Income Tax Appellate Tribunal - Chennai
Prime Urban Development Of India Ltd., ... vs Assessee on 27 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI
BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENT AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
ITA No.1795(Mds)/2012
Assessment Year : 2009-10
M/s. Prime Urban Develop- The Income-tax Officer,
ment India Ltd., Ward I(4),
110-Avinashi Road, Vs. Tirupur.
Gandhi Nagar Post,
Tirupur-641 603.
PAN AABCP9571D.
(Appellant) (Respondent)
Appellant by : Shri K.Ravi, Advocate
Respondent by : Dr. S.Moharana, IRS, CIT
Date of Hearing : 27th November, 2012
Date of Pronouncement : 14th December, 2012
ORDER
PER Dr.O.K.NARAYANAN, VICE-PRESIDENT This appeal is filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order passed by the Commissioner of Income-tax(Appeals)-II at Coimbatore on 27-9-2012. The appeal arises out of the
-2- ITA 1795 of 2012 assessment completed under section 143(3) of the Income-tax Act, 1961.
2. The assessee is a company traditionally engaged in manufacturing and trading of yarn and garments. The assessee- company filed its return of income for the impugned assessment year on 29-9-2009. The assessee returned nil income. In the previous year relevant to the assessment year under appeal, the assessee-company closed down its textile mill and withdrew from its traditional business. Instead, the assessee-company opted for realty business utilizing the precious land available with it. The textile mill of the assessee is situated in the heart of Tirupur City. The area measures around 25 acres. Therefore, as a better business proposition, the assessee commenced the process of converting the factory land into residential and commercial complex. This development is contemplated in a phased manner. In the previous year relevant to the assessment year under appeal, the assessee had completed its first project of construction of multi-storeyed residential apartments. An area of about 5 acres have been utilised for the above residential project. Thereafter, the assessee was proceeding to develop the
-3- ITA 1795 of 2012 remaining extent of land measuring 19.36 acres. This development is again contemplated in two phases, i.e. phase-I and phase-II. The income received by the assessee during the relevant previous year included the consideration received for sale of the undivided share of land utilized for constructing the multi-storeyed residential apartments and the consideration received for development rights available on the remaining land assigned for phase-I and phase-II development.
3. In the course of scrutiny assessment, the Assessing Officer found that the assessee had transferred the undivided share of land to the flat owners at rates far below the stamp duty value adopted for registration. According to the assessee, the undivided share in the land was sold at the rate of ` 1,186/- per sft. At the same time, the guideline value was ` 2,995/- per sft. The Assessing Officer found that the long-term capital gain offered by the assessee-company on transfer of the undivided share in the land to flat owners is ` 82,60,197/-, worked out on the basis of the sale consideration admitted by the assessee. When section 50C of the Act is applied and the guideline value is adopted, the Assessing Officer found that the long-term capital
-4- ITA 1795 of 2012 gain should be worked out to ` 2,39,16,169/-. The difference comes to ` 1,56,60,748/-.
4. As per the development agreement entered into between the assessee and M/s. Prime Developers, the ultimate buyers of flats paid the consideration for their shares of right in the undivided land directly to the assessee-company, i.e., the sale of land has been arranged as concluded between the assessee and the flat owners directly. In addition to that, M/s. Prime Developers had to pay 14% of the total contract receipts received by them to the assessee. The Assessing Officer found that the assessee had accounted for the consideration directly received from the flat owners, but has not accounted for the 14% of the contract receipts to be received from M/s. Prime Developers. The assessee is also a partner in M/s. Prime Developers and the company has admitted a share income of ` 1,93,56,349/-, which has been claimed as deduction under section 10(2A) of the Act. The Assessing Officer found that the assessee has not admitted any income by way of 14% of the contract receipts. The Assessing Officer found that the total contract receipts was ` 15,10,13,781/- and 14% of the said
-5- ITA 1795 of 2012 amount works out to ` 2,11,41,929/-. The Assessing Officer held that this amount of ` 2,11,41,929/- is also to be added to the income of the assessee for the impugned assessment year 2009-10.
5. Further, the assessee has admitted a business income of ` 30.50 crores in the nature of consideration received by the assessee for transfer of development and FSI rights in respect of the land assigned to phase-I and phase-II development project. The assessee-company explained that the total sum of ` 30.50 crores was received from M/s. New Line Buildtech Pvt. Ltd., a firm based at Delhi. According to the assessee, these payments were received against transfer of development and FSI rights and as per the accounting policy followed by the assessee, the said receipt of ` 30.50 crores has been treated as business income of the assessee company. The Assessing Officer examined the various clauses impregnated in the agreement entered into between the assessee-company and M/s. New Line Buildtech Pvt. Ltd., New- Delhi. On an analysis of the various clauses examined by him, he came to the conclusion that the settlement of sale of
-6- ITA 1795 of 2012 development and FSI rights is only a colourable exercise carried out by the parties to get away from the liabilities that would arise on transfer of land from different taxing provisions of the State. The Assessing Officer observed that normally sale agreements comprise of clauses which stipulate on conferring of rights or titles to the buyers, whereas in the present agreement the parties are again and again emphasizing that no title is transferred, no possession is given, etc. The Assessing Officer found that this is very obscure. He found that this type of agreement cannot be accepted as it is meant to defeat the provisions of law enforceable by the State. He found that in fact there was a transfer of land to an extent of 1/4th of the total area within the meaning of section 2(47) of the Income-tax Act, 1961.
6. In the light of the above observations, the Assessing Officer found that the total amount of ` 50 crores, being the consideration received from M/s. New Line Buildtech Pvt. Ltd. has to be treated as the business income of the assessee for the impugned assessment year under appeal. The assessee has already offered ` 12.5 crores from the above sum of ` 50 crores as its income for the impugned assessment year. Accordingly,
-7- ITA 1795 of 2012 the Assessing Officer added the balance amount of ` 37.50 crores to the income of the assessee-company.
7. In the light of the above stated adjustments and additions, the Assessing Officer computed the total business income of the assessee-company at ` 52,56,87,034/-. Thereafter, the Assessing Officer set off the unabsorbed business depreciation and the unabsorbed business loss and ultimately arrived at the total business income of ` 37,80,83,370/-. The long-term capital gain in the light of section 50C, being ` 2,39,16,169/-, was also added. The total income was thus determined at ` 39,39,93,543/-.
8. This assessment was taken up in first appeal before the Commissioner of Income-tax(Appeals).
9. The first point considered by the Commissioner of Income-tax(Appeals) was the addition made by the Assessing Officer on account of section 50C application. The Commissioner of Income-tax(Appeals) accepted the contention of the assessee that before adopting the guideline value, the Assessing Officer ought to have referred the matter to the District Valuation Officer (DVO). The Commissioner of Income-
-8- ITA 1795 of 2012 tax(Appeals), thereafter referred the matter to the DVO. The
DVO valued the property at ` 1,99,09,000/-. The Commissioner of Income-tax(Appeals) adopted the said value reported by the DVO and granted the consequential relief to the assessee.
10. The second issue considered by the Commissioner of Income-tax(Appeals) was the addition of ` 2,11,43,929/-, made by the Assessing Officer on the ground that the assessee has not admitted the 14% of contract receipts as its income. The Commissioner of Income-tax(Appeals), on a detailed examination of the facts relating to the said issue, found that what was not accounted by the assessee was 14% share arising from the sale of car parking facilities. This amounted to ` 8,92,500/-. The Commissioner of Income-tax(Appeals) found that there is no justification for making an addition of ` 2,11,43,929/-. Accordingly, he deleted the addition of ` 2,11,43,929/- and, instead, made an addition of ` 8,92,500/- against providing car parking facilities.
11. The third issue considered by the Commissioner of Income-tax(Appeals) was the addition of ` 37,50,00,000/- made by the Assessing Officer against transfer of 1/4th value of land in
-9- ITA 1795 of 2012 phase-II to M/s. New Line Buildtech Pvt. Ltd., New Delhi. On the basis of a detailed examination of the entire web of the case, the Commissioner of Income-tax(Appeals) arrived at the following conclusions:-
"1. The assessee has transferred Phase I land at ` 12.50 crores to M/s. New Line during the previous year relevant to the assessment year 08-09. This has been accounted as capital gain.
2. The assessee, however has refused to consider ` 30.50 crores received on Phase II land as capital gain and claimed it as business income. The real reason for claim of business income is because the assessee wants to set off certain business losses against this income. Therefore all the agreements for sale of development rights and FSI are claimed to be business transactions and not transfer of capital asset. This at best, is a colourable device engaged by the assessee not to declare this transaction as arising out of capital gains.
-10- ITA 1795 of 2012
3. In view of the legal and factual positions elaborated from para 6.2, 6.3 and 6.4 of this order, it is evident that the amount of ` 30.50 crores accounted as business income by the assessee has to be treated as capital gain arising out of transfer of development rights as per para 4 of agreement to sell dated 28.03.2008 and para 1.3.5 of development and collaboration agreement dated 23.07.2008. In view of the same the business income admitted to the tune of `30.50 crores towards 'transfer of development rights and FSI' is treated as income from Capital Gains.
4. The assessee has claimed a receipt of ` 18 crores towards sale of FSI. On a plain reading of para l, K and 2,3, of page 5 and para 6 of page 9 of the agreement dated 23.01.2009, it is evident that this is a separate receipt for sale of FSI @ ` 400 per sq.ft. in a 'Group Housing Scheme' to be floated in Phase II lands. This receipt arising out of transfer of capital asset i.e. Phase II land is also treated as Capital Gains.
-11- ITA 1795 of 2012
5. The Assessing Officer has made an addition of ` 37.50 crores vide para 4.8 of the assessment order. Out of this ` 7 crores is claimed to be reduction in the value of transfer of property due to considerations such as road widening and other statutory conditions. Out of the balance amount of ` 30.50 crores, the Assessing Officer, in his written submission during the course of appeal has admitted that ` 12.50 crores is already admitted by the assessee as business income. Therefore, the balance of ` 18 crores out of ` 37.5 crores alone is sustained as addition on account of Transfer of FSI discussed in sub para 4 of para 6.6 of the order mentioned above. Thus, in respect of the addition made under para 4.8 of the assessment order amounting to ` 37.50 crores, the assessee will get a relief of ` 19.5 crores (` 37.5 crores - ` 18.00 crores)."
The Commissioner of Income-tax(Appeals), for the reasons stated above, modified the addition of ` 37.50 crores to
-12- ITA 1795 of 2012 `18 crores and thereby granted a relief of ` 19.5 crores. The Commissioner of Income-tax(Appeals) also found that this amount is not the business income of the assessee, but capital gains arising out of the bundle of transactions entered into between the assessee and M/s. New Line Buildtech Pvt. Ltd., New Delhi. He found that the whole scheme made out by the assessee on the basis of a number of agreements is a colourable device adopted by the assessee not to declare the transaction as arising out of capital gains.
12. The assessee is still aggrieved and, therefore, the second appeal before us.
13. The first ground raised by the assessee is against the addition of ` 96,40,252/-, sustained by the Commissioner of Income-tax(Appeals) on account of the computation of sale consideration of share in the undivided right of land under section 50C of the Act. It is the case of the assessee that the Commissioner of Income-tax(Appeals) has erred in sustaining that addition, being the value of transfer of undivided share by adopting the valuation given by the DVO. We considered this issue. At the outset itself we have to state that this is a ground
-13- ITA 1795 of 2012 without any merit. Nobody can wish away the provisions of law stated in section 50C of the Act. It is not a dormant provision of law. Section 50C provides that the value as per the agreement shall not be the value for the purpose of computing capital gains when the guideline value issued by the State Government is higher than that. Within this statutory scheme, the Commissioner of Income-tax(Appeals) has fairly asked for the report of the DVO and has again fairly adopted the lesser valuation reported by the DVO. There is no infirmity in the order of the Commissioner of Income-tax(Appeals). This ground raised by the assessee is rejected and the addition sustained by the Commissioner of Income-tax(Appeals) is confirmed.
14. The second ground raised by the assessee is that the Commissioner of Income-tax(Appeals) has erred in adding a sum of ` 8,92,500/- as arising from 14% share in car parking amount collected from the tenants. The Assessing Officer has in fact made an addition of ` 2,11,43,929/-. After a detailed examination of the facts leading to the issue, the Commissioner of Income-tax(Appeals) came to the finding that the detailed analysis of the break up given by the assessee proved that the
-14- ITA 1795 of 2012 contentions of the assessee are correct except for accounting for the receipts for car parking. The Commissioner of Income- tax(Appeals) found that but for car parking, the assessee has accounted for its share receivable from the contract receipts. The addition sustained by the Commissioner of Income- tax(Appeals) pertains to car parking. It is on the basis of the above finding that the Commissioner of Income-tax(Appeals) has sustained the addition of ` 8,92,500/- as against the addition of ` 2,11,43,929/-. We find that the Commissioner of Income- tax(Appeals) has taken real pains to go through the details furnished by the assessee and to arrive at a correct and fair conclusion. There is absolutely nothing for us to interfere in his order on this point. This ground raised by the assessee is rejected and the addition sustained by the Commissioner of Income-tax(Appeals) is confirmed.
15. The third ground raised by the assessee is that the Commissioner of Income-tax(Appeals) has erred in treating ` 30.50 crores, being the amount received for sale of development and FSI rights against phase-II land, as capital gain without appreciating the facts of the instant case, wherein the
-15- ITA 1795 of 2012 appellant did not transfer the land which was the capital asset. It is the case of the assessee that the Commissioner of Income- tax(Appeals) has erred in treating the business income as capital gains without appreciating that 'transfer' of a capital asset, in this case being land, is possible only when there has been a conveyance of title by a registered deed as per the Transfer of Property Act, 1882, or alternately, in terms of section 2(47)(v) of the Income-tax Act, 1961, read with section 53A of the Transfer of Property Act, 1882. It is also the case of the assessee that the Commissioner of Income-tax(Appeals) has erred in treating the amount of ` 30.50 crores as capital gains as the assessee had in the previous assessment year 2008-09 brought to tax as capital gains in respect of the transfer of a part of the property. This property was offered as capital gains as transfer had taken place in terms of section 2(47)(v) of the Income-tax Act, 1961.
16. We considered this issue in detail. The assessee has offered the surplus on transfer of rights to M/s.New Line Buildtech Pvt. Ltd., New Delhi as business income on the basis of the argument that the development and FSI rights alone were transferred and those rights cannot be equated with the land as
-16- ITA 1795 of 2012 such and therefore there cannot be imputed a case of transfer of land, being the capital asset in this case.
17. As pointed out by the Commissioner of Income- tax(Appeals), the whole scheme is a colourable device framed by the assessee to escape from tax liability. Where the assessee itself has constructed residential houses as the first part of its realty business, the shares of the flat owners in the undivided land were directly transferred by the assessee to the flat owners, thereby already creating an impression that the lands were always ultimately transferred by the assessee to the ultimate owners of flats and other commercial properties. It is the extension of this strategy that the assessee-company has applied in its scheme of developing phase-II as well. Without explicitly transferring the land to the developers, the assessee is transferring only development and FSI rights. The profit arising on transfer of development and FSI rights is treated by the assessee as business income. On transfer of the land thereafter the assessee may claim it as capital gains. If the division of rights and assets is possible, as contemplated by the assessee
-17- ITA 1795 of 2012 in this case, the arguments of the assessee might be acceptable in law.
18. But, the fact is that the rights and the assets in the present case cannot be divided into two segments for the reason that all the transactions are part and parcel of a composite transaction with the developers for the purpose of constructing residential and commercial flats. It is the case of the assessee that what was transferred to the Delhi firm is only development and FSI rights. The assessee cannot construct castles in the air. Flats and structures can be constructed only on land. This is the crux of the matter. If the Delhi firm does not have the right to start construction in the land, there is no fun in Delhi firm acquiring the development and FSI rights from the assessee by paying a huge amount. Once the Delhi firm constructs residential and commercial properties in the land, the whole nature of the land has transformed, which cannot be reverted back. Therefore, it is very clear that the assessee is not entitled to treat the land as different from the buildings and structures that would be built upon the land. For the purpose of depreciation it is always accepted that land cannot be
-18- ITA 1795 of 2012 depreciated, but building thereon can be depreciated. That differential concept cannot be imported into the present case because the rights and duties of the parties to the agreement are involved and they create a bundle of rights in Civil law. In the present case, section 55A of the Transfer of Property Act applies very well. The assessee has received a substantial portion of the composite consideration from the Delhi firm. The Delhi firm is also given possession of the property. There is no force in arguing otherwise. Without handing over the possession of the land, whether explicit or implicit, the Delhi firm cannot materialize its development and FSI rights acquired from the assessee. Therefore, this is a composite bundle of transactions entered into between the assessee and the Delhi firm, but fragmented for the consumption of the revenue. This scheme is not sustainable in law. There is transfer of land. The final documentation of transferring the undivided rights to the ultimate owners of the buildings is only a concluding formality to be carried out by the assessee. That alone will not decide the character of the transaction. As the transaction is satisfied under section 53A
-19- ITA 1795 of 2012 of the Transfer of Property Act, it is well within the definition of 'transfer' provided under the Income-tax Act, 1961.
19. In the course of hearing, the Bench has put a question to the counsel appearing for the assessee as to why the assessee is so much worried on the order of the Commissioner of Income-tax(Appeals), treating the surplus as capital gains, against the argument of the assessee that it is business income. In fact, the rate of tax on long-term capital gains is less than the rate of tax on business income. In that way, the decision of the Commissioner of Income-tax(Appeals) is favourable to the assessee. The Bench asked the counsel as to whether the assessee has any stock of unabsorbed business loss and depreciation to be set off against the income of the impugned assessment year. The counsel appearing for the assessee fairly conceded that the assessee has claimed the set off of brought forward unabsorbed business loss and unabsorbed depreciation. Now the cat is out of the bag. It is for getting the benefit of carry forward and set off of the business loss and depreciation that the assessee has to make these issues as grievance necessitating in filing an appeal before the Tribunal.
-20- ITA 1795 of 2012
20. In the facts and circumstances of the case, we agree with the Commissioner of Income-tax(Appeals) that the surplus amount is to be assessed as capital gains and not as business income. This ground is also accordingly dismissed.
21. The next ground is regarding levy of interest, which is consequential.
22. In result, this appeal filed by the assessee is dismissed.
Orders pronounced on Friday, the 14th of December, 2012 at Chennai.
Sd/- Sd/-
(Challa Nagendra Prasad) (Dr. O.K.Narayanan)
Judicial Member Vice-President
Chennai,
Dated, the 14th December, 2012.
V.A.P.
Copy to: 1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. GF.