(16) The respondent further undertakes to this Hon'ble Court, that, in the event of the Clause 14 above becoming operation, or, if independently of Clause 14, the respondent Company is unable to construct or pay at the relevant instalment dates, the petitioners shall also be entitled to sell and/or dispose of the 12 flats in building C-4 in the building complex/project known as "Lok Everest" at Mulund, the sale deeds in respect of which had already been handed over to the petitioners, to the extent of the balance accounts then due. The ownership of the said 12 flats shall then pass to the petitioners automatically and without further reference to the respondent. For the purpose of this clause, each of the said 12 flats and their valuation is fixed today as per the schedule set forth in Annexure-C hereto. This rate and value shall be treated by both parties as the correct value of each of the said flats, irrespective of the market price at the date this clause is invoked. The portion of the full debt out of Rs. 7,00,00,000 (Rupees seven crores only) then outstanding shall be then paid and/or recovered from these flats. If, after full recovery as aforesaid, any surplus flats our of the above 12 flats still remain, then, the sale agreements relating to such surplus flats shall be returned to the respondent. The respondent undertakes to construct the building in Lok Everest where these 12 flats are situated, expeditiously and in any event not later than within 54 months from the date hereof, i.e. on or before 31st Dec, 2005. Time is of the essence.
(17) In addition to the above, if Clause 14 is invoked, then notwithstanding anything contained hereinbefore, such of the flats in Lok Nisarg as has/have already been handed over to the petitioners and still remain in their possession, shall forthwith vest in the petitioners absolutely as the owners and the petitioners shall he entitled to sell assign or otherwise deal with the same in their absolute right as owners thereof and without further reference to the respondent.
(18) Upon full and complete discharge of the respondent's liability of Rs. 5,00,00,000 (Rupees five crore) plus Rs. 2,00,00,000 (Rupees two crore) referred to hereafter (total Rupees seven crore only) which are secured by this order, or respondent handing over the flats mentioned in Annexure 'A' as per Clause 4 and flats mentioned in Annexure 'B' as per Clause 20 whichever is earlier, the petitioners shall return the aforesaid 12 flats in Lok Everest or such as remain after setting off the petitioners' claim, to the respondent.
(19) In the meanwhile, the respondent undertakes to this Hon'ble Court that they have not at this date sold the said 12 flats listed in Annexure-C hereto in Lok Everest nor created any charge or third party rights therein and will not sell, part with or otherwise create any third party rights in the same.
(20) The respondent further hereby expressly undertakes to this Hon'ble Court that the respondent shall also construct and complete, on or before 31st March, 2003 another building identified as B-7 in the complex/project known as "Lok Nisarg" situate on the property bearing CTS 3, 3/1 to 8 at Mulund, Taluka Kurla, Dist. Mumbai Suburban and hand over to the petitioners vacant peaceful and physical possession with clear and marketable title free of any encumbrances 20 (twenty) flats therein calculated at the rate of Rs. 1500 per square foot for the value of Rs. 2,00,00,000 (Rupees two crores only) as per Annexure "B" hereto. The number of flats equal in value to each cheque payment is also mentioned therein. For the purpose of the tower flats referred to in Clause 13 above the said sum of Rs. 2,00,00,000 (Rupees two crores only) shall be secured by fiats totalling 13,333 (thirteen thousand three hundred thirty three) sq. ft. built-up area in such towers. All the provisions hereinabove which are applicable to the building and cheque security for payment of Rs. 3,00,00,000 (Rupees three crores) aforesaid, shall apply mutatis mutandis to this security as well. Accordingly the sale agreements pertaining to the above 20 fiats in "B-7", Annexure-B are handed over by the respondent, to the escrow agent, as per the terms and conditions spelt out in the escrow agreement.
(18) The respondent company-further hereby expressly agrees and undertakes to this Hon'ble Court that in case the respondent or any of its constituents, servants or agents sets up a co-operative society in the building(s) given to the petitioners as abovementioned, then, the respondent and/or said society, its servants, agents or constituents shall within 15 days of setting up of such society, give to the petitioners share transfer forms along with the shares duly executed by the respondent and/or its servants, agents or constituents as the case may be, leaving the name of the transferees blank in respect of the flats mentioned in Annexures "A" and "B" offered as securities by the respondent to the petitioners.
(22) The respondent agrees to pay to the petitioners a sum of Rs. 1,46,170 (Rupees one lakh forty six thousand one hundred seventy only), on or before 16th Aug., 2001 towards their share of property tax outstanding in respect of the land sold by the petitioners to the respondent. The respondent hereby agrees and undertakes to this Hon'ble Court that they shall continue to pay their proportionate share of the property taxes as provided under the Memorandum of Understanding (MoUs.) dt. 28th Dec, 1994 and 10th May, 1995 every year promptly hereafter.
(23) The petitioners hereby agree and undertake this Hon'ble Court that against the last payment of Rs. 20,00,000 (Rupees twenty lakh only) by the respondent to M/s Shamvik Glasstech Ltd. On or before 31st Dec, 2005 both the petitioners shall execute their respective conveyance/power of attorney as may be desired by the respondent.
(24) It is hereby agreed and understood by and between parties hereto that they shall duly comply with all the terms and conditions of the supplemental MoU dt. 12th Oct., 1995 r/w the MolJ dt. 10th May, 1995 and the supplemental MoU dt. 12th Oct., 1995 r/w the MoU dt. 28th Dec, 1994, as also any supplementary writings attached thereto which are not expressly dealt with and/or covered by this order.
(25) All undertakings given by both parties herein are accepted and both parties are directed to ensure due compliance with the same.
(26) Both parties undertake to this Hon'ble Court to apply to the arbitrators for appropriate orders related to the arbitration proceedings.
(27)Both the petitions disposed of accordingly. No order as to costs.
For the time being, we are not really concerned about the developments beyond this point of time.
7. On these facts, the AO reopened the assessment of the assessee company mainly on the ground that the capital, gains arising to the assessee as a result of transfer of plot of land, in the asst. yr. 1996-97, have escaped assessment. The AO also held that in the light of Hon'ble Bombay High Court's judgment in the case of Chataibhuj Dwarkadas Kapadia v. CIT , the capital gains are to be taxed in the year in which licence to enter the property has been given by the assessee. The AO's justification was "the transaction has taken place in the financial year 1995-96, since NOC of the appropriate authority has been received in the financial year, supplementary MoU has been signed in this year, possession-which is so called licence has been granted in this financial year, and therefore, capital gain is to be chargeable to tax as income of the year under consideration". Admittedly, the basic emphasis of the AO was that the case of the assessee is covered by Section 2(47)(v) of the IT Act which provides that transfer is to include any transaction involving the possession of immovable property to be taken or retained in part performance of the contracts of the nature specified in Section 53 of the Transfer of Property Act, 1882". That is the foundation of the taxability of impugned capital gain. For the reasons we will set out a little later, it is not necessary to go into other discussions set out in the assessment order. Aggrieved, inter alia, by this stand of the AO, the assessee carried the matter in appeal before the CIT(A) but without any success. The stand of the AO, on this aspect of the matter, was approved and confirmed by the CIT(A). While doing so, the CIT(A) observed as follows:
Since the facts of the instant case are squarely covered by the decision of the Mumbai High Court the date of chargeability would then be the date on which the MoU was contracted. In this case the MoU entered into was on 10th May, 1995 between the appellant and M/s LHCL. This memorandum has not been deviated from. There have been supplementary MoUs entered, which are merely for financial aspects and which in no way impact the original MoU since the terms and conditions basically for development of the property were not amended. Hence the MoU dt. 10th May, 1995 is the MoU which will be the deciding factor for the chargeability of the capital gain. In view of the above, the chargeability of capital gain for the transactions entered into by the appellant with M/s LHCL therefore, has to be taxed in the assessment year under consideration. As a result, this ground of appeal is dismissed.
8. Aggrieved by the stand so taken by the CIT(A), the assessee is in further appeal before us.
9. We have heard the rival contentions at considerable length. We have also perused the material on record and duly considered factual matrix of the case as also the applicable legal position. Learned representatives have addressed us on different aspects of the matter-right from the legality of service of notice, to the correctness of the reasons recorded, furnishing of reasons recorded, to merits of the case. However, for the reasons we shall now state, it is not really necessary to go into all these aspects. We would first like to address ourselves to the core issue of taxability of capital gains in this year.
10. As Revenue has placed heavy reliance on the judgment of Hon'ble Bombay High Court's in the case of Chatuibhujdas Dwarkadas Kapadia v. CIT (supra), and it is based on this judgment that the impugned addition has been made by the AO, and sustained by the CIT(A), it is necessary to first appreciate what this judgment lays down, and perhaps even more important that that, what it does not lay down.
11. Their Lordships of Hon'ble Bombay High Court were examining the scope and import of Section 2(47)(v) which was introduced w.e.f. 1st April, 1988. This provision, which covers one of. the modes of deemed 'transfer', lays down that the scope of expression 'transfer' includes "any transaction involving the allowing of, the possession of any immovable property (as defined) to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act'. Elaborating upon the scope of Section 2(47)(v), their Lordships observed as follows:
Under Section 2(47)(v), any transaction involving allowing of possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v). That, in order to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under Section 2(47)(v).
12. Their Lordships, having made the above observations, took note of the fact that Section 2(47)(v) was introduced in the Act w.e.f. asst. yr. 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, Section 2(47)(v) came to be introduced in the Act.
13 There was. no dispute on whether or not the conditions of Section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon'ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows:
if on a bare reading of a contract in its entirety, an AO comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under Section 2(47)(v)
14. It is important to bear in mind that Section 2(47)(v) refers to 'possession to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act" and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of Section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under Section 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking Section 2(17)(v).
15. in order to invoke the principles' laid down by the Hon'ble Bombay High Court in the case of Chaturbhuj Dwaikadas Kapadia (supra), it is, therefore, necessary to demonstrate that the conditions under Section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference:
Section 53A : Part performance-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or. any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed thereof by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the, transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than the right specifically provided by the terms of the contract;
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.
(Emphasis, italicized in print, supplied by us now)
16. A plain reading of the Section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be "of the nature referred to in Section 53A of the Transfer of Property Act" it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon'ble Bombay High when their Lordships observed as follows:
That, in older to attract Section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract.
17. Elaborating upon the scope of expression "has performed or is willing to perform", the oft quoted commentary "Mulla-The Transfer of Property Act" (9th Edn. : Published by Butterworths India), at p. 448, observes that:
The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee's willingness to perform his part of the contract in terms covenanted thereunder.
Willingness to perform the roles ascribed to a party, in a contract is primarily a mental disposition. However, such willingness in the context of Section 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his income tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient...
In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed....
18. We are in considered agreement with the views so expressed in this commentary on the provisions of the Transfer of Property. Act. It is thus clear that 'willingness to perform' for the purposes of Section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform his obligations. Unless the party has performed or is willing to perform his obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of Section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of Section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under Section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have 'performed or is willing to perform' his obligations under the agreement.
19. Even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was he willing to perform his obligation under the agreement. The agreement based on which capital gains are sought to be taxed in the present year is agreement dt. 12th Oct., 1995 but this agreement was not adhered to by the transferee. In the very financial year in which this supplemental agreement was entered into, i.e. financial year 1995-96, transferee expressed his inability to perform his payment obligations. This is evident from the contents of letter dt. 7th March, 1996 extracts from which have been reproduced in para 5 earlier in this, judgment. The transferee did not make the payments as stipulated in the said agreement. Despite best efforts by the assessee, the payments from the transferee could not be obtained. In fact, as a result of this lapse by the transferee, the matter had to be taken up in the legal proceedings and it travelled right upto Hon'ble Bombay High Court. Earlier in the order, we have taken note of the developments leading to litigation before the Hon'ble High Court and the consent terms arrived at by the parties which were decreed by the Hon'ble High Court. All these factors unambiguously establish that not only the transferee never performed his obligations under the agreement but the transferee was, at least until the matter travelled before Hon'ble High Court, not even willing to perform his obligations. As we have not examined the position as to what was the position after the consent terms were arrived at before the Hon'ble High Court, it is not necessary to go into whether or not the transferee was 'willing to perform' his obligation under these consent terms, it is sufficient to take note of the fact that the matter travelled to Hon'ble High Court in the year 2001, i.e. much after the end of the relevant previous year. When transferee, by his conduct and by his deeds, demonstrates that he is unwilling to perform his obligations under the agreement, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee's obligations which can give rise to the situation envisaged in Section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform his obligations in the financial year 1995-96 in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under Section 53A of the Transfer of Property Act was not satisfied. Once we come to the conclusion that the transferee was not 'willing to perform', as stipulated by and within meanings assigned to this expression under Section 53A of the Transfer of Property Act, his contractual obligations in this previous year, it is only a corollary to this finding that the development agreement dt. 12th Oct., 1995, based on which the impugned taxability of capital gain is imposed by the AO and upheld by the CIT(A), cannot be said to be a "contract of the nature referred to in Section 53A of the Transfer of Property Act" and, accordingly, provisions of Section 2(47)(v) cannot be invoked on the facts of this case Chatmbhujdas Dwaikadas Kapadia v. CIT's case (supra) undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as 'willingness to perform' has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of Section 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue's case is thus devoid of legally sustainable basis.
20. In this light, let us take a look at the reasons recorded for reopening of the assessment. As stated in the assessment order, these reasons are contained in letter dt. 5th Jan., 2004, a copy of which was placed before us on pp. 58 and 59 of the paper book. This letter is dt. 5th Jan., 2004 and it only explains the reasons of reopening the assessment, but, by no stretch of logic, this can be said to be the reasons recorded for reopening the assessment simply because the reassessment notice is dt. 24th March, 2003 which is much earlier than the date of this letter. Be that as it may, this letter notes that the assessee "had received payment of Rs.. 30,00,000 on 12th May, 1995, and seven cheques each of Rs. 8,78,478 in the month of May 1996, and out of that two cheques have returned and not encashed". This letter further states that the assessee "has made agreement and supplemental agreement for granting licence to enter plot and start developmental activities" and that "as a result of this, your company received payment of Rs. 73,92,380 during the financial year 1995-96. This action falls within the purview of Section 53A of the Transfer of Property Act and such part performance has been defined as 'transfer' as defined under Section 2(47) of the IT Act". When we analyze these observations made in the letter of the AO, we find that there are factual inconsistencies and glaring errors. At one stage, the AO states that the seven cheques of Rs. 8,78,478 each, out of these cheques two these cheques two cheques remained unencashed, were received by the assessee in May, 1996 which was at the end of the relevant financial year, but then the' AO also includes the value of these cheques in the amounts said to have been received in the financial year 1995-96 itself. In this letter itself, the AO himself refers to the MoU dt. 12th Oct., 1995, and, therefore, it is clear that the AO was aware of the contents of this agreement which, inter alia, laid down that Rs. 2,80,00,000 was to be paid by the transferee within the same financial year, and yet, having noted that only Rs. 73,92,380 was received by the assessee in the relevant financial year, concludes that this agreement was given effect to. There was no material before the AO to infer that the transferee had performed, or was willing to perform his obligations under the agreement, and yet he concludes that the conditions of Section 53A are satisfied. On the contrary, there was material on record to suggest that the transferee has not, and is not willing to, perform his obligations under the agreement dt. 12th Oct., 1995, as was discemable from the details of payments received vis-a-vis the payment obligations under the agreement in question. The AO has apparently proceeded to reopen the assessment on the basis that mere grant of licence, coupled with entering of development agreement, was enough to invoke deemed transfer under Section 2(47)(v) of the Act. That is clearly an erroneous assumption, and an action based on such a fallacious assumption cannot be sustained in law. The precise reasons recorded for reopening the assessment are not even furnished to the assessee, despite the fact that in terms of Hon'ble Supreme Court's judgment in the case of GKN Driveshaft (India) Ltd v. ITO (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC), the AO was under an obligation to furnish the reasons for reopening and to meet all objections thereto. However, having considered merits of the case and adjudicated upon the same, we see no reasons to remit the matter to the file of the AO for this exercise. That will be a meaningless ritual and an empty formality at this stage. We are of the. considered view that the reopening of assessment was thus vitiated in law. In any event, whether the reopening of assessment is valid or not is rendered somewhat academic a question in the context of our finding to the effect that the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has received only a meagre amount' out of total sales consideration, the transferee is avoiding adhering to the payment schedule on one ground or the other, and there is no surety that the sales consideration will actually be realized by the assessee, and yet the assessee is expected to. pay capital gains on the entire agreed sales consideration. It is also important to bear in mind that, as set out in para 4 of this order, it was specifically agreed between the parties under the agreement in question that "that the Lok Housing will not issue stop payment instructions in any circumstances nor put forward any excuses of any type to avoid presentation and consequent encashment of the said cheques on their respective due dates. Further encashment of the said cheques on presentation shall be as of the essence of the contract". This condition of the contract was, by no stretch of logic, fulfilled. The transferee did request the assessee to reschedule the payments. When payment on time is essence of the contract, and the payments are not made in time, it cannot be said that such a contract confers any rights on the transferee to seek redressal under Section 53A of the Transfer of Property Act. This agreement cannot, therefore, be said to be in the nature of a contract referred to in Section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of Section 2(47)(v) will apply in the situation before us. For all these reasons, we are of the considered view that the assessee deserves to succeed on both the counts-i.e. for the reason that the reopening of assessment was not justified, as also for the reason that the capital gains, on sale of plot in question, could not have been taxed in the particular assessment year in appeal before us. For our purposes, it is not necessary to go into the question as to in which year the capital gain on sale of plot will be taxable. We leave it at that.
21. In the result the appeal is allowed.