2020 (12) TMI 116 - AT - Income Tax

Income in hands of assessee - AO made an addition holding that out of the total estimated profit from the units sold in Lodha Supremus 50% profit belongs to the assessee - assessee submitted that in absence of transfer of units in Lodha Supremus , neither a sale can be recorded in the books of the assessee nor any income can be said to have arisen in the hands of the assessee - HELD THAT - Right to use and occupy the units in Lodha Supremus is inextricably linked to its shares/shareholders - as agreed that SNCML would sell the shares of the assessee which would entitle the buyer of the shares to possess and occupy the designated constructed area. The sale proceeds of shares of the assessee shall be accounted as business receipts by the SNCML. In view of the above arrangement, the assessee-company was left with no right to occupy or sale or lease or deal in any manner with the units of Lodha Supremus as their rights were attached to the shares of the assessee-company and total shareholding of the assessee was with SNCML. Hence, SNCML being holder of the shares of the assessee, carrying right to premises, had entered into an agreement with the third party buyers for transfer of equity shares as a result of which occupancy rights in the units in Lodha Supremus was transferred. During the FY 2010-11, the SNCML has recorded a sales consideration of ₹ 32,81,74,835/-. Thus in absence of transfer of units in Lodha Supremus , neither a sale can be recorded in the books of the assessee nor any income can be said to have arises in the hands of the assessee and consequently no income can be brought to tax in the hands of the assessee - Decided in favour of assessee. Addition on account 8% profit - AO taxing presumptively at 8% of the cost of construction of the project Lodha Supremus , treating the assessee as a contractor for the said project - HELD THAT - There is nothing on record that the assessee acted as a work contractor on behalf of SNCML to construct the building. The contribution agreement referred to by the AO is nothing but assigning the supervision of the construction to the assessee by SNCML as per section 10 of MOFA. The said agreement unlike that of any work contract, does not assign any contractual profit or commission to the assesseecompany. The assessee received contribution from the prospective unit buyers. The said contribution is entirely taken into account by SNCML for determining profit from the project. It offered the entire profit to tax. The said profit has been taxed in the hands of SNCML (assessee s holding company) even by the Income Tax Settlement Commission (ITSC). No part of the profit has been assigned to the assessee. Further, the computation of the cost of the project does not include any payment made the assessee as a contractor. Thus, the presumption of the AO that the assessee acted as a work contractor and thus earned profit is clearly contrary to the facts. Addition of capital gain - HELD THAT - The application of section 45(2) is attracted only when there is a conversion of fixed assets into stock-in-trade which is not the case under consideration thereon. Here, the assessee has no right to sell any unit, the godown right was embedded in the cost of the units developed which were sold by SNCML. Section 45(2) which relates to capital gain arising out of conversion of capital asset into stock-in-trade requires that in order to be chargeable to tax, there has to be a transfer u/s 2(47) of the Act and capital gain shall be brought to tax in the year in which the stock-in-trade has been sold. Since, there is no conversion of capital asset into stock-in-trade and there is no transfer of such right by the assessee-company since it has not sold any units of Lodha Supremus , as all the sales is recognized and taxed in SNCML, there is no question of any taxability in the hands of the assessee.

Summary

Issues Involved:
1. Taxation of income from sale of "Lodha Supremus" units.
2. Presumptive taxation of 8% profit treating the assessee as a contractor.
3. Taxation of capital gains under section 45(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxation of Income from Sale of "Lodha Supremus" Units:
The primary issue is whether the income from the sale of "Lodha Supremus" units should be taxed in the hands of the assessee or its parent company, SNCML. The assessee, engaged in land development and construction, filed its return for AY 2011-12 declaring a total income of Rs. Nil. SNCML, the parent company, owned the land and was responsible for the sale of units. The AO added Rs. 3,49,23,699/- to the assessee's income, assuming that 50% of the profit from the sale belonged to the assessee. However, the CIT(A) deleted this addition, reasoning that the income from the project was already taxed in the hands of SNCML, and taxing the same income again would result in double taxation. The Tribunal upheld this view, emphasizing that the assessee acted as a Special Purpose Vehicle (SPV) for SNCML, and no profit arose in its hands.

2. Presumptive Taxation of 8% Profit Treating the Assessee as a Contractor:
The AO presumed that the assessee acted as a contractor for the "Lodha Supremus" project and estimated a profit of 8% of the cost of construction. The CIT(A) rejected this view, stating that there was no agreement indicating that the assessee would earn any income as a contractor. The Tribunal agreed, noting that the contribution agreement did not assign any contractual profit to the assessee. The entire profit from the project was taxed in the hands of SNCML, and there was no evidence to support the AO's presumption.

3. Taxation of Capital Gains under Section 45(2) of the Income Tax Act:
The AO invoked section 45(2) of the Income Tax Act, computing capital gains of Rs. 12,83,41,400/- on the grounds that the occupancy rights of the godown were converted from investment into stock-in-trade. The CIT(A) disagreed, stating that there was no conversion of the godown rights into stock-in-trade and no sale of such stock-in-trade. The Tribunal upheld this view, explaining that the godown rights were held as an investment and were included in the project cost by SNCML. Since there was no conversion or transfer of the godown rights by the assessee, section 45(2) did not apply.

Conclusion:
The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decisions. The income from the "Lodha Supremus" project was rightly taxed in the hands of SNCML, and there was no basis for treating the assessee as a contractor or invoking section 45(2) for capital gains. The Tribunal's decision ensures that the same income is not taxed twice and respects the legal structure of the entities involved.