Income Tax Appellate Tribunal - Hyderabad
M/S. Mekins Agro Products (P) Ltd, ... vs Assessee on 7 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 1687/HYD/2010
Assessment Year : 2006-07
Mekins Agro Product(P) Ltd., ... Appellant
Hyderabad.
(PAN - AAACM 9471G)
Vs.
Income-tax Officer, ... Respondent
Ward - 16(1), Hyderabad.
Appellant by : Shri S. Rama Rao
Respondent by : Shri V. Srinivas
Date of Hearing : 07/03/2012
Date of Pronouncement : 07/05/2012
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
This appeal filed by the assessee is directed against the order of the CIT(A)- V, Hyderabad dated 29/11/2010 for the assessment year 2006-07.
2. The grounds of appeal raised by the assessee are as follows:
1. The order of the learned CIT(A) is erroneous to the extent it is prejudicial to the appellant.
2. The learned CIT(A) erred in holding that the capital gain arises on the date of handing over of the constructed area and not on the date of agreement entered into. The learned CIT(A) ought to have seen that the capital gain arises on the date of development agreement and not on the date when the appellant received possession of the constructed area from the developer; alternatively the CIT(A) should have seen that the property was handed over to the appellant herein in the immediately preceding year and not during the year under consideration.
3. The learned CIT(A) erred in holding that the entire sale consideration is taxable for the year under consideration. The learned CIT(A) ought to 2 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
have considered the facts that (a) development agreement was entered into much earlier (b) a part of the constructed area was sold in the immediately preceding year; and (c) a part of the balance only is sold during the year.
4. The learned CIT(A) erred in holding that the advances received aggregating to Rs 1,76,36,255/- also forms part of sale consideration.
5. The learned CIT(A) ought to have seen that in the process of computing the capital gain what is to be taxed is the cost of constructed area handed over to the appellant as reduced by the cost of the property provided to the developer.
6. The learned CIT(A) ought to have seen that the amount of advance received should not form part of the subject matter of capital gain particularly when the amount of advances received by the appellant from the developer would never be the part of the capital gain, when capital gain has to be worked out with reference to the constructed area received.
7. The learned CIT(A) erred in holding that the capital gain has to be assessed on the sale consideration of Rs 4,15,33,255/- The learned CIT(A) ought to have seen that there are two stages of working out the capital gain. The first stage is when the development agreement was entered into and the second one is at the time of transfer of the property received from the developer. He should have directed the Assessing Officer to consider the capital gain taking into account the actual consideration received on the sales effected during the year.
8. The learned CIT(A) ought to have seen that the next stage of capital gain arises only when the constructed area is sold and, therefore, the CIT(A) ought to have not accepted the method of working out of the capital gain by the Assessing Officer.
9. The learned CIT(A) ought to have given a direction that stamp duty charges would form part of the cost of acquisition of the land and the cost of demolition also has to be considered for the purpose of determining the capital gain.
10. The learned CIT(A) erred in confirming the action of the Assessing Officer in applying the provisions of sec 50C of the IT Act with reference to the flats sold. The CIT(A) ought to have seen that when an objection is raised the Assessing Officer can not ignore the provisions of sec 50C while ascertaining the market value from the valuer.
11. The learned CIT(A) ought to have seen that merely there is a difference between the sale consideration and Registrar's value the provisions of sec 50C can not be applied with reference to the valuation report.
12. The learned CIT(A) erred in holding that there is understatement of the sale consideration and further erred in confirming the addition made of Rs. 18,55,000/- by the Assessing Officer . The learned CIT(A) ought to have seen that the said amount is included in the advances.
13. The learned CIT(A) erred in confirming the action of the Assessing Officer in estimating the cost of closing stock without considering the fact that the closing stock cannot be added while determining the income under the head "Capital Gain".
3 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
3. The facts are that the Assessee is engaged in the business of manufacture and supply of storage equipment and agricultural implements. For the financial year 2005-06 relevant to the current asst. year the appellant admitted total sales of Rs 10,55,78,008/- The Assessing Officer noticed that the total sales included an amount of Rs 415,33,255/- as receipts from sale of floor space. Moreover there was a variation in the opening stock of the current year vis a vis the closing stock of the earlier period. It was found that the appellant had debited Rs 18,77,094/- towards demolition expenses and Rs 39,35,394/- towards cost of land under the head opening stock.
4. The Assessee had two properties shown as capital assets in its books of account, These properties were given for development in the year 2001-,2002 etc and the developed properties were received back in the current financial year and were also sold. Details of these properties are quoted from the order of the assessing officer as below:
A) Property bearing no 6-3-1090/B/1 & 2. Raj Bhavan Road, Hyderabad admeasuring 1156 sq. yards(acquired in 1995 and 2990) which was given for development to M/s Maheshwari Plaza Resorts (P) Ltd for construction of multi stored complex by name Mayank Plaza. Vide development agreement dt 16.3.2001 and supplementary deed dated 23..2002. As per the terms of the agreement the assessee received 50% of the built up area and parking space of the developed property i.e. 9650 sq. feet of built up area floor space to his share which has been sold by him completely during the year under consideration.
B) Property bearing ni 6-8-866/A Greenlands Road, Begumpet Hyderabad admeasuring 1011 sq. yards (acquired in June 1992) which was given for development of a multi storied complex by name Mayank Towers to M/s Vasundhara Devi Estates (P) Ltd vide development agreement dt 29.3.1995 and MOU dated 11.9.1999 and 27.8.2001 As per the terms of the agreement the assessee received 50% of the built up area and parking space of the developed property i.e. 19136 sq.ft of built up area floor space to his share 4 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
of which 9443 sq. was sold in the financial year 2004-05 but the receipts there from are admitted in the year under consideration
5. The assessing officer held firstly that two transactions took place with respect to transfer of assets:
(1) The first transaction took place when the appellant gave its lands to the builders and received back the built up area in lieu of surrender of 50% of the land to the builder. In other words the appellant gave 50% of its lands to a builder and in return received consideration in the form of built up buildings on its portion of the land, This sale of 50% of the lands was the first transaction. As per the assessing officer, this transaction took place in the financial year 2005-06 when the constructed area was handed over to the appellant by the builders.
(2) The second transaction of sale also took place in the current asst. year when the appellant sold the build up area to various persons.
6. As per the assessing officer on both these transactions capital gain arose in the hands of the appellant. The appellant argued that the transactions were in the nature of business and could not be placed under the head capital gain. However in its own written submissions filed during appeal proceedings the appellant admitted that it had no objections to treating the transactions as capital gains and not as business income. The following is extract from the written submissions.
7. The assessing officer held that the receipt on sale of the constructed area is taxable as capital gain and not under the head business The appellant has no dispute with regard to this decision taken by the assessing officer. The appellant submits that the amount is taxable only as capital gain and not as income from business. Both the assets were held as capital assets of the appellant herein and do not represent the stock in trade of the appellant. The appellant herein is not in the business of real estate and therefore the assessing officer rightly concluded that the income is assessable under the head capital gain.
8. The assessing officer quantified the sale consideration and the cost of acquisition as below:
5 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
Sale consideration: Having held that the receipts are on account of transfer of capital assets it is necessary to quantity the sale consideration. The break up for the receipts admitted from the floor space is as under; A Mayank Plaza:
Sale of floor space Rs 1,12,52,000
Amount received from developer Rs. 1,44,36,255
B. Mayank Towers:
Sale of floor space Rs. 1,26,45,000
Rs. 4,00,000
Amount received from developer Rs 28,00,000
---------------------------
Total Rs.4,15,33,255
-------------------------
9. As per the terms of the agreement the assessee was entitled to and also allotted 50% of the built up area in both the projects i.e. 9650 sq.ft and 19136 sq.ft. However the assessee has admitted only receipts from sale of floor space as consideration. Since there is exchange of land with constructed area for the purpose of computation of capital gains we have to consider the value of unsold area also as a receipt this is because transfer includes exchange in exchange for the land assessee received built up area. Therefore for the purpose of computation of capital gains the value of unsold area is also to be included in the consideration received. Hence the value of unsold constructed area of 9693 sq.ft. (19136 -9443 sqft) of Mayank Towers is also taken into consideration as a receipt for the land surrendered to the developer in lieu of the built up area. The assessee was therefore asked to offer his explanation if any to the above and also to furnish the cost of construction per square feet. However the assessee has not filed any explanation in this regard Therefore adopting the cost of construction at the average rate sft on the basis of the sales made by the assessee during the year as per the sale deeds (details of some of the deeds are discussed in the para (iii) below) the cost of unsold built up area is worked out at Rs 900/ per sq.ft and value of 9693 sqft @ Rs 900/- per sq.ft works out to Rs 89,36,946/- which is also taken into account as consideration received. Hence the AO added Rs 89,36,946/-.6 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
10. Invoking of provisions of sec 50C, the AO observed that on verification of the sale deeds in respect of the sale made by the assessee AO noticed that in some of the deeds the market value on which and deficit stamp duty has been paid is higher than the sale consideration admitted. In view of the discrepancy in the registered value and market value as detailed above the provisions of sec 50C are invoked. The assessee was asked to explain why the provisions of sec 50C should not be applied to the sale receipts However the assessee did not file any explanation Therefore AO added the difference amount of Rs 928,951/- (1.08,91,550 -99,62,549) as consideration received for computing the capital gains.
11. Understated sale consideration:
As verified from the sale deed 2266/04 dated 27.8.2004 in respect of sale of ground floor of Mayank Towers to Sri GK Krishna Chaitanva and Ms G, Anusha the sale consideration received by the assessee is Rs 50,00,000 against which admitted is only Rs 31,45,000. The assessee was asked to explain why the difference of Rs 18,55,000 was not admitted as receipts In response assessee stated that it has received only Rs 31,45,000 which has been admitted by it. However in view of the payments mentioned in the deed the difference amount of Rs 18,55,000 received by the assessee was also taken into account as consideration received for computing the capital gain.
12. Cost of acquisition: Having held that the receipts are subject to long term capital gain the assessee is allowed indexation on the cost of acquisition However the demolition expenses of Rs 18,77,094 claimed by the Assessee was not added to the cost of acquisition. On verification of the ledger accounts it is found that this amount represents write off of depreciation claimed in earlier years on office buildings which were demolished prior to giving of the lands for development Since the cost of acquisition is inclusive of the cost of building the question of allowing deduction towards depreciation written off or demolition expenses separately does not arise Therefore the same is net added to the cost of acquisition.
7 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
13. In view of the above discussion the income from capital gains is computed as under:
Receipts admitted by the assessed Rs 4,15,33,255
Value of 9693 sq.ft of constructed Rs 89,36,946
Addition as per sec 50C Rs 9,28,951
Understated sale consideration s 18,55,000
---------------------
Total sale consideration Rs 5,33,13,301/-
Less: Indexed Cost of acquisition Rs. 90,72,922
--------------------
Long term Capital Gain Rs.4,42,40,379
------------------------
Aggrieved by the order of the AO, the assessee carried the matter in appeal before the CIT(A).
14. In appeal proceedings before the CIT(A), the Assessee argued that the first stage of capital gain arose on the date of entering into the development agreement and not on the date when the built up area was received back. Therefore it was contended by the appellant that the first stage of capital gain was assessable in the asst. years relevant to the two dates i.e. 29.3.1995 and 3.8.2000. Further the appellant also stated that the cost of construction to the developer was only 400 per sq.ft. and that should be taken. The important portions of the written submissions of the appellant are as below:
15. The only income that becomes liable for taxation is the capital gain that is to be arrived at on sale of constructed area handed over by the developer. For this purpose the sale price is to be taken into consideration and therefore the cost of construction as admitted by the builder and the cost of the balance of land left with the appellant herein is to be reduced from such sale price for arriving at the capital gain. The said working is provided hereunder:8 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
Second stage:
Sale price of Begumpet land Res 1,12,52,000
Less: Cost price ½ for land 27,32,965
+(9650 x 750 )constructed area 72,37,500
--------------
99,70,465 99,70,465
Capital gain 12,81,535
Sale price of Rajbhavan land 1,26,45,000
Less:Cost price 9443 x 23,20,130
19136
Cost of land 11,44,909
(9443 x 400)cost 37,77,200
Of constructed area -------------
49,22,109
-----------------
77,22,891
Capital gain in the second stage ----------------
90,04,426
16. As against the above, the assessing officer worked out the capital at Rs 4,42,40,379 for this purpose the assessing officer adopted the receipts at Rs 415,33,255 mentioning that the said amount is admitted by the appellant herein.
The appellant is submitting the details of the sale price:
1. Sale price received from Begumpet property Rs 1,12,52,000
2. Sale price received from Rajbhavan property Rs. 1,26,45,000
3. Advance received from vasandaradevi Estates &Jyothi Bio energy Ltd Rs. 32,00,000
4.Advances received from Maheswari Plaza Rs 1,44.36,255
------------------------------
Rs.4,15,33,255
---------------------------
9 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
1. Vasundaradevi estates P.Ltd Rs 28,00,000
2. Jyothi Bio energy Ltd 40,00,000
3. Advance received from .
Maheswari plaza 1,44,36,255
---------------------
1,76,36,255
17. This should not have been added to sale consideration by the assessing officer for arriving at the capital gain if this amount is reduced the total receipt works out to only Rs 238,97,000 The said amount in fact is received by the appellant herein as Rs 1,12,52,000 for the sale of Begumpet property and Rs 1,26,45,000 through Rajbhavan properties. Only to this extent sale price is to be considered for arriving at the capital gain Instead the assessing officer considered even the advances received by the appellant here> Therefore the assessing officer ought to have taken into consideration the correct amount of sale consideration after excluding the advances received.
18. The assessing officer while working out the capital gain added the closing stock value of 9693 sq. area left unsold with regard to the Rajbhavan Road property. The appellant humbly submits that the stock remaining can not be added by the assessing officer. The question of arriving at the closing stock arises only while working the business income and when the appellant incurred expenditure for the purpose. Further the said amount is assessed as the capital gain and the cost of construction is already included in the first stage of capital gain, Therefore unless the said area is sold no gain is derived Further the appellant has not incurred any expenditure in acquisition of the said property and therefore no closing stock can be considered Further in so far as the constructed area is concerned the same is a capital asset and can not be taken as the closing stock. Therefore the assessing officer is not justified in adding the closing stock value.
19. In view of the above the appellant humbly submits that the assessing officer is not correct in adding Rs 89,36,946/- as the closing stock value.
10 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
20. The assessing officer also added Rs 928,951/- by applying the provisions of sec 50C of the IT Act, The assessing officer is of the view that with regard to some of the properties the market value fixed by the registrar is more than the value admitted. The assessing officer applied the provisions of sec 50C taking into account the market value of the same. The appellant humbly submits that the market value of the property is much less than the value fixed by the sub registrar Further the value fixed by the sub registrar is not disputed the appellant further submits that the assessing officer when ever a dispute arises with regard to market value between the figure of the sub registrar and the sale consideration. The assessing officer should refer the matter to the valuation cell and the assessing officer did not refer the same to the valuation cell to arrive at a figure of Rs 1,08,91,500/- as against Rs 99,62,549/- Therefore the appellant humbly submits that the said addition should not have been made by the assessing officer.
21. The assessing officer also added understated sale at Rs. 18,55,000/- According to the assessing officer the sale of ground floor of Mayank Towers to Sri GK.Krishna Chaitanya and ms G,Anusha the sale consideration received is Rs 50,00,000 against which the appellant admitted only Rs 31,45,000 Therefore the assessing officer added Rs 18,55,000 The appellant humbly submits that the said amount is adjusted against advance received As the assessing officer considered the advance received separately the appellant submits that the assessing officer is not correct in making the addition. If the advances of Rs 176,36,255/- are deducted this amount of Rs 18,55,000/- may be added.
22. During the course of appeal proceedings the appellant gave written submissions and the following additional grounds:
1. The Assessing Officer erred in adopting the receipts on sale of plots at Rs 4,15,33,255/- as against the actual sale consideration of Rs 2,38,97,000/- The Assessing Officer ought to have seen that the said amount adopted by him includes the advances received of Rs 1,76,36,255/-11 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
2. The Assessing Officer erred in taxing the capital gain arising because of the development agreement entered into for the asst. year 2006-07 The Assessing Officer ought to have considered the fact that the development agreement were entered into in the years 1995 and 2000 and therefore they become liable for taxation of capital gain in the respective asst. years and not in the asst. year 2006-07.
23. Being legal grounds touching the very basis of the additions made these additional grounds are hereby admitted. The written submissions and additional grounds of appeal were sent to Assessing Officer for a remand report. The Assessing Officer submitted the remand report on 24.5.2010. The Remand report was again confronted to the appellant who in reply filed its counter submissions. After considering the submissions of the assessee and the remand report obtained from the AO, the CIT(A) held as under:-
"I have considered carefully the arguments the counter arguments and all the facts of the case. Firstly what has to be decided is whether the capital gains arise in two stages or in one stage and at what stage are the capital gains to be assessed to tax. As per section 2(47) of the IT Act the term transfer with resect to a capital asset is defined as below:
Sec 2(47) transfer in relation to a capital asset includes
(i) The sale exchange or relinquishment of the asset or
(ii) The extinguishment of any rights therein or
(iii) The compulsory acquisition thereof under any aw or
(iv) In a case where the asset is converted by the owner thereof into or is treated by him as stock in trade of a business carried on by him such conversion or treatment (or)
(v) The maturity or redemption of a zero coupon bond or
(vi) Any transaction involving the allowing of the possession of any immovable property 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 1882 (4 of 1882) or
(vii) Any transaction (whether by way of becoming a member of or acquiring shares in a co operative society company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property
(viii) Explanation for the purposes of sub clauses (v) and (vi) immovable property shall have the same meaning as in clause (d) for section 269UA.12 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
A plain reading of the above would indicate that with respect to land transfer clearly implies any of the aforementioned conditions. In other words an immovable property like land can be said to be transferred either when a deed of conveyance is executed or when the possession is transferred in part performance of a contract as per sec 53A of the transfer of property act In other words when the right to enjoyment of property is effectively given to other party the property can be said to be transferred If a person owns a piece of land and wants to build a shopping complex on it he has the option of either building it himself or giving a contract to a professional builder to do the same . For this purpose the so called handing over of the piece of land to the contractor does not tantamount to transfer of land. No possession or ownership is transferred once the contractor builds the shopping complex on the land the original owner of the land continues to own the land. With regard to the built up area he has an option to pay cash to the builder or he may transfer some other land which he owned to the builder in lieu of the cash provided this other land has the same value as the cost of construction, The net effect in the above transaction is that the person in question has got an area built. In case the payment has been made through sale of another land then the only sale transaction in question is the sale of this other land. In my conclusions drawn above I am fortified by the decision of the Hon'ble ITAT in the case of Smt.Vasavi prapat Chand vs Dy. CIT (2004 089 ITD 0073, (2004/ 090 TTJ TT) 0217.
The next question is as to at what point of time the land was transferred and at what consideration since the same would be relevant for determining the cost of acquisition of 56 per cent of built up area. Admittedly no conveyance deed has been executed by the assessee from the nature of the agreement it is clear that assessee was bound to transfer the land after the possession of built up flats was given by the builder to the assessee We have been informed that possession of flats was given in financial years 1991-92 though no material is placed before is. Assuming the same to be correct it is held that there was simultaneous transfer of possession of 44 percent of land by the assesses to the builders and possession of 56 percent of built up area by the builder to the assessee in financial year 1991-92 un terms of section 2(47) of the IT Act 1961 read with sec 53A of Transfer of property act. Hence the contention of the assessee counsel that land was transferred on the date of collaboration agreement is rejected.
AS FAR as consideration part is concerned we are of the view that value of 44 percent of land was equal to the cost of construction of 56 percent built up area. The sale consideration to the seller and the cost of acquisition to the buyer are two sides of the same coin. Both the parties to the agreement knew as to what was being transferred and what was being received In the case of exchange the price of both the assets would be the same. So when the assesses had agreed to transfer 44 percent of land. It must have kept in mind the value of construction of 56 percent of built up area. Therefore we are of the considered opinion that consideration for the transfer of 44 percent land was the cost of construction of 56 percent built 13 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
up area which was to be incurred by the builder This very sum would also amount to investment by assessee in the construction of flats and therefore the cost of construction of the flats and therefore the cost of construction of the flats by the builder would also amount to the cost of acquisition of the flats by assessee.
From the above discussions it emerges that the first stage of capital gains arises in the year in which the appellant effectively parts with its right to enjoy a portion of the property in other words on the date of the memorandum of understanding, If the appellant hands over its entire property to a builder it cannot be said that sale has taken place on that date this handing over of possession does not entitle the builder to enjoy a portion or whole of the property. This is done only to allow the construction to take on the property the builder or the purchaser of the land acquires the right to enjoy the property it has purchased only when it has paid consideration for the portion of the property and has obtained legal rights to enjoy the property it has purchased in the current case When the constructed area is handed back to the appellant by the builder at that stage the builder obtains the right to enjoy 50% of the property which it has got in lieu of the construction, The transfer takes place on that date. This is the mandate of the ratio discussed above. Therefore in the case of the appellant transfers with respect to both the properties took place in the current asst. year i.e. when the builders handed over the built up area and as a result received the right to enjoy their portions on the properties This decides additional ground no 2 in favour of the revenue.
Coming to the additional ground no 1 the appellant stated that the amount of receipts i.e Rs 4,15,33,255/- included an amount of advance received from various parties to the tine of Rs 1,76,36,255/- However during appeal proceedings the appellant did not provide any concrete evidence as to the nature of advance. On the other hand the assessing officer verified the facts during remand proceedings and reported as under:
The next ground of appeal is regarding the sale consideration. The assessee's argument is that the under mentioned amounts are deposits received from and are refundable to the developers.
28,00,000 Vasundaradevi estates pvt. Ltd., 4,00,000 Jyothi Bio energy Ltd 1,44,36,255 Advance received from Maheswari Plaza Resorts Ltd 1,76,36,255 However on verification of the balance sheet and scheduled thereto filed by the assessee for the AY 2006-07 it is noticed that these amounts are not reflected as liability to the assessee. Further on verification of the return of income and schedules thereto filed by M/s Maheswari plaza Resorts Ltd there is no such amount as receivable from the assessee further as M/sVasundaradevi Estates P. Ltd has not filed its return of income for the relevant year the assessee was asked to provide the assessment particulars 14 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
and copy of final accounts for the relevant year to verify the claim which the assessee has not been able to provide.
The assessee vide its written clarification filed on 17.5.2010 has stated that the advances have been transferred to sales account pending ratification under building regularisation scheme to MCH.
From the above facts it is very clear that the argument regarding treatment of the aforementioned amounts as advanced is clearly an after thought meant only to reduce the tax liability Firstly this argument did not appear during assessment proceedings when the appellant ought to have known that a portion of the sale consideration is in advance. The assessing officer has rightly pointed out that the so called advances are not reflected in the balance sheet and even in the schedules to the balance sheet no such information exist. Even the parties who are supposed to have advanced this money to the appellant had not shown the same in their returns of income. Moreover the properties in question had been handed over to all the parties or were in the process of handing over from these facts it is clear that there were no advances in question The assessing officer has rightly considered the sale consideration at Rs 4,15,33,255/- The first additional ground of appeal is also decided in favour of revenue.
Coming to the original grounds of appeal grounds nos 1 and 11 are general in nature and ground no 10 is only consequential in nature. Ground no 9 has already been decided by me in para 5.3.1. above.
Ground no 2 relates to the consideration by the assessing ofsfficer of adding the cost of unsold area to the total cost. In this regard the assessing officer has held as already discussed that there were two sale transaction,. The first transaction involved the sale of 50% of the land area to the builders instead of cash the appellant received built up area on its 50% portion of the land. The assessing officer considered this amount to be a receipt in the hands of the appellant. This issue has already been discussed in detail in this order. It has already been held that the first stage of capital gains arose when the land was transferred in lieu of the built up area. Therefore the assessing officer is absolutely correct in holding that the entire value of the built up area whether sold or unsold is the sale consideration in lieu of 50% of the land This ground of appeal is accordingly decided in favour of the revenue.
b. With respect to the demolition charges the assessing officer verified the issue during assessment proceedings and has given a finding that this amount represents write off of depreciation claimed in earlier years on office buildings. Since the demolition charge is essentially a write off of depreciation. I agree with the assessing officer that the same cannot be allowed as part of acquisition of land. I hold that the assessing officer has rightly not added the demolition charges to the cost of acquisition of land.15 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
c. The fourth ground of appeal deals with the adoption of value of Rs 900/- per sq.ft. with regard to coat of construction the appellant has contended that this value is incorrect and the cost of the construction to the builder was only Rs 400/- per sq.ft. I find from the assessment order that the assessing officer has adopted the cost of construction at Rs 900/- per sq.ft. on the basis of the sale deeds with respect to the portions of constructed area sold by the appellant He has stated that since the constructed area was sold by the appellant at Rs 900/- per sq.ft the cost of unsold constructed area should also be calculated @ Rs 900/- pr sq.ft. On the other hand the appellant contended during appeal proceedings that this was not correct because the cost to the builder was Rs 400/- per sq.ft. only further it was on the basis of these calculations that the area of the land to be given to the builder in lieu of the construction was calculated.
I have considered the arguments and facts carefully, There is no doubt that the sale price of constructed area cannot be equated to the cost of construction This would imply that the profit from the sale of constructed are is zero. The first stage of capital gain as already discussed arises on the transaction of sale of 50% of the land and receiving constructed buildings in lieu of cash Therefore it is only logical that the value of the land sold be equal to the cost of construction of the building to the builder because it is in lieu of this cost that the builder has obtained a portion of the land Given these facts I hold that the assessing officer should adopt the cost of construction and not the sale price of Rs 900/- per sq.ft. for calculation of capital gains. The appellant has mentioned that the cost of construction was about Rs 400/- The assessing officer is directed to adopt the exact cot of construction and not Rs 900/- per sq.ft.
Ground no 5 deals with the application of section 50C on the sale of constructed property by the appellant leading to an addition of Rs 928,951/- During assessment proceedings the assessing officer clearly brought out the difference between the market value of office space sold as per the sale deed vis a vis the lower rate admitted by the appellant as below:
Invoking of provisions of sec 50C On verification of the sale deeds in respect of the sales made by the assessee it is noticed that in some of the deeds the market value on which and deficit stamp duty has been paid is higher than the sale consideration admitted. The details of the same are tabulated hereunder: Name of the complex and the purchaser: Mayank Towers Jyothi Bio Energy td: Office space 4 x& 5 1915+126 sq.ft.Regd.value Rs 18,80,804 Market Value Rs 21,02,500/--
CG. Mohan Rao Office space 1 1540 sq.ft. Regd.Value 15,12,500 Market value Rs 16,63,500 N.Padma Rao Office space 2 1066 sq.t. Regd.Value 10,46,965 Market value 11,51,500 N.Bhaskar Rao Office space 3 1079+126 sq.ft. Regd.value 10,59,780 Market value 11,98,500 16 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
G.Appala Raju Office sace 501 1055 sq.ft. Regd value 11,60,500 market value 11,95,500 Mayank plaza Jayesh Kumar Shop no 5,LG 750 sq.ft. Regd value 8,00,000 Market value 8,10,000 Thakrar Mrs.Saleema Shop no. 3 LG 750 sq.ft. Regd,Value 12,51,000 market value 13,85,000 Jayesh Manilal Mashru shop no. 4 LG 750 sq.ft. Regd.value 12,51,000 Market value 13,85,000 Total Regd,value 99,62,549/- Market value Rs 1,08,91,500 It is clear from above that there was a difference of Rs 9,28,951/- since the appellant could not offer any explanation the assessing officer invoked the provisions of sec 50C. During appeal proceedings the appellant stated that the properties were mortgaged to bank and there was a slump in the real estate business and the floor space was located at the back side of the building Therefore the sales were made at discounted price I do not find merit in the arguments of the appellant because sec 50C is very clear in the way such transaction to be assessed.
I find clearly that the situation and the conditions demand the application of sec 50C which has been rightly done by the assessing officer Additions on this account are confirmed.
The sixth ground of appeal relates to the understatement of sale consideration by Rs 18,55,000/- and making the resultant addition by giving the following reasons:
Understated sale consideration:
As verified from the sale deed (2266/04) dated 27.8.2004 in respect of sale of ground floor of Mayank Towers to Sri GK. Krishna Chaitanya and Ms. G Anusha the sale consideration received by the assessee is Rs 50,00,000/- against which admitted is only Rs 31,45,000/- The assessee was asked to explain why the difference of Rs 18,55,000/- was not admitted as receipts. In response assessee stated that it has received only Rs 31,45,000/- which has been admitted by it. However in view of the payments mentioned in the deed the difference amount of Rs 18,55,000 received by the assessee is also taken into account as consideration received for computing the capital gains.
During appeal proceedings the appellant only reiterated its stand taken during the assessment proceedings, It was stated that no doubt the total consideration received was Rs 50 lakhs as mentioned in the sale deed. However an amount of Rs 18.55 lakhs had ben earlier received as an advance by the appellant and had ben accordingly adjusted from the consideration received later.
I have considered carefully the facts and arguments and I find that the contention of the appellant is not substantiated through any evidence The 17 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
appellant has failed to show the cheque no through which the so called advance was given by the purchasers of the property. The appellant has also not able to co relate the advances received by it if any to the payments stated to have been received. Therefore in the absence of any evidence to support the claim I agree with the decision of the assessing officer that there were no advances received and no adjustments made Rather the entire amount of Rs 50 lakhs was received by the appellant while it has disclosed only Rs 31,45,000/- The balance of Rs 18,55,000/- has been rightly added by the assessing officer.
The seventh and eight grounds of appeal relate to the demolition chares This issue has already been adjudicated upon in this order.
In the result the appeal is partly allowed."
Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
24. We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. The facts are that the Assessee had two properties. These properties were given for development in the years 2001,2002 etc. The developed properties were received during these years and were also sold. The AO and the CIT(A) has brought to tax the capital gains arising from both the transaction viz., the development as well sale of the developed areas handed over to the Assessee. In our opinion that capital gains arising out of the development of the land on the basis of an agreement in 2001 and 2002 cannot be taxed in this year. The Assessee had given possession of the land and the developer has also commenced construction on the same from those years. In the following cases, the coordinate bench of the Hyderabad Tribunal in the case of Potla Nageswara Rao in ITA Nos. 1519/Hyd/2011 and others vide order dated 22/03/2012, held as follows:
"9. In the instant case, on 7.3.2003 an agreement was entered into by the assessee with M/s. Bhavya Constructions Pvt. Ltd., and the plan of the building was approved on 31.3.2003. These dates fall in the previous year 2002-03, relevant to assessment year 2003-04. Thus, in this case, the land being capital asset was transferred by the assessee to the developer during the assessment year under consideration, viz.
2003-04, for construction and it is enough if the assessee has received the right to receive consideration on a later date, so as to attract exigibility to tax on capital gains during the year under appeal. Mere accrual of the consideration, as it is to be received in the subsequent years does not defer the taxability of the capital gains. The assessee 18 ITA NO. 1687/Hyd/10 M/s Mekins Agro Product (P) Ltd.
being owner of the capital asst, having parted with the possession of the land under a joint development agreement, for construction of residential flats/villas and having handed over the possession of the vacant land to the developer on promise to be handed over four flats equivalent to 40% of the value of the property to be constructed, it was a clear case of transfer by exchange within the meaning of S.2(47)(i) of the Act. Property was handed over in part performance under S.53A of the Transfer of Property Act, and it could not be said that the transaction was without consideration. The possession of the land having been handed over to the developer in the assessment year under consideration, the transfer takes place in the assessment year under consideration only, and consequently the assessee is liable to be assessed to tax in relation to the capital gains in the year under consideration itself. For this purpose, we place reliance on the decision of the coordinate Benches of this Tribunal in Smt. Maya Shenoy V/s. ACIT (2009)124 TTJ(Hyd) 692). We also find support in this behalf, from the judgment of the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkaddas Kapadia V/s. CIT (260 ITR 491), wherein it has been held that S.2(47)(v) read with S.45 indicates that capital gains was taxable in the year in which such transactions were entered into even if the transfer of immovable property is not effective or complete under the general law. We also place reliance in this behalf on the ruling of Authority for Advance Rulings in Jasbir Singh Sarkaria In Re (294 ITR 196(AAR), to the following effect -
In order to be 'transfer' within the meaning of cl. (v) ofs.2(47), there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. Secondly, such taking or retention of possession as is well known is a facet of the equitable doctrine of part performance of contract falling within the scope of S.53A of the Transfer of Property Act. The legislature advisedly referred to "any transaction" with a view to emphasize that it is not the factum of entering into agreement or formation of contract that maters, but it is the distinct transaction that gives rise to the event of allowing the contractee to enter into possession that maters. That transaction is identifiable by the terms of the agreement itself and it takes place within the framework of the agreement.
We may also refer in this behalf to the decision of the Hon'ble Karnataka High Court in the case of CIT V/s. Dr.T.K.Dayalu (202 Taxman 531), wherein it has been held that it is well settled position by now that the date on which possession was handed over to the developer is relevant for determination of the year in which the capital gains are assessable to tax. In this view of the matter, we find no merit in the contentions of the assessee that there is no taxability of capital gains in the year under appeal. We accordingly reject the grounds of the assessee on this issue."
19 ITA NO. 1687/Hyd/10M/s Mekins Agro Product (P) Ltd.
25. Hence, respectfully following the decision of the coordinate bench in the case of Potla Nageswara Rao, where the JM was the Author of the order, we are of the opinion that in case of development agreement which were executed the capital gains cannot be postponed. In these circumstances the profits/ capital gains arising from development of the land cannot be brought to tax this year, except to the extent the Assessee himself has offered for Tax in his return. Only the profits accrued on the sale of the built up area during the year shall be subject to tax. The AO is directed to compute the profit arising from sale of the built up area, together with undivided interest in land if any, made during the year under appeal. The addition made by the AO in respect of unsold area cannot be sustained as only profits arising from land and building transferred can be brought to tax. As regards the addition of Rs. 18,55,000/- the explanation of the Assessee is not clear. As the other issues have been set asided to the file of the Assessing officer this issue is also set aside to the files of the AO redoing it de novo after giving reasonable opportunity to the assessee. The AO will consider the applicability of sec 50C and if he feels that the provisions are applicable, he may refer to the Valuation officer for determining the market value- as required in that section. With the above directions, we set aside order of the CIT(A) and restore the issues to the files of the AO for re-computing the income after giving reasonable opportunity of hearing to the Assessee.
26. In the result, the appeal of the Assessee is treated as allowed for statistical purposes.
Pronounced in the open court on 07/05/2012.
Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 7 th May, 2012
kv
20 ITA NO. 1687/Hyd/10
M/s Mekins Agro Product (P) Ltd.
Copy to:-
1) M/s Mekins Agro Products (P) Ltd.,
C/o S. Rama Rao, Advocate, Flat No. 102,
Shriya's Residency, Road No.9,
Himayat Nagar, Hyderabad
2) DCIT, Range 16(1), Hyderabad
3) The CIT (A)-V, Hyderabad
4) The CIT-IV, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad