2019 (4) TMI 1791 - AT - Income Tax

Addition on account of sale of land by way of Development Agreement - applicability of provisions of Section 2(47) relating to capital asset - HELD THAT - We find that the CIT(A) has correctly applied the law in the facts of the case. As per the terms of the development agreement there is no transfer of possession of land as noted by the CIT(A). Secondly the land was held as stock and trade and therefore provisions of Section 2(47) relating to capital asset would not apply at all. It is seen from the order of the CIT(A) that as per the development agreement the assessee was required to collect price of land from the developer from time-to-time when the construction is completed. The CIT(A) has also observed that assessee has recorded income as per accounting standard concerning real estate development. We do not see any infirmity in the process of reasoning arrived at by the CIT(A) and consequently endorse it in entirety without repeating the same. CIT(A) has erred in law and on facts in deleting the disallowance of consultancy fees by observing that the assessee has complied with the TDS provisions. Disallowance of consultancy charges paid by the assessee - HELD THAT - We are unable to see any merit in the appeal of the Revenue. The CIT(A) has noted that assessee has provided copy of bills for consultancy charges paid to the Consultant S. S. Baid. The assessee has deducted TDS thereon when the payments have been made through banking channel. The CIT(A) has also noted the submissions of the assessee towards nature of services. The CIT(A) in our view has taken a holistic view of the matter and accepted the claim of the assessee as bonafide. We do not see any reason to depart from the view taken by the CIT(A) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of ?3,13,18,468/- on account of sale of land by way of Development Agreement.
2. Deletion of disallowance of consultancy fees of ?4,50,000/-.

Issue 1: Deletion of Addition on Account of Sale of Land
The assessee company engaged in the business of L.T. Insulators, sale/purchase of land, and development of properties, filed a return of income for AY 2010-11 declaring total income at Rs. Nil. The AO, during the scrutiny assessment, added ?3,13,18,468/- against the sale of land, treating the development agreement executed by the assessee as a transfer under Section 2(47) of the Income Tax Act, 1961, thus chargeable to capital gain.

The CIT(A) adjudicated the issue in favor of the assessee, noting that:
- The land was held as stock in trade and not as a capital asset, making Section 2(47) inapplicable.
- The development agreement did not transfer possession of the land to the developer.
- The sale deed was to be executed by the assessee in favor of the proposed members, indicating that the ownership remained with the assessee.
- The consideration of ?2.86 Crore was to be received in the future, not at the execution of the agreement.
- The assessee recognized revenue on a proportionate basis as and when the units were booked.

The Tribunal upheld the CIT(A)’s decision, agreeing that:
- The land was held as stock in trade, not a capital asset.
- The development agreement did not transfer possession of the land.
- The assessee correctly recognized revenue based on the completion of work by the developer.
- The assessee's method of recognizing income was consistent with the accounting standards for real estate development.

Issue 2: Deletion of Disallowance of Consultancy Fees
The AO disallowed consultancy fees of ?4,50,000/- on the grounds that the assessee did not explain the nature of services provided with supporting documents. The CIT(A) deleted the disallowance, observing that:
- The assessee provided a copy of the bill for the consultancy fees paid to S.S. Baid.
- The payment was made through banking channels after complying with TDS provisions.
- The AO did not point out any instances of payment being made for non-business purposes.

The Tribunal agreed with the CIT(A), noting that:
- The assessee provided necessary documentation and complied with TDS provisions.
- The payment was made through banking channels, indicating bona fide business expenses.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s decisions on both issues. The assessee correctly recognized revenue from the sale of land based on the development agreement and provided adequate documentation for the consultancy fees, justifying the deletions made by the CIT(A).