Income Tax Appellate Tribunal - Ahmedabad
Popular Estate Management Ltd.,, ... vs The Income Tax Officer, Ward-5(2),, ... on 29 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH AHMEDABAD
BEFORE, SHRI S. S. GODARA, JUDICIAL MEMBER
AND SHRI MANISH BORAD, ACCOUNTANT MEMBER
ITA No. 212/Ahd/2014
(Assessment Year: 2009-10)
Popular Estate Management Ltd.,
53-B, New York Tower-A, Opp:
Muktidham Derasar, S. G. Highway,
Thaltej Cross Road, Ahmedabad 380054 Appellant
Vs.
The Income Tax Officer,
Ward 5(2), Ahmedabad Respondent
PAN: AABCM0617P
आवेदक क ओर से/By Assessee : Shri Dhiren Shah, A.R.
राज व क ओर से/By Revenue : Shri K. Madhusudan, Sr. D.R.
सन
ु वाई क तार ख/Date of Hearing : 04.07.2017
घोषणा क तार ख/Date of
Pronouncement : 29.08.2017
ORDER
PER S. S. GODARA, JUDICIAL MEMBER
This assessee's appeal for assessment year 2009-10 arises against the CIT(A)-XI, Ahmedabad's order dated 19.11.2013, in case no. CIT(A)- XI/347/Wd-5(2)/11-12, upholding Assessing Officer's action making business income addition of Rs.3,87,27,804/- on account of relinquishment of right before development, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short "the Act".
ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO)A.Y. 2009-10 -2-
2. We come to relevant facts. This assessee is a company engaged in real estate development business. It had executed into a development agreement dated 31.03.2007 with Shri Hasmukh Bhavsinh Vaghela qua the land measuring 49068 sq.mtrs. in R. S. No. 231 in Village & Taluk Sanand, Dist. Ahmedabad for Rs.81lacs to be paid on as and when required basis. The assessee entered into similar agreement on the very day in identical terms with Shree Someshwara Darshan Samudike Kheti Sahkari Mandli Ltd., Part- 1 (registered body) pertaining to its land measuring 1012 sq.mtrs. comprised in R.S. 305, revenue estate of village Thaltej, Daskroi Taluka, Dist. Ahmedabad for Rs.25lacs. It issued a cheque of Rs.14.54lacs in favour of the said body. It further agreed to provide remaining sum of Rs.10.46lacs on as and when required basis in the nature of interest free security deposit. The assessee's third development agreement came to be executed on 18.03.2008 with S/Shri Raghuvir Sinh Amar Sinh Vaghela and his son Balbhadrasinh Vaghela regarding their land admeasuring about 57,466 sq.mtrs. in R.S. 232, Village & Taluka Sanand, District Ahmedabad. There is no dispute that clause no. 24 in this third agreement stipulated the assessee to pay sum of Rs.95 lacs on as and when required basis herein as well.
3. The Assessing Officer observes in his assessment order that these three owners paid the assessee respective sums of Rs.2,22,27,804/-, Rs.50lacs and Rs.1.15crore; totaling to Rs.3,87,27,804/- in relevant previous year in lieu of the latter having surrendered its pre-emptive right(s) to purchase/develop the above land being annulled in cancellation agreements. The two sets of vendors hereinabove terminated their corresponding obligations on 30.06.2008 and 27.09.2008. The said vendors relied upon identical compensation/damages clauses relating to assessee's goodwill loss arising from the cancellation hereinabove in order to part with their money in question. It is evident from the said cancellation agreements that the assessee ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -3- undertook to surrender all of its right acquired in above development agreements. Both vendor(s) and vendee treated the impugned compensation to be paid in lieu of terminating right to sue for preemptive purchase. The individual vendors herein thereafter executed their registered sale deeds dated 30.06.2008 and 27.09.2008 in favour of third parties for consideration money of Rs.2,28,12,111/- & Rs.1,37,94,000/-; respectively. Paper book page 49 in assessee's P&L account reveals that the assessee treated the above sum totaling to Rs.3,87,27,804/- as income in the nature of compensation/damages received.
4. We advert to assessment order dated 15.12.2011 now. Assessing Officer took up scrutiny. He perceived the above sequence of development and cancellation transactions as assessee's modus operandi inter alia indicating it to enter into development agreement with owners first, the latter would sell the very land to third parties with former's consent who would invoke its preemptive purchase right to get the same annulled in lieu of compensation money. This compensation money would be treated as a capital receipt exempted from being taxed. The Assessing Officer accordingly issued a show cause notice seeking to treat the above compensation as business income.
5. The assessee appears to have filed its multiple replies dated 22.11.2011, 25.11.2011 & 13.12.2011 inter alia reiterating the above entire backdrop of facts to plead that the compensation amount was in fact a capital receipt not assessable as income u/s. 2(24) of the Act. The assessing authority declined the same in assessment order. It observed that the above development and cancellation agreements had taken place in a very short time span within the very financial year by way of unregistered documents scribed on Rs.100/- non judicial stamp papers despite involving huge sums of ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -4- money which indicated that the stamp papers were not genuine documents. It re-narrated the entire modus operandi vis-à-vis assessee's real estate development agreement embedded therein followed by development, cancellation and settlement deeds leading to avoidance of tax as the damages in question had been claimed as capital receipts. The assessing authority was of the view that all this mechanism employed at assessee's behest defied business prudence. It thereafter took note of similar transactions in earlier assessment orders without any development activities undertaken. The Assessing Officer further took cognizance of meager capital gains in vendors'cases (supra) to observe that they had declined pittance figures of capital gain as against assessee getting sizeable exempt income of Rs.3.87crores. He therefore made the impugned income addition in assessee's hands.
6. The CIT(A) upholds the impugned addition as follows:
"2.2 The various issues involved in the case of the appellant along with my comments are discussed as under:
A. There were three agreements entered into by the appellant with three different parties i.e. land owners, in two eases the appellant has entered into development agreement with individuals. In the third case the agreement is with society for Project Consultancy. In all cases similar agreement was entered into by the appellant. All agreements provided for compensation if the development does not take off, as also the pre-emptive right to purchase the property if the owners decide not to go ahead with the development.
B. If the project had gone through as originally contemplated by the appellant as well as the land owner, then the appellant would have earned income in the nature of business profits. Such profits would have been earned for one year or for few years. The profits would not have continued for a long time so as to qualify to become source of business.
C. The rights acquired by the appellant were in the nature business right D. It is seen that in the earlier year also the appellant had derived profits from compensation amounting to Rs. 5.4 crores on surrender of right to sue and claimed the same as capital receipt. During the year the appellant had entered into as many as three such agreements and all of them ended with ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -5- the appellant benefitting on account of surrender of right to sue. A coincidence happening too many times can not be accepted as a real life event and appears to be beyond the normal scope of human probability. Hon'ble Supreme Court of India while deciding the case of Sumati Dayal v/s CIT reported in [1995] 214 ITR 801(SC) has held after referring to the decision of Supreme Court in the ease of CIT v. Durga Prasad More [1971] 82 ITR 540 (SC):
"This raises the question whether the apparent can be considered as the real. As laid down by this court the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real arid that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities."
E. It is seen that no evidence has been produced by the appellant to show that any dispute had arisen between the land owners and the appellant. The ultimate purchasers were not a party to the termination agreement. They already had a legal title and physical possession of the land purchased by them. The unregistered documents of the appellant did not have any enforceable value in the court of law to claim the specific performance. Hence such a huge amount cannot be accepted as compensation received by the appellant against relinquishment of right to sue. That too in all cases in exactly similar fashion.
F. From the plain reading of the development agreements it is clear that the compensation was an in-built part of the agreement. The compensation received by the appellant is the income received by it for loss of future income.
G. The timing of the various transactions reflect a pattern in the actions of the appellant.
Land Date of Date Date of Gap Total Total Benefit to
Dev. of sale termination between the consideration Benefit to appellant
Agreement to third Agreement sale and (Rs.) the (Rs.)
party termination owner/
agreement owners
(Rs.)
Survey 18-03-2008 15-09- 27-09-2008 12 days 1,37,94,000 22,94,000 1,15,00,000
no. 232, 2008 (stamp
Village paper
Moje, purchased
57466 sq on 5-09-
mt 2008)
Survey 31-03-2007 30-06- 30-06-2008 Nil 2,28,12,111 584307 2,22,27,804
no. 2008 (stamp
231/1+2, paper
Village purchased
Moje, on 11-03-
49068 sq 2008)
mt
Survey 31-03-2007 Not 27-12-2008 Not sold to 50,00,000/- NIL 50,00,000
ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO)
A.Y. 2009-10 -6-
no. 305, Sold third party. Paid to
Village Only appellant
godhavi, agreement
Thaltej. cancelled.
1012 sq
mt
H. From the reading of the development agreements in the first case in the above
table, following salient features emerge:
a. In respect of land at Survey no. 232, Village Moje, the agreement was
executed on a stamp paper of Rs.100/-. This stamp paper was purchased on 11/03/2008 bearing no. G116669. The agreement was executed on 18/03/2008. The termination agreement was executed on 27/09/2008 on a stamp paper which was purchased on S/09/2008, It may be highlighted here that the sale to the third party took place on 15.09.2008 i.e. after the date of stamp paper purchase for the termination agreement which was executed within 12 days from such sale.
b. Under Clause 2.4 of the agreement the appellant (developer) have promised to pay a sum of Rsx 95 lacs to the land Owners. The developer was supposed to carry out the development activities, incur the expenses and enjoy the consideration and the resultant profits. No amount was paid by the appellant to the owners of the land.
c. As per clause 5.2 of the above agreement the developer i.e. appellant has confirmed having taken over the possession of the land at the time of execution of the agreement.
d. Clause 6.11'provides for the compensation in case of termination agreement, in case, the development project because of circumstances beyond the control of the developer or otherwise could not be commenced. In clause 6.12 the developer has been given pre-emptive right to purchase the land in case of termination of the development agreement; In clause 6.14 it has been clearly provided that the possession of land shall remain with the developer in case of termination until the developer exercise the right not to purchase the land.
e. For the sake of clarity the clauses 6.11 to 6.14 are reproduced as under;
6.11 It has been specifically agreed by and between the parties hereto that if the development project, because of the circumstances beyond the control of the developer or otherwise could not be commenced and/or executed or completed for any reason whatsoever, developers shall be entitled to receive such amount by way of compensation/damages or defamation charges for damaging the goodwill of developer in the event of termination of this agreement by the owners, as may be mutually agreed upon between the parties hereto for the termination, of rights arising in favour of developer under this agreement.
6.12 it has been further agreed by the owners that in the event of termination of this dollop and agreement as mentioned herein before in para 6.11 and/or for any reason whatsoever, then in that case pre-emptive right to purchase the said land shall remain with the party of the other part(Developer) ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -7- It has been further agreed by and between the parties hereto that in ease the party of the other part exercises the pre-emptive right to purchase the said land then the requirement of obtaining all necessary sanctions and permissions from the local authorities or other authorities under the law fir the time being in force for the purchase of said land shall be that of the party of the other part.
6.13 It has been also agreed by and between the parties to this agreement that in case of the party of the other part exercise their pre-emptive rights to purchase the said land then they shall acquire the said land as a buyer of the said land and not for the purposes of development of the said land. Of the exposition of the said land as aforesaid from the owner it will be on the part of the other part to decide further whether to develop the said land or not.
6.14 It has been further agreed by and between the parties to this agreement that in ease of termination of this agreement by the owners for any reason whatsoever, as mentioned in para 6.11 hereinabove, then the position of the said land shall remain with the developers until they decide not to exercise the right of pre-emptive purchase of the said land as given in the Para 6.12 herein above.
f. In clause 13.1 it has been provided that in case of dispute between the parties, Shri IH Syed, Advocate would act as mediator and his decision shall be final and binding on both the parties.
g. From overall reading of the agreements it is seen that the owners Mere to Benefit to this extent of Rs. 95 lacs if the development agreement went through. However, on cancellation they have gained only to the tune of Rs. 22.94 lacs whereas the appellant have benefited by a whopping sum of Rs.1.15 crores and that too without investing a single rupee.
I. Identical development agreement has been executed by the appellant in respect of land in Survey no. 232/1+2, Village Moje, except for the difference that the amount to be paid by the developer i.e. appellant to the owner was committed at Rs.81 lacs. Here again the termination agreement was executed on 30/06/2008 on a stamp paper which was purchased on 11/03/2008. It may be highlighted here that the sale to the third party took place on 30/06/2008 i.e. after the date of stamp paper purchase for the termination agreement. Interestingly, the termination agreement Was also executed on the same day Without any delay, clearly indicating the active involvement of the appellant Again* from overall reading of the agreements, it is seen that the owners were to benefit to the extent of Rs. 81 lacs if the development agreement went through. However on cancellation, they have gained only to the tune of Rs.5.84 lacs whereas the appellant have benefited by a whopping sum of Rs. 2.27 crores and that too without investing a single rupee.
J. If the appellant's claim of relinquishment of right to sue is to be accepted then such swift action does not seem to be with the realm of human probability.
K. It needs to be reiterated that no amount whatsoever was paid by the appellant to either W the above two land owners at the time of execution of ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -8- development agreement and even the possession of land was taken by the appellant.
L. In the case of the agreement; with society, similar provisions exist except that the advance of Rs. 1454000/- was actually given by the appellant to the society with the commitment of payment of additional RS. 1046000/-. Further the role of the appellant was termed as that of a 'Project consultant and Organiser'. However the; clauses relating to pre-emptive purchase possession of land remained similar to the other two agreements. Even specific clauses in respect of compensation to the appellant in case of default exist.
M. It is interesting to note that the society has not sold the land to the third party. Only the agreement has been cancelled on 27-12-2008 on the stamp paper which was purchased on 24-07-2008.
N. The purchase of stamp papers much ahead of the agreements for compensation agreement clearly indicates that the prior planning for all such exercise was clear.
O. It is not clear as to why the agreements were not pursued by the appellant despite lapse of substantial period of time after execution.
P. The sale-agreement indicates that they have handed over the possession of vacant land to the ultimate purchasers of land. This clearly means that the possession which was with the appellant earlier was given by the appellant to the owners back. Hence the appellant was fully aware of the transaction, No legal notice was ever given by the appellant to the owners for contravention of the development agreement.
Q. From perusal of the copy of termination agreement with the society it is seen that there is no subsequent sale by the Society to any third party. The society could not obtain necessary permissions and therefore the compensation is stated to have been paid. Clause no. 16 and 25 of the agreement with the society specifically deal with the compensation to be paid to the appellant in case of the agreement not being followed.
R. In case of development agreements, the compensation payment on termination of the agreement has been provided in the development agreement in clause 6.11. Hence the compensation has been received by the appellant as part of the agreement for termination. The claim of surrender of the right to sue is merely a shelter claimed by the appellant to get the benefit from Income Tax. If it was right to sue then there should be some semblance of the efforts made by the appellant to sue the owners. The termination agreements have been executed without any delay after the owners have sold their land to third party, In normal course the appellant would raise some objection, file a Case In the Court for specific performance and then withdraw the case on settlement, The agreement included a clause for mediation The appellant have not taken any recourse to this clause. Further the appellant had the possession of the land. The ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 -9- same was given by them to the owners for transfer to the ultimate purchasers; All these clearly indicate that the termination was worked out amicably without any recourse to suing the owners, it was simply an agreement terminating the development agreement and the appellants were more than adequately compensated for the cancellation, this is clear from the findings given by the AO. The owners got very little consideration and the major part of the consideration was received by the appellant.
S. In the information agreemend with individuals following clause is mentioned:
"And whereas, as mentioned in clause number 6.11 and 6.14 of the said project consultancy agreement dated 30-03-2007, a party of the first part and a second part to this termination agreement have mutually agreed and decided that by virtue of existing development rights of the said land held by the party of the second part, the party of the second part shall be entitled to get the compensation /damages for the termination of the rights to Sue for pre-emptive purchase right arising to the party of the second part vide project consultancy agreement...."
As is clear from the clause number 6.11 to 6.14 of the development agreement as reproduced above, the provision for compensation was an inbuilt part of the development agreement. If the termination agreement takes place between the two parties and the compensation is received in accordance with the clauses of the development agreement, then it is to be treated as compensation arising 'on account of the development agreement and not on account of relinquishment of rights to Sue.
T. The Supreme Court, in the case of Suraj Lamp & Industries Pvt. Ltd. Vs. State of Haryana & Anr., (2012) 340 ITR 1 held that the transactions of the nature of 'GPA sales' or "SAN GPAVWILL transfers' do not convey title and do no amount to transfer, nor can they be recognized as valid mode of transfer of immoveable property and that the Courts will not treat such transactions as completed or concluded transfers or as conveyances as they nether convey title nor create any interest in an immovable property.
U. If legally the facts are examined then appellant had no case before the court of law to sue for specific performance. The development agreement was not registered. The appellant had hot paid a single penny to the owners in two cases and in the third case of society only an amount of Rs.1454000/- was paid, which was miniscule when compared to the ultimate sale price of the land; In absence of any step taken by the appellant and in view of the fact that the agreements were not registered, appellant had no enforceable claim in the eyes of law; Hence what was received was only possible by way of mutual consultation within the terms of agreement and that too only because the owners wanted to respect the agreement. The compensation clause was very much a part of the development agreement and therefore the compensation received by the appellant was within the purview of the development agreement. The compensation was in course 5 of the normal business activities of the ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 10 -
appellant It can be at best be described as consideration against loss of future; profits and not as consideration for loss of source. This is in tune with the decision of the Hon'ble Delhi High Court in the case of M/S Ansal Properties & Industries ... vs Commissioner of Income tax in ITA No. 183/2008, It was held by the court that the compensation received in case of cancellation of development agreement would have to be taxed as revenue receipts in absence ,of any substantial restrictive covenants.
V. In normal course of cancellation of development agreement the compensation would be taxable as revenue receipt and the appellant would have to pay regular tax on the same. But by showing the income under the garb of compensation against right to sue, the appellant has claimed the consideration as capital receipt not liable to tax. Here I would think it appropriate to mention the famous Gourley principle. This has been relied upon by the Indian courts in plethora of cases of Income Tax. The principle is that a person must not fee placed in a better position as a result of a breach of contract than if the contract had actually been performed. The potential for being placed in a better position will arise in cases where:
a. payment made from one party to another would be subject to tax in the event that the contract had been properly performed; but b. the damages are not themselves subject to tax.
In the case of Sri Harindar Singh vs Wealth Tax Officer, 1967, 64 ITR 394 P H, Punjab-Haryana High Court has referred to the words of Earl Jowitt "in British transport Commission v. Gourley (1):
"The obligation to pay tax-save for those in possession of exiguous incomes is almost universal in its application, that obligation is ever present in the minds of those who are called upon to pay taxes, and no sensible person any longer regards the net earnings from his trade or profession as the equivalent of his available income."
The principle has also been referred to by the Hon'ble Gujarat High Court in the case of Commissioner Of Wealth-Tax, ... vs Raipur Manufacturing Company (1964) 52 ITR 482.
W. The accounting standard AS-5 provides the definition of extra ordinary items of income. As per AS-5 Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly, It is further provided that the nature and the amount of each extraordinary item should be separately disclosed in the statement of profit arid loss in a manner that its impact on current profit or loss can be perceived.
However, in the annual report of the appellant company, it has been clearly mentioned with regard to the financial performance that ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 11 -
"During the year under report, the company has achieved a gross income of Rs.3 87.28 lakhs as compared to Rs.5 40.02 lakhs during the previous year and the operations for the year under review have resulted into net profit of rupees to 91.79 lakhs. Your company could achieve sustained growth in business due to continued pursuit of our strategy to work with innovation ideas and developing new areas of Its activities or stop directors are hoping even better performance during the current year."
This clearly indicates that the amount of compensation has been received in course of regular business activity and is to be considered as business income.
The income received on account of .compensation has been included in; the profit and. loss account as compensation / damages received however there is no remark in the annual report with regard to the extraordinary nature of income. The appellant has accounted for the income in the ordinary course of accounting and has also claimed various expenses which are incurred in the normal course of business against such income. From the perusal of dates involved in the transaction of termination and the sale made by the landowners to the ultimate purchasers it is quite clear that appellant was a silent party to the transaction. And the consideration on account of composition has been received in the regular course of business activities of the appellant.
X. Whenever a termination agreement is signed between the parties to cancel the original agreement, than naturally the party receiving the compensation does indemnify the other party from any future legal course of action. Therefore the party receiving the composition naturally does not retain any right to take legal action in future. Such compensation, however, cannot be viewed as a compensation for relinquishment of the right to sue. Further legal actions will naturally not have any legal force in view of the receipt of compensation and has to be seen merely as a corollary to the compensation receipt.
Y. A specific fight to Sue and its relinquishment will arise only When some action is taken by the party to show that it is capable of taking sortie legal action or it is willing to move to the courts to secure specific performance. In the case of the appellant no such action has been taken.
z. In the case of Manoj B. Joshi v. Income-tax Officer [2009] 179 TAXMAN 30 (BOM.) a similar case came before Hon'ble Bombay High Court. In this case the only difference was that the assessee was the owner not conducting any business of realty. The assessee had entered into an agreement with the developer for development of property and the developer could not carry out the work and indemnified the assessee by way of compensation. The receipt was considered by assessee as capital receipt not chargeable to tax. The High Court held that "The assessee had, admittedly, received the amount in issue from 'D' in accordance with the agreement and/or the release deed entered into by and between the assessee and 'D'. In view of the admitted facts and circumstances of the case, it could not be said that the amount in issue so ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 12 -
received by the assessee was not an income at all in terms of section 2(24), read with section 14 and section 56. Therefore, the finding of all the lower authorities, that the amount in issue received by the appellant was an income taxable under the Act, was to be confirmed. [Para 9] On facts, it was clear that the assessee had not received the amount in issue from 'D' towards either acquiring or releasing or relinquishing any right or title or interest whatsoever in the immovable property. He was paid separately, for relinquishing his interest in the immovable property, an appropriate amount along with interest. Obviously, therefore, the amount in issue could not be said to be an amount received by the assessee as compensation for relinquishing his interest in the immovable property and, therefore, could not be considered under the head 'Capital gains'. [Para 11] It is true that the term 'property' used in section 2(14) is to be interpreted widely, and that it will include any right, title or interest in the immovable property, as also right to obtain conveyance(s) of the immovable property. However, in the instant case, the assessee had failed to correlate the amount paid by 'D' towards any such right. As the assessee had failed to show that the amount in issue was paid to him towards relinquishment of any such right/title/interest in respect of any movable property or for that matter 'property of any kind', it could not be said that the amount in issue had been received by him as 'income from long-term capital gains'. [Para 13] The facts clearly demonstrated that the assessee was paid the amount in issue so that no action in future was initiated against 'D' by the members of the proposed housing society for having failed to construct flats for them as was initially agreed by it. In other words, the assessee had received the aount in issue to indemnify 'D' against any action (that too, if any) that may be taken against 'D' in future. The amount in issue was not paid to the assessee towards any right/title/interest that he had in praesenti in any immovable property. [Para 14] The Tribunal was justified in holding that the amount in issue was paid to the assessee only to safeguard 'D' from any claim(s) likely to be made against him by the person who had booked the flats throuqh the assessee, since 'D' did not construct the flats as agreed by him earlier. [Para 15] Thus, considering all the facts and circumstances of the case and the factual findings retarded by all the three lower authorities, it could not be said that the amount in issue received by the assessee was not an income at all, as defined under section 2(24); and that alternatively, the income of the assessee was required to be treated as 'Income from long-term capital gain' and not as 'Income from other sources.' as contemplated by section 14 read with section 56. All the three lower authorities were fully justified in treating the receipt of amount in issue by the assessee, not only as an income but also as income received by the assessee from other source as contemplated, by section 14, read with section 56 and subject the same to laxation accordingly. [Para 16]"
ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO)A.Y. 2009-10 - 13 -
2.3 For the sake of arguments even if the appellant's contention that the compensation was in the form of indemnity against any possible legal action, then the same would have to be treated as revenue receipt in view of the decision of Hon'ble Bombay HC in the case of Manoj Joshi (supra). At the most' the head of income can be Income from Other Sources. However, in the case before the Bombay HC the assessee had not received such amount in the course of business whereas in the present case the appellant was in the business of realty and therefore in my opinion the AO has correctly taxed it as income under the Head Business and Profession.
2.4 In View of the above discussions, I hold that the income from the business operation earned by the appellant being a part and parcel of the conditions of the development agreement has to be considered as taxable business income. The action of the A.O. in treating the compensation shown by the appellant as revenue receipt is accordingly confirmed. The first ground of appeal including sub grounds 1 to 7 is accordingly dismissed."
7. Mr. Dhiren Shah appears for the assessee as its authorized representative. He first of all reiterates the above narrated facts once again regarding assessee's three development agreements followed by termination thereof and execution of sale deeds by vendors in favour of third parties. He submits that the above vendors compensated the assessee in lieu of getting its right to sue arising from breach of development agreement surrendered. He refers to Section 6(e) of the transfer of property Act, 1882 envisaging a mere right to sue to be not transferable since not a property. Case law of Baroda Cement & Chemicals Ltd. vs. CIT (1986) 53 CTR 0260 (Guj.) is quoted confirming Chagla, C.J's. view in holding therein that a mere right to sue is neither an actionable claim nor transferable under the above transfer of property law provision hereinabove as it does not have any cost of acquisition. Leaned counsel then takes us to Section 2(14)(a) of the Act defining a capital asset to be property of any kind. We are therein taken to Section 2(47) of the Act defining transfer in Income Tax Law not including in its ambit such a right to sue involved herein.
8. The assessee pleads that its above right to sue surrendered in lieu of getting compensation money is not a property as well so as to invite ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 14 -
taxability of its compensation money as either capital gains or business income as per case law CIT vs. Ashoka Marketing Ltd. (1987) 164 ITR 664 (Cal.) and Govindbhai C. Patel vs. DCIT (2010) 36 SOT 0270 (Ahmedabad- Trib.) concluding that even paying damages for default as per an agreement without any transfer of a capital asset is not assessable as capital gains or business income. The above co-ordinate bench holds that Section 28(va) does not include such an income in specified cases therein. Mr. Shah takes us to assessee's paper book comprising of all development agreements, termination documents as well as registered conveyance deed alongwith necessary replies submitted in lower proceedings.
9. Mr. Shah's next submission is that its above development agreements followed by their terminations are also not compulsorily registerable under Indian Registration Act since the same are mere MOUs not in the nature of part performance of contract u/s.53A of the Transfer of Property Act. He quotes hon'ble apex court's decision in Suraj Lamp & Industries (P.) Ltd. vs. State of Haryana (2012) 340 ITR 1 (SC) holding that unregistered instruments alike GPA sales, agreement, GP and will transfers do not amount to transfer nor would they be recognized as valid modes of transfer of immovable properties. The assessee thereafter cites a co-ordinate bench decision in (2016) 73 taxmann.com 288 (Ahmedabad-Trib.) Smt. Sapnaben Dipakbhai Patel vs. ITO distinguishing hon'ble apex court's abovestated judicial precedent as under:
"24. On due consideration of the above reasoning, we are of the view that as far as the judgment of the Hon'ble Supreme Court in the case of Suraj Lamp & Industries (supra) is concerned, it is altogether in different context. There is no dispute with regard to the proposition that transfer of an immovable property having value of more than Rs.100/- can only be completed by way of registered sale deed, as contemplated in section 17 of the Registration Act. This judgment deals with the concept of power of attorney, lease, licence etc. Definition of expression "transfer" provided in section 2(47) is more wider than in the general law. As observed earlier, while dealing with the issue no.(ii), the expression ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 15 -
"transfer" employed in section 2(47) includes (a) any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the TPA, and (b) any transaction entered into in any manner which has the effect of transferring, or enabling the enjoyment of, any immovable property. In these two eventualities, profits on account of capital gains would be taxable in the year in which such transactions are entered into, even if a transfer of immovable property is not effective or completed under the general law. In the present case, there is a fine distinction which remained un-noticed at the end of the ld. CIT(A). According to the assessee, the rights which have been alienated by her by virtue of agreement dated 4.4.2008 are the rights of capital nature. These rights have been alienated in favour of SDS. The ld.CIT(A) has referred to sections 17 and 49 of the Indian Registration Act, but, failed to notice the proviso appended to section 49 which has been incorporated by way of amendment subsequently. Thus, it is pertinent to take note of section 49 along with proviso which reads as under:
"49. Effect of non-registration of documents required to be registered.-- No document required by section 17 or by any provision of the Transfer of Property Act, 1882 (4 of 1882), to be registered shall--
(a) affect any immovable property comprised therein, or
(b) confer any power to adopt, or
(c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered :
Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1877 (1 of 1877), or as evidence of part performance of a contract for the purposes of section 53A of the Transfer of Property Act, 1882 (4 of 1882) or as evidence of any collateral transaction not required to be effected by registered instrument."
25. Section 53A of the T.P. Act provide a shield to defend the possession taken by virtue of the agreement. The vendee can claim protection of the possession even against the owner i.e. vendor, during the period sale deed was not registered.
The person who has acquired the possession on execution of agreement as referred to in section 53A may not be able to protect his possession on account of non- registration of the agreement, but for all other collateral purposes, i.e. for tendering the agreement into evidence for suit for specific performance, etc. it is to be treated as valid agreement. A controversy in this aspect had arisen whether such non-registered agreement can be entertained in evidence or not in a suit for specific performance. A reference was made before the Division Bench of Punjab & Haryana High Court in regular Second appeal No.4946 of 2011 in the case of Ram Kishan Vs. Bijeder Mann. The Hon'ble High Court has resolved the controversy and held that such unregistered agreement can be produced as evidence in suit for specific performance. It can be made basis of suit for specific performance. The finding recorded by the Hon'ble Punjab & Haryana High Court in this case reported in (2013) 1 PLR 195 as under:
ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO)A.Y. 2009-10 - 16 -
"11. A conjoint appraisal of sections 53A of the Transfer of Property Act, 1882, sections 17(1A) and 49 of the Indian Registration Act, 1908, particularly the proviso to section 49 of the Indian Registration Act, in our considered opinion, leaves no ambiguity that, though, a contract accompanied by delivery of possession or executed in favour of a person in possession, is compulsorily registrable under section 17(1A) of the Registration Act, 1908, but the failure to register such a contract would only deprive the person in possession of any benefit conferred by section 53A of the 1882 Act. The proviso to section 49 of the Indian Registration Act clearly postulates that non-registration of such a contract would not prohibit the filing of a suit for specific performance based upon such an agreement or the leading of such an unregistered agreement into evidence.
12. A suit for specific performance based upon an unregistered agreement to sell accompanied by delivery of possession or executed in favour of a person who is already in possession, cannot, therefore, be said to be barred by section 17(1A) of the Registration Act, 1908.
13. Section 17(1A) merely declares that such an unregistered contract shall not be pressed into service for the purpose of section 53A of the Transfer of Property Act, 1882. Section 17(1A) of the Registration Act, 1908, does not, whether in specific terms or by necessary intent, prohibit the filing of a suit for specific performance based upon an unregistered agreement to sell, that records delivery of possession or is executed in favour of a person to whom possession is delivered and the proviso to section 49 of the Indian Registration Act, 1908, put paid to any argument to the contrary.
14. We, therefore, hold that :
(a) a suit for specific performance, based upon an unregistered contract/agreement to sell that contains a clause recording part per-
formance of the contract by delivery of possession or has been executed with a person, who is already in possession shall not be dismissed for want of registration of the contract/agreement;
(b) the proviso to section 49 of the Registration Act, legitimises such a contract to the extent that, even though unregistered, it can form the basis of a suit for specific performance and be led into evidence as proof of the agreement or part performance of a contract."
26. Thus, if the assessee refused to honour her agreement dated 4.4.2008, SDS has a right to get this agreement enforced by way of suit for specific performance and the assessee could be persuaded to execute the sale deed in favour of SDS by virtue of this agreement. The validity of this agreement under general law viz. Specific Relief Act as well as Indian Registration Act has not been effected. This aspect has not been appreciated by the ld.CIT(A) while holding that since the agreements are unregistered, therefore, they are non-genuine.
27. Let us examine the issue with different angles. For example, the assessee refuses to honour her agreement dated 4.4.2008 and SDS/Capital Consultancy ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 17 -
files a suit for specific performance. A decree for performance of the contract is being granted in favour of the SDS. In that situation, the assessee has to register sale deed in favour of SDS. On such registration she would get the amounts only agreed upon by way of agreement dated 4.4.2008. She could be charged for capital gain on this amount only. Even for argument's sake, the reasons of the Revenue authorities are being accepted that the agreements dated 4.4.2008 and 2.3.2009 are unregistered, therefore, they shall not goad the adjudicator to construe part performance of the contract u/s.53A of T.P. Act and no transfer of the land could be construed within the meaning of section2(47)(v) of the Act. In that situation, only the year of taxability could be shifted i.e. effective date for transfer of capital asset could be taken to 27.1.2010. How the AO can bring the amount for taxation in the hands of the assessee ? Under issue No.(i), we have discussed the nature of right acquired by SDS by virtue of agreement dated 4.4.2008. Suppose the agreement was not honored and suit for specific performance was filed by the assessee for persuading the SDS to purchase the land in dispute. During the pendency of the Civil Suit SDS assigned his right to a third party and ultimately that third party agreed for purchase of suit land. A settlement is arrived. The assessee would get only a consideration agreed upon by virtue of agreement dated 4.4.2008, and other consideration will go to SDS for assigning his right accrued under this agreement. The right to obtain registration of sale deed acquired by him by virtue of agreement dated 4.4.2008, is a capital right, therefore, the transfer would result capital gain. It will be taxed in the hands of SDS. This aspect has been dealt with in a large number judgment discussed by us in issue no.(i). Thus, the ld. Revenue Authorities have failed to notice distinction between a valid and genuine contract under the general law vis-à-vis a contract having effected for the purpose of section 53A of TP Act."
10. Learned counsel concludes his arguments after once again reiterating assessee's stand adopted throughout that it had entered into a valid development and cancellation agreements. Its case accordingly is that the compensation in question of Rs.3.87 crores has been wrongly held to be income assessable under the head business income despite the settled law that it is a capital receipt which is neither capital gains nor business income. Case law (2009) 179 TAXMAN 30 (Bom.) Manoj B. Joshi vs. ITO, M/s. Ansal Properties & Industries Ltd. vs. CIT ITA No.183/2008 decided on 19.11.2010 (Delhi High Court), CIT vs. Hiralal Manilal Mody (1981) 131 ITR 421 (Guj.), (1985) 149 ITR 215 (Delhi) CIT vs. J. Dalmia, DCIT vs. Shri Shekhar G. Patel ITA No. 1997/Ahd/2010 decided on 19.03.2014 and Satyam Food Specialties (P.) Ltd. vs. DCIT (2015) 57 taxmann.com 194 ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 18 -
(Jaipur Tribunal) is quoted in support the pray for deleting the impugned addition made in assessment as confirmed in lower appellate proceedings.
11. Learned Departmental Representative draws strong support from both the lower authorities' action making the impugned addition more particularly from the CIT(A)'s above extracted detailed discussion. He quotes hon'ble apex court's decision in Mc Dowell & Co. Ltd., Sumati Dayal and Durga Prasad More cases (supra) to support the impugned addition. He pleads that the assessee has entered into a complex web of above transactions by employing colorable device in order to evade payment of taxes. He seeks to highlight the fact that the above cancellation agreements stamp papers had been purchased well in advance. We are reminded of our jurisdiction in the Act as the final fact finding authority to take note of all the abovestated suspicious circumstances leading to the impugned addition as discussed in lower appellate findings.
12. Learned Departmental Representative thereafter reiterates CIT(A)'s discussion to contend that the assessee itself had influenced the vendors concerned to terminate the development agreements. It terms all these transactions set up to be a case of re-routing of unaccounted income being brought to the system through farmers/agriculturists. Learned Departmental Representative reiterates that no vendor in facts of the instant case would agree to such paltry gains as against the assessee deriving huge amounts of exempt income. The same is stated to be a case of human improbability.
13. Mr. Madhusudan continues his vehement support to CIT(A)'s specific illustration in clauses A to Z. His case is that the assessee has made an attempt to evade payment of taxes than tax planning as held in hon'ble apex court's decision in Mc Dowell's case. He thereafter opposes assessee's right to sue plea by contending that it had not undertaken any step to enforce the ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 19 -
relevant development agreements. He then refers to the relevant terms in said development agreement stating to have delivered possession to the assessee despite not getting the same registered as per hon'ble apex court's decision in Suraj Lamp & Industries (P.) Ltd. case (supra), Section 17 r.w.s. 49 of the Indian Registration Act and Section 53A of the Transfer of Property Act. The Revenue's further case is that the assessee is in the business of entering into such development agreement followed by identical compensation receipts being received from the vendors concerned. Both the lower authorities therefore have rightly assessed it under the head business income regarding the impugned compensation receipts in relevant previous year. It therefore seeks to confirm the addition under challenge.
14. Next come assessee's submissions in rebuttal. Mr. Shah reiterates his argument made earlier. He pleads that the lands in question were all agricultural at the time of development agreement being executed in all three cases. Section 63 of the Bombay Tenancy & Agricultural Lands Act as applicable in Gujarat state bars such transfer of agricultural lands to a non agriculturist without getting conversion certificate from Collector's Office. The assessee accordingly explains that it could not have got the above agreements registered in view of said statutory bar. It clarifies that its possession in development agreement was in the capacity of a licensee than that covered u/s.53A of the Transfer of Property Act. Mr. Shah refers to Section 52 of the Indian Easement Act, 1882 giving limited right for development purposes only instead of full fledge possession. Mr. Shah refers to case record that there is no material therein indicating the assessee to have undertaken even a single development exercise in all the three tracts of land.
15. We afforded rejoinder opportunity to the Revenue as well. Learned Senior Departmental Representative undertook to file written submissions.
ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO)A.Y. 2009-10 - 20 -
He has indeed submitted a detailed compilation of arguments running into 10 pages thereafter once again seeking to strongly support learned CIT(A)'s action affirming impugned addition.
16. We have given our thoughtful consideration to rival submissions. We have also perused the relevant case record with able to assistance of both the learned counsel. The dispute between the parties is qua treatment of compensation receipt in question amounting to Rs.3.87crores. The assessee's case is that it is a capital receipt not taxable as business income or capital gains. The Revenue on the other hand draws support from both the lower authorities' action assessing the same as business income. The assessee admittedly is in real estate development business. It entered into the above identical verdict three development agreements with as many vendor parties followed by the latter paying it variable amounts in question totaling to Rs.3.87 crores in lieu of getting former's right to preemptive purchase or right to sue for specific performance surrendered in their favour. There is no evidence in the case file indicating the assessee to have undertaken even a single activity of development is all three parcels of land. We notice in this factual backdrop that hon'ble jurisdictional high court's decision in Baroda Cement and Chemical case (supra) holds that the amount received in lieu of such a right to sue available after a vendor breaching the relevant agreement is not an actionable claim so as to be transferred u/s.6(e) of the Transfer and Property Act giving rise to assessable capital gains. Their lordships of Calcutta High Court (supra) further reiterate the same view Mr. Madhusudan's case is that the amount in question has been rightly assessed as assessee's business income. We find no merit in the instant plea as the assessee has neither paid any consideration money nor carried out any development activity. It had merely obtained a licensee right to enter into possession into three parcels of land not creating any easement or interest ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 21 -
therein as per Section 52 of the easement law. We further observe that the assessee developer could not have entered into full fledged possession in performance of the agreement in view of statutory bar u/s. 63 of the Bombay Tenancy and Agricultural Land Act, 1948 (applicable in Gujarat state). There is no material indicating the above lands being converted to non agricultural. The same sufficiently indicates that assessee's license right existed on paper only. Hon'ble Bombay high court's decision in Manoj B. Joshi's case (supra) holds that such an amount is not to be taxed as income u/s.2(24) of the Act. This tribunal's co-ordinate bench decision in Govindbhai C. Patel's case (supra) also is of the view that an identical compensation sum as in facts of the instant case is not a business income as well since not covered under specific instances u/s.28(va) of the Act. The Revenue's stands therefore holding both development and cancellation agreements in all cases is not sustainable in view of the same unregistered documents does not carry any merit as Section 17 of the Registration Law could not have been applied in view of bar on transfer of the lands in question. We thus observe that assessee's above development license acquired in its all three agreements does not amount to part performance requiring compulsory registration u/s.17 of the Registration Act. We therefore conclude in this view of all this evidence as well as legal position that the impugned compensation amount is not liable to be treated as income u/s.2(24) of the Act nor the same is taxable as capital gain for business income being in the nature of a capital receipt.
17. We now advert to Revenue's strong effort that the assessee's modus operandi is that of entering into such development agreements in order to evade payment of taxes (supra). We find instant plea as well to be devoid of merit since the department has itself accepted vendors' so called paltry capital gains in their assessments wherein they have claimed the impugned payments made to the assessee as expenses in computation of their respective ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 22 -
income without questioning any genuineness element therein. So is the outcome of Revenue's next plea that the assessee had surrendered its right to sue without taking any legal recourse. We observe in this context with the assessee could very well be treated as an aggrieved party against its vendors' action executing sale deed in favour of third party vendees. The Revenue's argument that the cancellation document had been purchased well in advance is also not relevant since it is not mandatory that the same ought to have been purchased on the date of cancellation only. What is material in these facts is that there should be a valid document. There is no bar in stamp law that any party cannot purchase such documents in advance. The Revenue fails to quote any such rule which could be held as to have been violated in such an advance purchase of stamp papers. We find that Revenue's further argument that no prudent assessee would enter into such a transaction also does not deserve acceptance since the assessee in fact has acted as a prudent entity wherein it succeeded in excessive compensation amount not otherwise taxable being in the nature of capital receipt. We further reject Revenue's next argument that the assessee itself had shown the impugned sum as its income in its books of account in view of hon'ble apex court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (1997) 6 SCC 117 (SC) to conclude that an accounting treatment is not a determinative factor in deciding taxability of receipt.
18. The Revenue's next argument is based on the hon'ble apex court's landmark decision in Mc Dowell & Co. Ltd., Sumati Dayal and Durga Prasad More cases (supra) in seeking to treat assessee's above development and cancellation agreement to be a method employed to evade payment of tax as by adopting colorable device. We have already concluded in preceding paragraphs that assessee's above transactions are well within the four corners of law i.e. Transfer of Property Act, Indian Registration Act as well as ITA No. 212/Ahd/14 (Popular Estate Management Ltd. vs. ITO) A.Y. 2009-10 - 23 -
Bombay Tenancy & Agricultural Lands Act (supra). There is no law violated in the same. Its instant case is therefore squarely covered by the above judicial precedent(s) holding the amount received of Rs.3.87 crores as a capital receipt not assessable either as capital gains or business income. We take into account the same to conclude that the above case law quoted at Revenue's behest in seeking to pierce corporate veil is without any merit as the assessee's above transactions are genuine ones in view of our forgoing discussion. We therefore delete the impugned addition of Rs.3,87,27,804/-.
19. This assessee's appeal is allowed.
[Pronounced in the open Court on this the 29th day of August, 2017.] Sd/- Sd/-
(MANISH BORAD) (S. S. GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 29/08/2017
True Copy
S.K.SINHA
आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं धत आयकर आयु!त / Concerned CIT
4. आयकर आयु!त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद /
DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण, अहमदाबाद ।