Courtesy : Taxguru

2005-06 &
2006-07

M/s Golflink Software
Park P Ltd., 1st Floor, Embassy Point, 150, Infantry Road, Bangalore ACIT, C.C.-
1(2), Bangalore.
DCIT, Circle-11(3),
Bangalore
Appellant by : Shri Harsha Prakash, CIT-II
Respondent by : Shri G Seetharaman, C.A.
ORDER
PER BENCH:
These six appeals preferred – (i) two appeals by the Revenue and (ii) two appeals as well as Cross Objections by the assessee company – are directed against the impugned appellate orders of the Ld. CIT (A)-I, Bangalore, in ITA No.269/bC-11(3)/CIT(A)-I/07-08 and in ITA No.204/AC­11(3)/CIT(A)-I/08-09 dated: 12.10.2009 &13.10.2009 for the assessment years 2005-06 & 2006-07 respectively in the case of M/s.Golf Link Software Park (P) Ltd., Bangalore.
I. ITA NO.40/B/10 – AY 2005-06 – (By the Revenue):
2. Though the Revenue has raised seven grounds in its grounds of appeal in an extensive and illustrate manner, the cruxes of the issues are two-folds, namely:
TheLd. CIT(A) erred in:
(i) directing the AO to treat the assessee’s income from lease rentals under the head ‘business’ and to allow the expenditure and depreciation as claimed; &
(ii) deleting the addition being the STC6 on account of sale of the land to its sister concern.
II. ITA NO.41/B/10 – AY 2006-07 – (By the Revenue):
2.1. For this AY too, though the Revenue has raised six grounds in an illustrative manner as in the preceding AY, the essence of the issue is confined to a lone ground, namely:
(i) that the Ld. CIT (A) erred in directing the AO to treat the assessee ‘s income from lease rentals under the head ‘business’ and to allow the expenditure and depreciation as claimed
III. ITA NOs. 52 & 53/B/10-AYs 2005-06 & 06-07 (By the assessee):
3. The assessee company in its grounds of appeal for the AYs under
challenge has raised an identical lone issue that -
“The Ld. CIT (A) erred in sustaining the disallowance of interest of Rs. 35.96 lakhs and Rs. 53.57 lakhs respectively.”
3.1. Subsequently, the assessee company in its Cross Objections [C.O Nos.20 & 21/B/10 for the AYS 2005-06 & 2006-07] raised the identical issues which have already been figured in its appeals [ITA Nos. 52 & 53/10 for the AYs 2005-06 & 06-07] cited supra.
3.2 Since the assessee~s grievances for the AYs 2005-06 & 06-07 have already been raised in its appeals cited supra, subsequent submission of Cross Objections had become superfluous and, accordingly, they have been treated as redundant.
4. As the issues agitated by the rival parties in these appeals pertaining to the same assessee and rather inter-linked, for the sake of convenience and clarity, they were heard, considered and disposed off in this common order.
5. Before considering the grievances of either party, it was noticed that the appeals preferred by the assessee company for both the AYs under consideration were barred by limitation. The assessee company, in its identical petitions for condonation of delay, submitted that it had engaged the services of the Chartered Accountant based at Chennai to prepare the appeals for both the AYs under dispute and, accordingly, the relevant papers mailed to the assessee for signatures and subsequent filing before this Bench, were lost in transit and the CA was required to prepare fresh set of papers for signature which caused delays of 11 and 1 day(s) respectively in preferring these appeals before this Bench. Since the delays were unintentional and beyond the control of the assessee, it was passionately pleadedthat the delays caused be condoned.
5.1. The Ld. b.R present was heard. After due consideration of the submission of the Ld. A R and also the reasons contained in the petitions, we are of the considered view that the assessee was prevented by a reasonable cause in not preferring the appeals within the stipulated time frame. Accordingly, the delay is condoned and the Registry was directed to place the appeal papers on record.
Let us now address to the grievance of the Revenue.
I. ITA NO.40 & 41/B/10 – AY 2005-06 & 06-07- (By the Revenue):
6. Briefly stated, the assessee company – Golf Link Software Park (P) Limited – (‘the assessee’ in short henceforth) was in real estate development business. For the AYs under dispute, the assessee had furnished its returns of income, admitting income at Rs.Nil and a loss of Rs.33.19 crores respectively which were initially processed u/s 143(1) of the Act and, subsequently, taken up for scrutiny. buring the period under consideration, the assessee had received rents from different concerns by providing space, other fit-outs and equipments in the software Technology Park constructed by it in Golf Area of Bangalore. The income shown by the assessee as ‘income from business’ was, however, treated by the AOs as ‘income from house property’ and ‘Other Sources’ for the reasons recorded in their respective impugned assessment orders which are under challenge. Besides, for the AY 2005-06, the AO had also computed STCG on sale of land inside the tech. park by the assessee to one of its sister concerns.
7. Aggrieved, the assessee took up the issues before the Ld. CIT (A) for redressal.
Receipt from rent of space and fit-outs etc.
It was the case of the assessee that -
- the assessee had developed a technology park in an area of about 55 acres which being an approved tech park under SPI scheme houses many software companies; that apart from providing building, it had to provide various facilities and amenities to have the status of a software technology park; that the facilities provided in the park were:
Fit-outs, central air conditioning, generator back up, street lighting, food courts, roads, drainage, gardens, security, water facilities, sewerage and water treatment plant, electricity etc.,
- that the income derived in the above circumstances by exploiting the assets by letting out the space in the STP cannot be considered as rental income assessable u/s 22 of the Act, this was because the activity carried on by the assessee was not a simple case of letting out buildings for rent; that it involves carrying on a complex commercial activity of setting up a software technology park in which various amenities and fit-outs provided which were designed to enable the user of the buildings and commence its specialized business;
- relies on the case law: National Storage Pvt. Ltd. 66 ITR 596 (SC);
- that it can, therefore, be contended that the STP developed by the assessee involves construction of a specialized building, providing of fit-outs along with host of common facilities that results in carrying on a complex commercial activity; that there is a distinction between letting out building with furniture and customary fittings as opposed to letting out a building with various equipments and amenities that bring into existence a STP where the clients of the assessee can enter upon the facility and use the same for their businesses; therefore the amounts paid by the clients of the assessee for user of the STP would be in the nature of a complex commercial activity assessable under the head ‘business8;
- that the tenants do not pay any rent to the common areas such as roads, parks, street lighting, common drainage facilities, food courts, generators, water treatment plants etc., however, these facilities were to be provided compulsorily to engulf the status of techpark;
- that the entire operations were to be viewed as commercial venture; that the object and business of the assessee is to do the business of tech park development operations and, therefore, the income earned there-from was to be taxed under the head ‘business income8;
- that the tech park development was covered by 60I under Industrial policy and promotion; that the government envisaged that the development of tech park was similar to the industrial activity and not mere construction of buildings, thus, the 6ovt. recognizes that the activity undertaken was complex operations and not mere construction of buildings;
- relies on the case laws:
(a) Narain Swadeshi Weaving Mills 26 ITR 765 (SC);
(b) PFH Mall and retail Management Ltd. v. ITO – (2008) 110 ITO 337 (Kol)
(c) Harvinder Pal Mehta v. OCIT 177Taxman – IT14T, Mumbai
(d) ITO v. Tejmalbhai f Co., (2006) 100TTJ(Rajkot) 898
(e) Sri Balaji Enterprises v. CIT 225 ITR 471 (Kar);
(f) 6lobal Tech Park Pvt. Ltd. v. 14CIT 119 TTJ(Bang) 421
7.1. After analyzing the rival submissions and also placing strong reliance on the finding of the Hon’ble Bench in the case of Global Tech Park Pvt. Ltd. cited supra, the Ld. CIT (A) was of the considered view that the receipt from rent for space and fit-outs be taxed under the head ‘income from business’ and the claim of expenditure made thereon be allowed.
8. bisenchanted with the finding of the Ld. CIT (A), the Revenue has come up with present appeals. It was the case of the Revenue that -
- the ZT (A) had erred in allowing the claim of the assessee company that its income from leasing out of space and fit­outslamenities was taxable under the head ‘business’ in stead of bifurcating the income from leasing out of space as ‘income from house property’ and income from fit­outs/amenities as ‘income from Other Sources’ without appreciating the facts and circumstances stated in the relevant assessment order;
- he had also erred in directing the AO to treat the assessee ‘s income from lease rentals under the head ‘business’ and to allow its claim of expenditure including depreciation on the building; f
- that he had further erred in arriving at a finding without appreciating that as per the relevant lease agreements, the leasing out of space was independent of the leasing out of fit-outslamenities etc.,
8.1. The Ld. A R, on the other hand, was very fervent in his urge that the stand of the Ld. CIT (A) had the backing of various judicial precedents and, therefore, pleaded that no intervention of this Bench is required at this stage.
9. We have considered the rival submissions, perused the relevant records and also the relevant case laws on which either party had placed their strong reliance.
9.1. It is an undisputed fact that the assessee had developed a technology park wherein a number of elite I.T companies have been housed. It was also a fact that the assessee had not merely let-out its buildings for rent, but also carried on a complex commercial activity of setting up a software technology park in which various amenities and fit-outs have been provided.
9.2. In this connection we recall the ruling of the highest ,judiciary of the land in distinguishing the significance of merely letting out a bare building and a building braced up with various amenities in the case of CIT, Bombay City 1 v. National Storage Pvt. Ltd. reported in 66 ITR 596 (SC) wherein after analyzing the issue at length, the Hon’ble Court had visualized that -
9.2.1. Further, an identical issue to that of the present one had cropped up before the earlier Hon’ble Bangalore Bench in the case of Global Tech Park (P) Ltd. v. ACIT – reported in (2008) 119 TTJ (Bang) 421 – wherein it was observed that -
“The assessee having been incorporated with the sole intention of developing Technology Park for which it obtained leasehold land from ICIOC and also obtained loan from bank for constructing superstructure thereon, it could not be considered as having made investment in a property for earning rental income only. The lease of the property was shown as part of the business activity, thus, the income received there from cannot be said as income received as a land owner but as a trader……………….The activity was done by the assessee as a business venture and was in accordance with the main object of the company. The intention of any prudent businessman is to earn;profit at a maximum level and investment made in the business never lost its main intention for which it was incorporated………………………….The assessee is providing ward and watch, maintenance of common area, maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, over-head water tanks, maintenance of drainage etc., This clearly establishes that the entire activity is in organized manner to earn profit out of investment made by the assessee as a commercial venture. In view thereof, the AO is directed to assess the rental income as from business…..”
9.2.2. As the issue before the earlier Bench was similar to that of the present case wherein the Hon’ble Bench took cognizance of the fact that KThe assessee is providing ward and watch, maintenance of common area, maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, over-head water tanks, maintenance of drainage etc., This clearly establishes that the entire activity is in organized manner to earn profit out of investment made by the assessee as a commercial venture’ and, accordingly, arrived at a conclusion that the rental receipts of the assessee is to be assessed as ‘business income’. In conformity with the finding of the earlier Bench as well as ruling of the Hon’ble Apex Court cited supra, we are of the considered view that the Ld. CIT (A) was justified in arriving at such a conclusion. It is ordered accordingly.
9.2.3. Before parting with the issue, we would like to emphasis that we have duly perused the case laws on which the Revenue had placed its strong reliance, chiefly, in the case of CIT v. Bhoopalam Commercial Complex and industries Pvt. Ltd. [262 ITR 517 (Kar)]. In that case, the issue, in brief, was that the assessee was a Private Limited Company and one of its directors had taken certain extent of lands situated at Bangalore on a long­term lease of 36 years under a registered lease-deed and executed a registered deed of transfer in favour of the assessee-company transferring his leasehold rights. Subsequently, the assessee-company built a commercial complex on the said land and allotted the same to various parties and earned income there-from.
For the year 1985-86 and 86-87, the assessee filed its returns of income showing losses for which the AO completed the assessments making minor adjustments in computing the losses. The CIT initiated suo motto proceedings u/s 263 and after such proceedings directed the AO to make fresh assessments computing the income from rentals received from the commercial complex under the head “Income from house property.”
On an appeal by the assessee, the Tribunal held that the income derived by the assessee could have been assessed only as income from business and not under the head “Income from house property”. According to the Tribunal, since the land over which the property had been built is a leasehold land, the assessee cannot be treated as the owner of the land which is a condition precedent for treating the income as income from house property under section 22 of the Act.
The Hon’ble Court, taking cue from the ruling of the Hon’ble Supreme court in the case of CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625, had held that the income derived by the company from shops and stalls is income received from property and falls under the specific head described in section 9.
9.2.4. We would like to point out that the case law relied on by the Revenue is clearly distinguishable to the facts of the issue on hand in the sense that the present assessee, apart from providing bare building, had also provided various amenities such as fit-outs, central air conditioning, generator back ups, street lights, roads, drainage facilities, garden, security, water facilities, sewerage and water treatment plant, sub-station for electricity, water treatment plant etc., which were not made available to the tenants in the case Bhoopalam Commercial Complex case cited supra.
9.3. In the case of Shambhu Investment P. Ltd. v. CIT reported in (2003) 263 ITR 143 (SC), the issue, in brief, was that the assessee owned an immovable property, a portion of which was in its possession and let out the rest to be used as ‘table space’ to occupants with furniture and fixtures and lights and air conditioners. The assessee provided services like watch and ward staff, electricity, water and other common amenities. The monthly rent payable was inclusive of all charges. The assessee had also recovered by way of security from the occupants. The Hon’ble High Court of Calcutta [249 ITR 47 (Cal)] held that the income from the property was assessable in the hands of the assessee as income from house property. When the issue came up on appeal before the Hon’ble Highest Judiciary of the land, the appeal was dismissed, holding that there was no reason to interfere with the conclusion arrived at by the High Court.
9.3.1. We would like to point out that the issue before the Hon’ble High Court was that the occupants were allowed to use a portion of property as ‘table space’ with furniture and fixtures, lights, air-conditioners etc., and the monthly rent payable was inclusive of all charges whereas the issue on hand is entirely on different footing, namely, the assessee had developed about 4.7 million square foot of a technology park in a sprawling area of more than 55 acres by providing various amenities such as roads, street lights, drainage facilities, gardens, high connectivity facilities such as tele­communication towers, sewerage and water treatment tanks, water treatment plants to attain the status of a Soft-ware Technology Park whereas in the case of Shambhu Investment P. Ltd., the immovable was a tiny property and the so called amenities provided to the occupants only as against the amenities provided in a STP to feed a special purpose. Letting out of a building in a STP is incidental whereas the fact in the case of Sambhu Investment was rather predominant and, thus, Sambhu Investment case cannot, at any stretch of imagination, be equated with that of the present assessee.
9.4. Taking into account the facts and circumstances of the issue, we are, therefore, of the firm view that the case laws on which the Revenue placed reliance cannot come to its rescue.
10. The other grievance of the Revenue pertaining to the AY 2005- 06 being that the Ld. CIT (A) erred in deleting the addition made on account of STCG on sale of the land to the assessee~s sister concern.
10.1. The issue, in brief, was that the assessee had sold 82152 sft of land in the Tech Park for Rs.389.52/sft to its sister concern – M/s. Mb Properties Pvt. Ltd. On being queried as to why Rs.1193/sft being market value of the land should not be adopted in the case of Mb Properties Pvt. Ltd, the assessee, among others, contented that -
- the assessee could not able to raise further funds as the financial institution had exceeded their exposure which resulted in some portion of property of the assessee becoming idle from the point of view of raising money. This had resulted in disposing off of the property under distress sale that too to its group concern which could profitably put the property to use;
- that the sale was made at a price more than the guidelines value of the property; that the a piece of land was sold to its sister concern which never parted with the property and that the sale was at arms length within the parameters of law.
10.1.1. Brushing aside the assessee’s fervent request, the AO went ahead in working out the STCG by adopting the value of the said property at Rs.1193/sft.
10.2. Aggrieved by the AO’s stand, the assessee carried the issue before the Ld. CIT (A) for relief. While doing so, it was contended that -
- the assessee had sold a piece of land to B.E. Properties Pvt. Ltd. – a sister concern -at the rate of Rs. 389.52/sft. and another land was sold to a third party for Rs. 1193/sft.;
- that the fact that the sale to a third party was at a price which was much higher than the rate adopted for the purpose of stamp duty prescribed by the State 6ovt.; that such exceptional price cannot be adopted as standard price; that the AO had not brought on record any documentary evidence to prove that there was suppression of sale consideration;
- that the sale price of Rs. 389.52/sft was higher than the value determined for the purpose of stamp duty and, thus, the provisions of s.50C stands complied with; f
- that the law has provided for the arms length transaction rules wherever it has deemed it necessary. 5. 50 providing for adoption of the guideline value as the consideration for transfer of a capital asset, s. 80IA (B) requiring adoption of market value of goods in place of the actual sale price in the cases of certain specified sales, and the transfer pricing rules, are some of the examples which give the AO the right to adopt a fair value. In this case, first, the transaction was at a fair value and secondly, the AO does not have power to substitute the value for the actual sale price in the absence of any evidence of understatement of the value.
10.2.1. Taking cognizance of the assessee~s submission, the Ld. CIT (A) deleted the addition.
10.2.2. It was the case of the Revenue that the Ld. CIT (A) had failed to analyze the issue before coming to such a conclusion.
10.2.3. On the other hand, the Ld. AR was emphatic in his resolve that the issue in question has been duly examined by the Ld. CIT (A) and, thus, it was pleaded that there was no infirmity in the finding of the first appellate authority which requires review at this stage.
10.3. We have duly considered the rival submissions and also perused the relevant records.
10.3.1. It is an undisputed fact that the assessee had parted with a piece of land to its sister concern for a sale consideration of Rs.389.52/sft. which, according to the assessee, was more than the guideline rate prescribed by the State Government. Another salient feature in this transaction was that the assessee had sold the said piece of land to its sister concern only and when the assessee had an occasion to sell another piece of land to a third party – M/s.Mac Charles Pvt. Ltd. – wherein the sale value was adopted at Rs.1193/sft which significantly exhibits the fair-play on the part of the assessee. On the other hand, the Revenue had not brought any credible documentary evidence to even remotely suggest that the assessee had, in fact, attempted to suppress the sale consideration on this transaction.
10.3.2. In view of the above facts, there was no ,justification on the part of the AO to bring to tax STCG of Rs.6.34 crores without any adequacy of documentary evidence on this score. It is ordered accordingly.
We shall now take up the issues raised by the assessee for consideration.
ITA NOs. 52 & 53/B/10 – AYs 2005-06 & 06-07 (By the assessee):
11. A lone ground raised by the assessee for the both the AYs under challenge is that the Ld. CIT (A) was not justified in sustaining the disallowance of interest of Rs. 35.96 lakhs and Rs. 53.57 lakhs respectively.
11.1. buring the course of assessment proceedings, the Ld. AO noticed that the assessee had advanced to its sister concern substantial amounts of Rs.47.95 crores & Rs.71.43 crores out of loans of Rs.500.36 crores and 672.63 crores availed from HbFC Bank for the AYs.2005.06 and 2006.07 respectively. On being queried, it was revealed that the same was advanced for a property owned by bynasty bevelopers Pvt. Ltd., and since no corroborative evidence was produced, the Ld. AOs went ahead in disallowing proportionate portion of interests for the AYs under consideration for the reasons recorded in their impugned orders.
11.2. On appeals before the Ld. CIT (A), it was contended that during the course of business had given advances to bynasty bevelopers Pvt. Ltd., that the Ld. AOs held that the genuine business advance given for acquiring lands as diversion of funds from loan funds and, accordingly, disallowed
Rs.35.96 lakhs and Rs.59.57 lakhs for the AYs. 2005-06 and 06-07 respectively, that the assessee had made advances to bbPL with an intention to acquire real estate and to earn profit from the venture on total commercial understanding and that the advances were made in the course of business and for the purposes of business. Strong reliance was placed on the following case laws:
(i) S. A. Builders Ltd. v. CIT (Appeals) (2007) 288 ITR 1 (SC)
(ii) C.T. Desai v. CIT (1979) 120 ITR 240 (Kar);
(iii) ,$fadav Prasad Jatia v. CIT(1979) 188 ITR 200 (SC)
(iv) CIT v. Chandulal Keshavlal f Co. (1960) 38 ITR 601 (SC)
11.3. After taking into account the submission of the assessee coupled
with various case laws cited supra, the Ld. CIT (A) had observed thus -
“10. The above shows that no new argument or fact has been brought on record to enable me to delete the addition.
11. In fact, I find the appellant has harped on the legal issues more instead of giving the details of land owned by DDPL for which interest free advance was given to it. In the absence of such details, I find the appellant has no cause to grieve for the justified disallowance made by the A~J.=
11.4. buring the course of hearing before this Bench, when it was pointed out that the assessee had declared total income of Re.Nil and (-) Rs.33.19 crores for the AYs 2005-06 & 06-07 respectively and if the issues were to be decided in its favour, the losses admitted by the assessee to be enhanced by Rs.35.96 lakhs and Rs.53.57 lakhs and such losses cannot be carried forward for set off against the income of the assessee in the later year(s) since the assessee had already availed the benefit of s.80IA of the Act in the subsequent years, the Ld. A R had readily and fairly conceded the observation of the Bench. The Ld. AR agreed that he had no objection of this Bench’s view to treat the issue raised by the assessee for both the AYs under challenge as redundant and no useful purpose would be served by deciding the issue on merits.
In view of the above, we are of the considered view that th issues raised by the assessee do not require any adjudication at this stag which has been duly acknowledged by the Ld. A R referred above.
12. In the result:-
(i) the Revenue’s appeals for the AYs 2005-06 and 2006-07 are dismissed;
(ii) The assessee’s appeals for the AYs. 2005-06 & 2006-07 are dismissed; &
(iii) The assessee’s Cross Objections for the AYs. 2005-06 & 2006- 07 are dismissed as superfluous.
The order pronounced on Tuesday, the 31st day of May, 2011 at Bangalore.

Courtesy : Taxguru

The bench said the three essentials of a gift under Mohammadan Law are (i) declaration of the gift by the donor (2) acceptance of the gift by the donee and (3) delivery of possession.

“Though the rules of Mohammadan Law do not make writing essential to the validity of a gift, an oral gift fulfilling all the three essentials make the gift complete and irrevocable. However, the donor may record the transaction of gift in writing.

?The taxpayer and his wife jointly owned building along with plot of land admeasuring 840 sq.mts. i.e. 1,005 sq.yards. The owners entered into agreement with the developers to demolish the existing building and redevelop the said land into a new building on 50 percent sharing basis based on the terms and conditions set out in the agreement.
?As per the agreement, the plot of land will continue to be owned by the owners and developers have no right and title over it. The owners would retain FSI of 11,835 sq.ft granted to them by Municipal Corporation and the developer would load their sources of FSI and construct the total area.
?The owners have agreed to pay the developers costs of construction of FSI retained by owners at INR 1000 per sq.ft. as per the agreement.
?A sum of INR 21.83 million was received by the owners (including the taxpayer) from developers in consideration of the owners granting in favour of the developers the right, authority and power to develop the said property.
?In the return of income the taxpayer has computed the net capital gains arisen to the taxpayer on account of transfer of taxpayer’s 50 percent share by virtue of development agreement as nil after claiming deduction under Section 54 and 54F of the Act.
?During the course of assessment proceedings, the Assessing Officer (AO) has also raised a query whether the consideration received can be considered as income from other sources. However, ultimately, the AO recomputed the capital gains after considering the market value, as worked by Registration Authority for stamp duty valuation, of the property at INR 38.25 million under Section 50C of the Act.
Taxpayer’s contentions

?Before the AO and Commissioner of Income Tax (Appeals) the taxpayer contended that the right of ownership of plot of land continued to be with the taxpayer.
?On query from the AO that why the consideration received from the developer should not be treated as income from other sources, , the taxpayer contended that there is in fact transfer of right, title and interest in the plot of land. He ceases to be the single holder of right, title and interest therein. He, along with the purchaser of the flats in the new building would become joint interest holders. Accordingly, there is a transfer of capital asset which is exigible to capital gain tax.
?The taxpayer also contended that development rights on land and
building do not come under the purview of Section 50C of the Act.
?Before the Tribunal the taxpayer relied on various judicial precedents (Refer Note -1 for list) and contended that the transaction was not liable to tax as capital gains as per the provisions of the Act. The taxpayer also contested the applicability of Section 50C of the Act to the said transaction.
Tax department’s contentions

?Referring to the various decisions relied by the taxpayer, the tax department submitted that in all those cases, the existing building was not demolished and only further construction/modifications were done to the existing building.
?The developer is entitled to demolish the building and the debris and other building material of the demolished building will belong to the developer as the consideration thereof is included in the aforesaid consideration. Thus, the entire building has been transferred.
?The documents have been registered by the State Registration Authorities; therefore, the AO had no other option but to apply provisions of Section 50C of the Act.
?It is a clear transfer of capital asset falling under the provisions of Section 50C of the Act.
Tribunal’s Ruling

?On perusal of the various clauses of the agreement and including the submission of the taxpayer before the AO, the Tribunal held that there is transfer of land and building. Therefore, the provisions of Section 50C of the Act are clearly applicable to the facts of the present case.
?The various decisions relied on by the taxpayer are distinguishable and not applicable to the facts of the present case as in none of the cases relied on by the taxpayer, there was demolition of existing building. In all those cases, there was construction of additional floor/modifications on the existing structure.
?The Tribunal also distinguished the decision in case of New Shailaja Co-op. Hsg. Soc. Ltd. relied on the taxpayer, on the basis in that case the taxpayer transferred his entitlement for consideration to the builder. In that case the Mumbai tribunal held that the taxpayer has not incurred any cost of acquisition in respect of the right which emanated from the 1991 rules making the taxpayer eligible for additional FSI. Since there was no cost of acquisition for additional FSI, the Tribunal, relying on a couple of decisions including decision of Supreme Court in case of CIT v. B C Srinivasa Shetty [1981] 128 ITR 294 held that no capital gain chargeable to tax has arisen.
However, in the instant case, there is a transfer of existing land and building.

?Considering the totality of the facts of the present case and certain clauses of the agreement and submission made by the taxpayer before the AO, in the instant case the taxpayer has transferred the land and building to the developer through a document, which has been registered through State Registration Authorities. Therefore, there is transfer of a capital asset i.e. land and building, the capital gain on which is chargeable to income tax. Accordingly, provisions of Section 50C of the Act are applicable to the facts of the instant case.

Brief : Revised Accounting Standard 7 – ‘Construction Contract’ is applicable to only contractors and not to builders and real estate consultants. Accordingly, the Project Completion Method consistently followed by the taxpayer for recognising revenue in the books of accounts cannot be regarded as an unreasonable. Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) has held that the Accounting Standard (AS) 7 – ‘Construction Contract’ (revised) issued by the Institute of Chartered Accountants of India (ICAI) is applicable only to contractors and not to builders and real estate developers. Accordingly, the Project Completion Method followed by the taxpayer for recognising revenue in the books of accounts cannot be regarded as an unreasonable. Further, the tax department cannot change the method of accounting as any change would be a tax neutral.

Citation : Unique Enterprises v. ITO [2010-TIOL-737-ITAT-MUM] (Judgment date: 20 August 2010, Assessment Year: 2005-06)

Background:- The ICAI issued Accounting Standard (AS) 7 – ‘Construction Contract’ in the year 1983 which was later on revised in the year 2002. The AS 7 laid down the principles of accounting for ‘construction contracts’ in the financial statements of the Contractors. As per the revised AS 7 the accounting was to be done as per percentage/progressive completion method.

In response to a query rose, on applicability of revised AS 7 to a real estate developer, before the Expert Advisory Committee (EAC) formed by the ICAI, the EAC observed that the pre revised AS 7 specifically mentions about its applicability to enterprises undertaking construction activities on their own which would include real estate developer. However, the revised AS 7 is applicable only to Contractors.

Facts of the Case
• The taxpayer was engaged in the business of redevelopment of tenanted property. The taxpayer was following the Project Completion Method of accounting since its inception in the assessment year 1995-96 and the income of the project was offered for taxation in the year of completion of the project. The expenditures incurred on a project were accumulated under the head ‘construction work-in-progress’ and in the final year of completion it was taken as expenditure.

• For the Assessment Year 2005-06, the taxpayer computes its taxable income following Project Completion Method. However, the Assessing Officer (AO) recomputed income based on the percentage/progressive completion method prescribed by AS 7. The Commissioner of Income-tax (Appeals) [CIT(A)] uphold the AO’s action and held that the revised AS 7 was applicable to taxpayer.

Taxpayer’s Contentions
• The taxpayer relied on the opinion of the EAC and contended that revised AS 7 issued in the year 2002 was not applicable to the taxpayer since it does not apply to builders and real estate developers. Further, the same method of accounting followed in earlier years had been accepted by the tax department.

• The taxpayer contended that it has been consistently following the Project Completion Method of accounting since its inception and has accordingly offered to tax the entire income in the next assessment year i.e. Assessment Year 2006-07. Further, before AS 7 was issued by the ICAI, the Mumbai Tribunal in the case of Champion Construction Company v. ITO [1983] 5 ITD 495 (Mum) had accepted the Project Completion Method as an appropriate method of computing income.

• The taxpayer also relied on the Guidance Note on ‘Recognition of Revenue by Real Estate Developers’ issued by ICAI in 2006. The taxpayer contended that Guidance Note read with the Agreement of Sale, executed by the taxpayer, it is clear that the risks and the rewards of ownership have not been transferred to the buyer and it retains effective control of the property. The reliance was also placed on the decision of the Bangalore Tribunal in the case of Prestige Estate Projects (P) Ltd. v. DCIT [2010] 33 DTR 514 (Bang).

Tax department’s Contentions
• The tax department contended that AS 7 was applicable to builders and contractors and revenue recognition has to be done as per AS 7 read with AS 9.

• As per the Guidance Note on ‘Recognition of Revenue by Real Estate Developers’ issued by the ICAI the taxpayer is bound to declare income during the year since the Agreements to sale entered by the taxpayer was partly complete and the risks was already passed.

Tribunal’s ruling
• The Tribunal observed that the pre revised AS 7 issued by ICAI in the year 1983, specifically included enterprises undertaking construction activities on their own and as such to builders and real estate developers. However, such specific inclusion is missing in the AS 7 revised in the year 2002. The Tribunal also went through the opinion given by the EAC on the applicability of AS 7 and held that the revised AS 7 does not apply to builders and real estate developers.

• The method followed by the taxpayer cannot be called as an unreasonable method and any change in the method is revenue neutral. Further, the tax department cannot change the method of accounting which was accepted by it over the years.

• The Tribunal observed that the Bangalore Tribunal in the case of Prestige Estate Projects (P) Ltd. held that the Government has not specified AS 7 in Section 145 of the Act and the taxpayer developer had been regularly, under a bonafide belief, employing Project Completion Method which is an accepted method of accounting. Accordingly, the AO cannot reject the accounts of the taxpayer under Section 145(3) of the Act.

• The Tribunal relied on the decision of the Mumbai Tribunal in the case of Champion Construction Co. and held that it would be appropriate to offer income tax in the year in which 80 percent of the construction was completed. Since the taxpayer admittedly completed only 53.95 percent of the construction it cannot be said that the taxpayer has substantially completed the project so as to recognize income under the Project Completion Method of accounting.

• The Tribunal also relied on the decision of the Bombay High Court in the case of CIT v. Tata Iron & Steel Co. Ltd. where it was held that the method of accounting followed by the taxpayer company cannot be said to be unreasonable, and that in such a case, even if a better method could be visualised, the method consistently followed should be accepted.

• Accordingly, the Tribunal allowed the taxpayer’s contention to follow Project Completion Method and recognise the revenue accordingly in the year of project completion. The Tribunal refrained from deciding as to whether any revenue has to be recognised in the relevant assessment year based on the Guidance Note issued by ICAI considering the agreement to sale entered into by the taxpayer.

Citation : Arif Akhatar Hussain V/s. Income Tax officer ITA No. 541/Mum/2010 (Assessment Years: 2006-07) Jaffar Akhatar Hussain V/s Income Tax officer ITA No. 706/Mum/2010 (Assessment Years: 2006-07)

Judgement :

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, ‘D’, MUMBAI

BEFORE SHRI R.S.SYAL, ACCOUNTANT MEMBER AND
SHRI VIJAY PAL RAO, JUDICIAL MEMBER

Arif Akhatar Hussain V/s. Income Tax officer

ITA No. 541/Mum/2010
(Assessment Years: 2006-07)

Jaffar Akhatar Hussain V/s Income Tax officer

ITA No. 706/Mum/2010
(Assessment Years: 2006-07)

O R D E R

PER VIJAY PAL RAO, JM

These two appeals by the assessees are directed against the two different orders of CIT(A), both dated 24.11.2009 for the assessment year 2006-07. Since issues raised in these appeals is common and the assessee are also co-sharers of the property in question, therefore, for the sake of convenience both the appeals were heard together and are being decided by this composite order.

2. Grounds of appeal taken by both the assessees are common, therefore, the ground taken by the assessee in ITA No.541/Mum/2010 is reproduced below:

“On the facts and in the circumstances of the case, the learned CIT(A) has erred in law and in facts in concluding that the provisions of section 50C of the IT Act are applicable to transfer of development rights nad thereby directing the assessing officer to adopt the valuation under section 50C of the Act, as sale consideration, for the purposes of calculating capital gain, instead of actual sale consideration offered by your appellant”

3. Brief facts of the case are that the assessee are co owners along with other four co-owners of the inherited property in question. During the year under consideration, the assessee along with other co-owners entered into an agreement with the developer for development of the said inherited property against the consideration of Rs.63 lakhs shown in the said agreement. The assessee herein had 2/7 and 1/7th shares respectively in the said property. Accordingly, the assessee’s share in the share value was admitted at Rs.18 lakhs and 9 lakhs respectively. However, the Stamp Valuing Authority valued the property at Rs.4,73,48,000/-. The AO accordingly, issued a show cause notice to the assessees to explain as to why the provisions of section 50C should not be invoked in their case. The Explanation offered by the assessee was not accepted by the AO, however, he accepted the prayer of the assessee to refer the property for valuation to the DVO. The AO accordingly took the sale consideration as per the valuation made by Stamp Valuation Authority. The assessee challenged the order of the AO before the CIT(A) and raised the issue of taking the stamp duty value as sale consideration for transfer of the development rights of the property. In the mean time, the report of the DVO was received and accordingly, the AO passed order dated 20.11.2009 u/s 155 r.w.s.154 of the Act based on the DVO’s report whereby, the property was valued at Rs.1,81,34,749/-. Thus, the capital gain was re-worked out by the AO as per the valuation made by the DVO.

4. Before us, the learned AR of the assessee has submitted that this is not a case of transfer of land or other capital asset but it was a case of transfer of development rights of the property. Therefore, the provisions of section 50C are not applicable for taking the valuation made by the Stamp Valuing Authority as full value of sale consideration. He has further contended that the deeming provisions of section 50C cannot be applied when there is no transfer of the property itself, but only transfer of development rights.

5. The learned AR has further submitted that the valuation by the Stamp Valuation Authority has been made for registration of development agreements and the Stamp Duty was charged as per the rate prescribed for agreement and not for any sale or transfer of the land or building or the property itself. The learned AR of the assessee has mainly contented that the assessee is still owner of the property in question. He has pointed out that in Municipal Record, the property tax is still in the name of the assessee, therefore, there is no transfer of the land or building and only developments rights were transferred. The stamp duty was paid by the developer and the assessee was not concerned about the stamp duty valuation even when the assessee realized that the stamp duty value of the property was taken as full value of the sale consideration, the time limit for filing the appeal against the stamp duty valuation was already expired. He has pointed out that even the stamp duty authority has also distinguished between the transfer of land or building and transfer of the development rights. Accordingly, only one percent stamp duty was paid on the valuation of the property. Where in the case of transferring the property 5% of the valuation, stamp duty will have to be paid.

6. The learned AR of the assessee has further contended that since the property was occupied by the tenants and the developer took the onus of dealing with the tenants, the valuation of the property cannot be compared with the other property and accordingly, the valuation made by the Stamp Duty Valuing authority cannot be applied without taking into consideration the other factors and demerits attached with the property.

7. On the other hand, the leaned DR has submitted that the assessee did not raise any objection regarding the applicability of the provisions of section50C during the assessment proceedings. He has further submitted that the assessee themselves have offered the capital gain by admitting the transfer of the property/capital asset during the year. He has further submitted that the DVO has already considered all the relevant factors attached with the property and thereby valued the property at Rs.1 ,81 ,34,749/- as against the stamp valuing authority valued at Rs.4,73,48,000/-. He has relied upon the orders of the lower authorities.

8. After considering the rival contentions and relevant record, we find that the aseseee themselves have offered the capital gain against the transfer of the property vide development agreement which was available before the AO. The documents itself shows the sale consideration admitted by the aseseee and the stamp valuation made by the Stamp Valuation Authority. The AO adopted the full value of sale consideration ;at Rs.4,73,48,000/- as valued by the Stamp Valuation Authority against the sale consideration admitted by the assessee at Rs.63,00,000/-. The assessee’s share in the said property are 2/7 and 1/7, respectively, therefore the AO proportionately took the share of sale consideration and computed the capital gain.

9. The main contention of the learned AR is that the development rights does not amount to transfer of land or building and therefore the provisions of section 50C are not applicable. It is to be noted that the definition of transfer in the Income Tax Act, is not similar to that of definition under the Transfer of Property Act. Apart from various mode of transfers provided under the Transfer of Property Act, the Income Tax Act, also provides a definition of transfer as deemed transfer u/s 2(47)(v). The deemed transfer is applied when the condition prescribed u/s 53A of Transfer of Property Act are fulfilled Section 53A of the Transfer of Property Act does not provide the condition for transfer but it provides protection to the transferor of any immovable property by a written contract, the terms of which constitute the transfer and can be ascertained with reasonable certainty and the transferee as part performance of the contract taken the possessions of the property and has performed or willing to perform his part of contract, then even the said contract though required to be registered has not been registered and the transfer has not been completed in the manner prescribed therefore by law, the transferor is barred from enforcing against the transferee any right in respect of the property other than the right expressly provided by the terms of the contract. Under the Income Tax Act, 1961 by inserting Clause (v) to section 2(47), the definition of the term transfer includes the transaction which fulfills the conditions provided u/s 53A of Transfer of Property Act. Thus, the provisions of Section 53A of Transfer of Property Act does not provide any transfer but it talks about the situation when the right created in favour of the transferee cannot be defeated otherwise than the terms and conditions expressly provided in the contract itself. When the assessee has received the sale consideration and handed over the possession of the property in question vide development agreement then the condition prescribed u/s 53A of the Transfer of Property Act are satisfied and accordingly, as per the provisions of section 2(47)(v) of the IT Act the transaction of transfer is completed. Accordingly, we do not find any merit or substance in the contention of the assessee. Merely because the name of the assessee still stand in the record of the municipal record does not change the nature of transaction. Even otherwise the mutation of the property in the Property tax record of Municipal Authority does not give any title of ownership. Once, undisputedly, the assessee has handed over the possession of the property to the developer against the payment of share of sale consideration then the property is deemed to have been transferred as per the deeming provisions of section 2(47) of the IT Act. When the conditions of section 53A of Transfer of Property Act is fulfilled irrespective of the fact that it is not absolute transfer by way of execution of sale deed, the transaction is to be completed. The transfer of capital asset is completed if the certain conditions of section 53A of the Transfer of Property Act is satisfied. Accordingly, we do not find any reason to interfere in the order of the lower authorities on this issue. As far as, demerits attached to the property are concerned, the DVO has already taken into account all aspects while making the valuation of the property. The assessee has participated in the proceedings before the DVO and accordingly, we do not find any error or illegality in the valuation made by the DVO which is much less to the valuation made by the Stamp Valuation Authority. The substantial relief has already been given by the DVO as well as by the AO while passing the consequential order as per the DVO’s report. Accordingly, the appeals of the assessee are devoid of merits on this issue

10. Both the appeals of the assessees are dismissed as indicated above.

Order pronounced in open court on 22.12.2010

Sd sd
(R.S.SYAL) (VIJAY PAL RAO)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated 22nd Dec, 2010

Thereafter (1-10-1986) Chapter XXA was replaced by Chapter XXC which granted the Government pre-emptive right to purchase immovable property at a price agreed to by the transferor.

This led to many litigations between the assessees and the Income Tax department. It was also observed that even when tax department acquired such high priced properties, the same could not be disposed of at a profit. This had resulted in a situation whereby the Department was criticized for unnecessarily acquiring the high priced immovable properties. The funds of the Government were unnecessarily blocked. Thus, neither the Income Tax Department nor the people were happy about Chapter XXC. The Finance Act, 2002 deleted Chapter XXC w.e.f. 1st July, 2002.

The Government decided to introduce section 50C with effect from April 1, 2003.

The Finance Act, 2002 had amended the Income-tax Act, 1961 inter alia by inserting section 50C with effect from 1st April 2003 i.e. from A.Y. 2003-04 affecting transactions in land and buildings taking place on or after 1st April, 2002.

Section 50C provides that if the value stated in the instrument of transfer is less than the valuation adopted or assessed or assessable by the stamp duty authorities, such valuation of the stamp duty authorities will be considered as the sale consideration for the purpose of computation of capital gains arising on transfer of land or building or both.

Explanation 2 has been inserted in Section 50C w.e.f. 1-10-2009 stating that value “assessable” by the stamp valuation authority means the price which would have been adopted/assessed had the transaction been referred to such valuation authority for the payment of stamp duty. Prior to insertion of this Explanation, it had been held in many cases that for invoking the provisions of Section 50C, the transfer of property must first be registered for the purpose of payment of stamp duty. Now, by virtue, of this amendment, the above judgments are rendered redundant and the income-tax authorities are free to refer the property to stamp valuation authority irrespective of whether the same has been registered for stamp duty purposes or not.

Provisions apply to transfer for a consideration of land or building if only held as capital asset at the time of such transfer. Thus, transactions of flats, shops, galas, factories being parts of buildings etc. are covered by the provisions of section 50C.

Under the Bombay Stamp Act, 1958, the stamp duty authorities have the power to revise valuation of immovable property within a period of 6 years from the date of stamping.

The assessee may represent before the Income Tax Officer that the valuation adopted by stamp duty authorities is higher than the fair market value of property on the date of transfer and that the Income Tax Officer may refer the matter of valuation to the Valuation Officer of the Income Tax Department itself.

If the valuation by the Valuation Officer of the IT department is lower, then such lower valuation will be adopted. However, if valuation by the Income Tax Valuation Officer is higher than the valuation adopted by the stamp duty authorities, the stamp duty valuation will be adopted and higher valuation by the Income Tax Valuation Officer will be disregarded.

The DVO will have to follow the procedure under relevant sub-sections of section 16A of the Wealth Tax Act wherein the DVO will have to call for the records, give an opportunity of being heard to the assessee and lead evidences and then pass a speaking order of valuation. Further, the order of the DVO can be appealed against.

Section 155(15) provides that where the value adopted by stamp duty authorities is revised due to an appeal, revision or reference, the assessment made on the basis of earlier valuation shall be amended and capital gains shall be recomputed on the basis of such revised value.

SERVICE TAX

By the Finance Act, 2010 the Government has amended the definition of Commercial or Industrial Construction Service [Section 65 (25b) read with Section 65 (105) (zzq)] and construction of Residential Complex [Section 65 (30a) read with Section 65 (zzzh)].

The scope of these categories is expanded to cover sale of flats/units under construction. Builders/developers are now liable to service tax if any payment towards sale consideration is received before the grant of completion certificate by the competent authorities for such flats/units. This amendment overrides the Gauhati High Court’s decision in the case of Magus Construction Private Limited v/s UOI [2008 11 STR 225].

Therefore, if a builder/developer receives the entire sale consideration for flats/units after issue of completion certificate, the same is not liable to service tax.

There is an abetement of 75% of the sale value. Thus, the tax will be levied on 25% of the sale value of flat at the rate of 10.3%. For example if the agreement value of a flat sold under construction is Rs. 50,00,000/- then service tax @ 10.3% is payable on Rs. 12,50,000/- which works out to 1,28,750/-. Thus, there will be an additional burden of 2.6% on the agreement value of flat. The amendment will be effective from the date to be notified by the Central Government.

VAT

The Maharashtra Government in the state budget has also introduced a new composition scheme on sale of under construction property along with land or interest in land @ 1% of the agreement value. The scheme is effective from 1st April, 2010 but the notification in respect of the same about the manner in which the tax is to collected by the builder/developer has not yet come. There is no deduction for value of land or interest in land.

It may be noted that already a composition scheme @ 5% is in operation which is effective from 20th June, 2006 i.e. the date on which the transfer of property under construction was brought within the ambit of VAT. In this composition scheme there is a deduction provided for land cost under Rule 58 (1A) of MVAT Rules.

….Contd. 2.

: 2 :

It may further be noted that the levy of tax on property under construction itself is challenged by Maharashtra Chamber of Housing Industry (MCHI) an association of builders by a writ petition in Bombay High Court (being Tax writ petition No. 2022 of 2007). The major issue involved in the writ petition is the competency of the State Legislature to enact the definition of Works Contract in the manner which suggests its applicability to the builders/ developers, in addition to the contractors. The definition talks about transfer of property in goods in the execution of works contract including the building, construction, ……. . The Government is competent to levy tax on construction (sale of goods involved in construction). Article 366 read with Article 246 (2) of the Constitution has authorised it to do so. But power to levy tax on building; i.e. Sale of flats is unimaginable. It appears that prima facie the Hon’ble High Court is convinced about this position and ordered for an interim relief for the members of the Association. The Hon’ble High Court has directed that the members of the MCHI should not be treated as ‘dealers’ liable to tax under the MVAT Act, 2002 in respect of sale of flats on ownership basis under the Maharashtra Ownership Flats Act, 1963 (MOFA Act), provided such members of MCHI submit the data and documents as mentioned in the Court Order. Thus, such members of MCHI have been absolved from registration and also from assessments till the disposal of the petition. However, the developers who are not members of the Association are not protected by the Court Order.

It seems that to divert the attention of the public from the court matter, the Government has introduced new composition scheme @ 1% on the agreement value of the transfer of flat/unit under construction without providing any deduction for land etc.

There is an impression in the mind of people that this is a new amendment and only under construction flats/units sold after 1st April, 2010 are chargeable to VAT @ 1%. This is not so, the amendment regarding tax on flat/unit under construction is effective from 20th June, 2006. In this budget the Government has come out with new composition scheme of 1% of agreement value without any deduction for land against earlier composition scheme of 5% of the agreement value after allowing deduction for land as per Rule 58 (1A). The rule states that the cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on the 1st January of the year in which the agreement to sell the property is registered. It further provides that the value of land shall not exceed 70% of the agreement value of the property.

….Contd. 3.

: 3 :

Thus, it appears that to avoid the cumbersome procedure of deduction of the value of land the Government has come out with the new composition scheme of 1% without any deduction. It means there is an option to choose the composition scheme of 5% (with deduction for value of land) or 1% (without any deduction for land).

Though the new composition scheme is effective for the flat/units registered on or after 1st April, 2010 the notification in respect of the same regarding procedural aspect has not yet come. In the absence of the notification the builders are in a dilemma as to how and in what manner the tax is to be collected as the full sale price is not collected at the time of executing agreement for flat/unit which is under construction.

Thus in the hands of purchaser the overall cost of the flat/unit is going to increase by about 3.6% of the agreement value by way of Service Tax and VAT. In the given example of Rs. 50,00,000/- value of flat, the additional cost by way of Service Tax will be Rs. 1,28,750/- and by way of VAT will be Rs. 50,000/- making it a total of Rs. 1,78,750/-.

It is pertinent to note that the above cost can be avoided if a ready flat is purchased after builder obtains completion certificate.