2018 (1) TMI 888 - AT - Income Tax

Capital gains - transfer u/s 2(47) - Taxation of profits arisen on handing over of possession of development rights together with land in terms of the shareholders agreement - Legal transfer given u/s 2(47)(v) - income accrued to assessee - Held that - Even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is, therefore, not the income of the assessee. It is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48. The consortium parties were under obligation to provide the developed land along with necessary approvals and permissions from the concerned competent authorities, i.e. GDA, having a total FSI area of 34,94,371 sq ft, i.e. an FSI area of 47,933.76 sq ft per acre of land and in case they failed to provide such FSI, then they would be liable for penal consequences and so much so the consortium parties could not withdraw their amounts fixed under the agreement. In this way, unless and until the approvals and permissions are granted by GDA, it cannot be said that any income accrued to the appellants.- Decided in favour of assessee. Admissibility of land development expenses - Held that - Because we have already held while adjudicating the ground nos. 1 to 3 above that such development rights together with land in relation to the stipulated land under shareholders agreement dated 18th May 2007 cannot be taxed in Assessment Year 2008-09 in the absence of registration u/s 17(1A) of the Registration Act, 1908. Hence it is not necessary to decide the issues involving computation of profits and because this ground relates to the computation of profits, therefore we are not adjudicating upon the issue and this ground has become infructuous and dismissed . FCD Interest allowability - Held that - No doubt that the debentures have been allotted by the SPV as part of the sale consideration of development rights together with land in terms of the shareholders agreement dated 18th May 2007, but because there were various obligations which had to be carried out by the assessees, more particularly obtaining of approvals and permissions and because till all the conditions are completed, the appellants could not withdraw any amount from the SPV. The accrual of interest on FCD is also linked with the transfer of development rights together with land and accordingly it is correctly credited to the WIP account. Basically, it is a revenue neutral exercise because ultimately it will increase the profits in the year as and when approval is made and the profits have been offered by the assessees.Therefore, the additions in dispute are deleted. Deemed dividend u/s 2(22)(e) - Held that - We hold that the additions as made by the CIT (Appeals) in terms of section 2(22)(e) of the IT Act are not correct because such amounts received cannot be considered as loans and advances. Even otherwise also, the payer companies had already made their investment in capital field more than the accumulated profits and in that situation it cannot be considered that those companies were having physical possession of accumulated profits capable of being disbursed. Therefore, the additions in dispute stand deleted. Addition of cash payment u/s 40A(3) - Held that - Provision of section 40A(3) is applicable when any expenditure has been incurred and claimed by way of debiting to the profit & loss account. In the present case, the assessee had not claimed the expenditure of ₹ 26 lakhs because the same has not been debited in the profit & loss account. Moreover, the repayment of debt is not covered u/s 40A(3) of the IT Act because the amount of ₹ 26 lakhs was paid by the appellant to Saamag Construction Ltd. as repayment of the debt, hence the addition in dispute is deleted. Allowability of Legal & Documentation Expense - Held that - We agree with the view of the Ld. CIT(DR) that basically the admissibility or inadmissibility of the expenditure so incurred has to be seen only in those years in which the profits and gains from transfer of development rights together with land as contemplated under the shareholders agreement dated 18th May 2007 would be considered and because we are holding, in view of the judgment of the Supreme Court in the case of Pr. CIT vs. Balbir Singh Maini (2017 (10) TMI 323 - SUPREME COURT OF INDIA), that on account of the non-registration of the shareholders agreement dated 18th May 2007, the provisions of section 2(47)(v) of the IT Act cannot be applied and transactions cannot be considered as transfer for the purpose of levy of income-tax. Therefore, no specific addition on this issue is called for because even the assessee had not claimed the same by way of debiting to the profit & loss account. This ground has become infructuous. Addition on account of settlement of debts - Held that - So-called settlement of debts is the combination of revaluation of land owned by SRPL, which have been made SPV under shareholders agreement, coupled with the chargeable interest on the amount advanced by appellant to SRPL plus the expenses required to be incurred and borne by the appellant under shareholders agreement. Therefore, in the interest of justice, we direct the AO to calculate the interest on the amount of advance made by the appellant to SRPL from the date of its advancement @ 14% per annum and tax the same in the year under appeal and out of the balance amount of so-called settlement of debt whatever amount the appellant has incurred on legal expenses of ₹ 1,46,02,000/- for increase in authorized capital of SRPL and loss on wrong registry expenses ₹ 1,43,64,501/- incurred in relation to the land of SRPL be excluded and the residual amount be treated as capital receipt not liable for tax. However, such amount of ₹ 1,46,02,000/- legal and documentation expenses and wrong registry expenses ₹ 1,43,64,501/- will not form part of WIP as claimed by the appellant against development rights together with land as discussed above. As a result, this ground is partly allowed. Unexplained expenditure u/s. 69C - disallowance was made on the basis of seized material - Held that - When the assessee has not purchased any land from the persons mentioned in the papers, no addition can be made on the basis of such papers. The Assessing Officer has not made any independent inquiry from such personsand in the absence thereof no addition can be made. We further note that the Assessing Officer did not bring any adverse material on record or gave a finding with cogent evidence contrary to that of the assessee. AO has not brought any independent corroborative material suggesting that the assessee has purchased such land and has made the payment as recorded in seized papers. Hence, in the absence of any such action by the AO. CIT(A) has rightly deleted the addition in dispute

Summary

Issues Involved:
1. Taxability of consideration received on account of transfer of development rights.
2. Accrual of consideration in the year under consideration.
3. Disallowance of land development expenses.
4. Disallowance under Section 40A(3) of the Income Tax Act.
5. Accrual of interest on Fully Convertible Debentures (FCDs).
6. Jurisdiction of Commissioner of Income Tax (Appeals) [CIT(A)] to enhance income and applicability of Section 2(22)(e) of the Income Tax Act.
7. Additional ground regarding the non-registration of the shareholders' agreement.
8. Deletion of addition made by the AO on account of unexplained expenditure under Section 69C.
9. Deletion of addition on account of deemed dividend under Section 2(22)(e).

Detailed Analysis:

1. Taxability of Consideration Received on Account of Transfer of Development Rights:
The lower authorities held that the sums received by the assessees on account of transfer of development rights in the underlying land were taxable in the respective assessment years. The assessees contended that the consideration had not accrued to them in the year under consideration because the transfer of development rights was subject to various obligations and regulatory approvals.

2. Accrual of Consideration in the Year Under Consideration:
The assessees argued that the consideration had not accrued in the year under consideration due to the pending regulatory approvals. The Tribunal admitted the additional ground based on the Supreme Court's judgment in CIT vs. Balbir Singh Maini, which held that an unregistered agreement could not be treated as a transfer under Section 2(47)(v) of the IT Act.

3. Disallowance of Land Development Expenses:
The assessees contended that land development expenses should be fully allowable while determining the profits arising from the transfer of development rights. The Tribunal agreed that such expenses should be deducted from the consideration fixed for the development rights together with land, as per the shareholders' agreement.

4. Disallowance Under Section 40A(3) of the Income Tax Act:
The Tribunal held that the provision of Section 40A(3) is applicable when any expenditure has been incurred and claimed by way of debiting to the profit & loss account. Since the assessees had not claimed the expenditure of ?26,00,000, the addition was deleted.

5. Accrual of Interest on Fully Convertible Debentures (FCDs):
The Tribunal found that the accrual of interest on FCDs was linked with the transfer of development rights together with land and was correctly credited to the Work In Progress (WIP) account. This accounting policy resulted in a revenue-neutral exercise, as it increased the profits in the year when the profits were factually chargeable to tax.

6. Jurisdiction of CIT(A) to Enhance Income and Applicability of Section 2(22)(e):
The Tribunal held that the CIT(A) had no jurisdiction to enhance the income by determining new sources of income. The provisions of Section 2(22)(e) were not applicable to the sums in question, as the transactions were undertaken during the course of development of a residential project.

7. Additional Ground Regarding Non-Registration of the Shareholders' Agreement:
The Tribunal admitted the additional ground based on the Supreme Court's judgment in CIT vs. Balbir Singh Maini, which held that an unregistered agreement could not be treated as a transfer under Section 2(47)(v) of the IT Act.

8. Deletion of Addition Made by AO on Account of Unexplained Expenditure Under Section 69C:
The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO on account of unexplained expenditure under Section 69C, as the AO had not made any independent inquiry to substantiate the addition.

9. Deletion of Addition on Account of Deemed Dividend Under Section 2(22)(e):
The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO on account of deemed dividend under Section 2(22)(e), as the transactions were in the form of current and inter-banking accounts and did not bear the characteristics of loans and advances.

Conclusion:
The Tribunal's judgment provided relief to the assessees on multiple grounds, including the non-registration of the shareholders' agreement, the accrual of consideration and interest, and the disallowance of expenses and additions under various sections of the Income Tax Act. The Tribunal also upheld the CIT(A)'s decisions to delete additions made by the AO on account of unexplained expenditure and deemed dividend.