2013 (11) TMI 410 - AT - Income Tax

Diversion of income by overriding title or application of income - loan was discharged in pursuance of the decree order of the Jurisdictional High Court - on the basis of consent agreements between assessee and PGFICL, decrees of the High Court, development agreement with Piramal Holdings Ltd., final sale proceeds and treatment of the income by the assessee, submitted that the assessee has not received the amount of ₹ 225 crores at all, as the same was given directly by the seller to the PGFICL in terms of decree passed by the Hon ble Jurisdictional High Court, therefore, it is a clear cut case of diversion of income by overriding title. - Held that - For allowability of business deduction or loss, it has to be seen, whether the same business has been continued i.e., whether there is any inter-connection, inter-lacing, inter-dependence and unity of control in the two businesses by way of existence of common management, common business organisation, common business administration, common funds and common place of business. Even if one business is closed without affecting the conduct of other business, there would still be strong indication that the two business construed the same business. However, this aspect has not be examined either by the Assessing Officer or by the Commissioner (Appeals) at all - decision in the case of CIT v/s Prithvi Insurance Co. Ltd. 1966 (10) TMI 49 - SUPREME Court followed - matter remanded back for reconsideration. Disallowance of value of stock-in-trade - conversion of land into stock-in-trade - joint development agreement - The assessee had received a sum of ₹ 32 crores for assigning the development rights on the said land - Held that - Ideally, once the assessee has received a sum of ₹ 32 crores from Piramal Holdings Ltd., the assessee has as developer should have adjusted the amount against the cost and should have taken the amount to the Balance Sheet as reduced work-in-progress rather than showing it as business income. In any case, this claim of deduction has to be allowed on the peculiar facts of the assessee s case. The findings and the conclusion drawn by the learned Commissioner (Appeals) as well as the Assessing Officer cannot be upheld for this reason alone. In fact, this is merely an arithmetical adjustment of accounts so as to disclose the correct profit from the sale of stock, otherwise either the income offered and assessed in the assessment year 2004-05 is incorrect or the claim for reduction in the stock of ₹ 8,20,25,000 is incorrect. Both cannot be held to be incorrect simultaneously because it will leading to a double jeopardy to the assessee - Decided in favour of assessee. Sharing of rental income with the developer of land / property - transfer of income by overriding title or not - Held that - AO himself while treating the income from sales, has accepted the revenue sharing basis of 78% and 22%. Therefore, this principle and ratio was to be applied on rental income also. The findings of the CIT(A) that the entire development agreement is a kind of financial arrangement for obtaining the loan is wholly erroneous because the sum of ₹ 32 crores, which was paid by the developers to the assessee at the time of entering the development agreement, has been shown as business income in the assessment year 2004-05, which has been assessed and accepted as such by the Department. Thus, the said reasons given by the learned Commissioner (Appeals) cannot be upheld that this was some kind of loan / finance arrangement - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of Rs. 225 crores on account of deduction claimed by the assessee on the sale consideration of Tower-A at Kurla.
2. Addition of Rs. 8,20,25,000 on account of proportionate deduction in the value of stock-in-trade.
3. Addition of Rs. 2,47,19,200 on account of reduction of rental receipts to the extent of 22% from gross rental receipts while computing the rental income under the head "Income From House Property."

Issue-wise Detailed Analysis:

1. Addition of Rs. 225 crores on account of deduction claimed by the assessee on the sale consideration of Tower-A at Kurla:
The assessee took a bridge loan from Peerless General Finance and Investment Co. Ltd. (PGFICL) against the mortgage of its land at Kurla. Due to an inability to repay the loan, a consent decree was passed by the Bombay High Court requiring the assessee to deliver constructed area to PGFICL. The assessee later converted the land into stock-in-trade and entered a development agreement with Piramal Holdings Ltd. The constructed area was offered to PGFICL, and an agreement was made to pay Rs. 225 crores in lieu of the constructed area. The assessee sold Tower-A to Essar Tech Park Pvt. Ltd. for Rs. 256 crores, with Rs. 225 crores paid directly to PGFICL. The assessee claimed a deduction for Rs. 225 crores in the return of income, showing only Rs. 31 crores as surplus income. The Assessing Officer added Rs. 225 crores to the income, treating it as application of income and not diversion by overriding title. The Commissioner (Appeals) upheld this, relying on various case laws. The Tribunal restored the issue back to the Assessing Officer to verify the exact amount of principal loan and examine the allowability of any deduction or loss of excess amount over the principal loan while computing business income under section 28.

2. Addition of Rs. 8,20,25,000 on account of proportionate deduction in the value of stock-in-trade:
The assessee converted its land into stock-in-trade and entered a development agreement with Piramal Holdings Ltd., receiving Rs. 32 crores for assigning development rights. This amount was shown as business receipts, and the value of stock-in-trade was reduced by Rs. 32.81 crores. In the original return, this reduction was disallowed and added back, leading to double taxation. The assessee claimed a proportionate deduction in the current year, which was disallowed by the Assessing Officer and Commissioner (Appeals). The Tribunal allowed the deduction, noting that the assessee had already offered the income for taxation in the earlier year and the claim was for write-off of income already taxed. The Tribunal set aside the impugned order and allowed the ground raised by the assessee.

3. Addition of Rs. 2,47,19,200 on account of reduction of rental receipts to the extent of 22% from gross rental receipts while computing the rental income under the head "Income From House Property":
The assessee declared rental income and reduced 22% of the rental receipts, claiming it belonged to Peninsula Land Ltd. as per the development agreement. The Assessing Officer added the reduced amount to the income, treating it as application of income. The Commissioner (Appeals) upheld this, treating the development agreement as a financial arrangement. The Tribunal found that the development agreement provided for revenue sharing, and the Assessing Officer had accepted the revenue sharing basis for sales. The Tribunal set aside the impugned order and allowed the ground raised by the assessee, noting that the rental income should be accepted net of 22% share of the developer.

Conclusion:
The Tribunal restored the issue of Rs. 225 crores deduction to the Assessing Officer for fresh examination, allowed the proportionate deduction of Rs. 8,20,25,000 for stock-in-trade, and accepted the revenue sharing basis for rental income, setting aside the additions made by the Assessing Officer and Commissioner (Appeals). The assessee's appeal was partly allowed for statistical purposes.