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TMI Blog2011 (10) TMI 491X X X X Extracts X X X X X X X X Extracts X X X X ..... For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the appellant had not made any transfer liable to capital gains tax during the relevant year. 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer erred in not reading the agreements of Prestige Estates Private Limited with the appellant and its shareholders as a whole. 5. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the agreement entered into by the appellant was only for development of property and not an agreement for transfer of any asset. 6. For that the Commissioner of Income Tax (Appeals) has failed to appreciate that the appellant has not alienated any immovable property during the year under appeal. 7. For that the Commissioner of Income Tax (Appeals) wrongly concluded that the appellant had transferred 50% of the land owned by it. 8. For that the Commissioner of Income Tax (Appeals) failed to appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 50% of 6.29 acres i.e. 50% of 274472 Sq. Ft = 1,37,236 Sq. Ft which already belonged to the appellant company. 18. For that, without prejudice to the above that there was no transfer, the Commissioner of Income Tax (Appeals) erred in treating the guideline value as the full value of consideration. 19. For that without prejudice to the above that there was no transfer, the Commissioner of Income Tax (Appeals) failed to appreciate that the guideline value adopted by the Assessing Officer for the purpose of computation of capital gains at a uniform value of Rs. 4,000/- per sq. ft both for land as well as built up area, is exceedingly high and arbitrary. 20. For that, without prejudice to the above that there was no transfer, the Commissioner of Income Tax (Appeals) failed to appreciate that the cost of square foot of land and cost of construction of square foot of built up area cannot be equal and arbitrarily applied the same built up area and at best could only have treated the guideline value of the built up area that could possibly belong to the shareholders of the appellant prior to the transaction as the full value of consideration. 21. For that without prejudice to the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the appellant company, to be by way of fresh allotment of shares by the appellant company. (5) For that, without prejudice to the above that there was no transfer, the Commissioner of Income Tax (Appeals) erred in treating the guideline value adopted by the Assessing Officer as the full value of consideration and upholding the FMV as on 1.4.1981 fixed by the Assessing Officer. (6) For that, without prejudice to the above that there was no transfer, the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer erred in computation by not deducting the cost attributable to the Open Space Reservation. (7) For that without prejudice to the earlier grounds the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer has calculated the capital gains, incorrectly. (8) For that the Commissioner of Income Tax (Appeals) erred in disallowing depreciation on roads as the required details are available with the appellant. (9) For that the Commissioner of Income Tax (Appeals) failed to appreciate that the sum of Rs. 2,28,52,741/- is chargeable under the head profits and gains of business or profession. (10) For these grounds and suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its confirmation by the ld. CIT(A). 5.1 As regards first issue, facts indicate that the assessee company has entered into an agreement on 26.05.06 at Bangalore with M/s. Prestige Estates Projects Private Ltd. (PEPL). The salient features of the agreement are as under: * Large part of the "Schedule Property" the assessee owns and which still remains undeveloped with old dilapidated buildings which are no longer required by the assessee company; * The assessee company is desirous of developing the Schedule property into a. modern commercial building consisting of office building and a shopping mall ; * PEPL is in the business of real estate development, construction, managing and leasing office space and malls and has gained considerable expertise in real estate development, management and leasing of office spaces and shopping malls; * The type and nature of development : Out of total Schedule property, an extent measuring approximately 6.29 acres identified in the red colour portion (hatched portion) in the plan annexed hereto as Annexure I shall be developed by constructing thereon an office building a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancy mix, fixation and tenancy programming of the building/s to be built on the Schedule Property. This Management fee of Rs. 10 crores will be paid/adjusted in instalment over the period of implementation of the project. (b) For the purpose of facilitating investment by the Second Party the aforesaid amount, the First Party shall open a separate Bank account in the name of the First Party, to be operated by the Second Party and its authorized Signatories up till the investment by the Second Party reaches Rs. 115 crores. The Second Party shall bring in its own funds for the purpose of implementation of the project to the extent of the Investment to be made by the second party, into this account and is fully authorized to payout and discharge all the expenses and costs incurred on the project. The amount so brought in by the Second Party into this account shall be treated by the First party as Second Party's payment towards allotment of shares of the First Party until the investment by the Second Party reach Rs. 115 crores including the Project Management Fee. (c) All additional investment to be made in the project for construction and completion of the buildings in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Its clearly agreed between the First Party and the Second Party, that office building and the shopping mall has to be built utilizing about 6.29 acres of land marked in the plan attached as Annexure 1, with not less than 9,80,000 sq.ft. of built up area. To achieve this built up area it shall be lawful for the Second Party to utilize the unused FSI of the rest of the Schedule Property. It is further agreed between the parties hereto that upon sanction of Construction plans by the statutory authorities, it shall be lawful for the first party to dispose of in any manner the portions of the Schedule Property other than the above six acres of land, reserved for the office building and the shopping mall. The First Party shall be free to undergo the process, of merger and demerger for separating the portions of the Schedule Property, without altering the shareholding pattern and all such process including clearance of statutory liabilities arising of such transactions shall be completed by the First Party before allotment of shares to the Second Party before allotment of shares to the second party in terms of this agreement. (b) The First Party has also agreed to clear/discharge a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond Party, create charge I lien on the shares held by them in the said company. (d) That they shall not appoint Directors to the said Company other than amongst themselves, without the consent of the Second Party." * "5. The members of the First Party agree that upon Second Party completing an investment of Rs. 115 crores in the project as per the terms of the joint development agreement, the Second Party shall be entitled to seek allotment of such number of shares so as to make members of the First Party and the Second Party become equal stake holders in the said Company, thereby converting the said company as a special purpose vehicle to implement and own the project." * "8. It is clearly agreed between the First Party and the Second Party that if any of the members of the First Party wish to dispose off their shareholdings the other members of the First Party shall have the first opinion to purchase the same and in the event any other members of the First Party refuse/do not opt to purchase the shares, the Second Party shall have an option to purchase the same. Except this all other situations the First Party and the second party agreed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution and the second party brings in its experience, expertise and funds to do the development of the schedule property and both the parties share land and the buildings to be developed thereon in equal shares i.e. 50:50 and enjoy the usufructs thereof in the same ratio..". Please explain why this should not be treated as a joint venture and taxed accordingly as transfer in the hands of M/s Vijaya Productions Pvt. Ltd. Ans. no. 4. At pp2 of the agreement referred to in the question the development would be as a joint venture wherein VPPL brings in the property as its contribution and PEPL does the development; the intention of the agreement is not a joint venture in the legal sense but the property would remain with VPPL and PEPL would bring money into VPPL towards share application money and shares would be allotted to PEPL once they bring in Rs. 145 cr. at 50% of equity shares and the present shareholders shareholding would be 50% of the shareholding at that point, by which PEPL gets 50% interest in the assets of the company, subject to clause 7 a of the said agreement at pp8. All payments for development are made by VPPL. Q. no. 5. What is the area that is agreed to be dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not on the balance treated as share premium of Rs. 109 cr. Please explain the commercial expediency of PEPL. Ans. no. 14. This can best be answered by PEPL Q. no. 15. What is the value of the property in the books of account of VPPL in AY 06-07? Ans. no. 15 The value of the property in the books of account in AY 06-07 is Rs. 52.36 cr. for 230 grounds and this has been the value from 31.3.2003 onwards. Q. no. 16. Please refer to pp 77 of the agreement referred to above. In the event of sale by the shareholder the existing shareholders of PEPL, the first right of refusal would lie with the other party. What would be the valuation of shares in that event? Ans. no. 16. The valuation of shares would be as per the prevailing market price of the shares based on the asset value and the future earnings of the company which will be mutually agreed upon. Q. no. 17 Is there any power of attorney granted for the said property? If yes, is it irrevocable? Ans. no. 17. A specific power of attorney was granted to Shri Swarup Anish and T. Arvind Pai of PEPL to carry out specific acts in connection with approvals and representation for the development of the property before the local autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. The agreement dated 26.05.2006 is only an agreement of understanding which had clauses to safeguard that in case PEPL is not able to bring in the share capital, the amount brought in by PEPL will be refunded by the assessee company giving reference to Entitled Rules for Interpretation of Deeds and Documents and following rules of interpretation, it has to be noted by reading document/agreement and stating 4 rules of interpretation, it was pleaded that the agreement is to be read in terms of guidelines, which is clear in its scope and intention and reference was made to clause 6 (ix) in page 3 which states that the agreement is for subscription to share capital, which is further reiterated in the shareholder's agreement. It is because the agreement has not been read as a whole, the Assessing Officer has held that there was a transfer of the asset, which is neither proper nor justified and the ld. CIT(A) has just upheld the view of the Assessing Officer without appropriately considering the issue in the light of various documents produced. The assessee's counsel has relied upon the decision of Hon'ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case. Para 5 of page 2 of the agreement, it was clear intention of both the parties to the agreement to jointly undertake the development of the schedule property into an office building and a shopping mall as a joint venture, wherein the first party i.e. the assessee brings in the schedule property as its contribution and the second party brings in its experience, expertise and funds to do the development of the schedule property and both the parties share land and building to be developed thereon in equal shares and enjoyed the usufructs thereof in the same ratio. As regards consideration of 50% of the total built-up area along with the 50% of all other benefits such as car parking, terrace and other benefits in the building/mall of the constructed area, it is further stated that it was obligatory of the second party to apply for and secure all necessary approvals for commencement of construction and completion of the project. The power of attorney executed on 28.12.2006 by the assessee in favour of Shri Swaroop Anish and Shri T. Arvind Pai belonging to PEPL authorizes them to perform all the functions as are necessary for the development of the project. On that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y when there is a "transfer" of "capital asset". The term "transfer" has been defined in section 2(47) of the Income-tax Act and in relation to that capital asset includes : I. The sale, exchange or relinquishment of the asset, or II. The extinguishment of any rights therein, or III. Compulsory acquisition thereof, or IV. Conversion of assets into stock-in-trade, or V. Any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the TP Act, 1882, VI. Any transaction (whether by becoming member, acquiring shares etc. in a company or AOP etc. by way of agreement or arrangement etc.) which has the effect of transferring or enabling the enjoyment of, any immovable property. Therefore, the term "transfer" as defined in the Act is wider in scope and covers both a transfer by the act of the parties as well as transfer by operation of law. The definition is inclusive in nature and had been defined in relation to a capital asset. Thus existence of an asset is essential at the time of transfer. In the case of the assessee, the assessee was own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulting in transfer as defined in section 2(47) of the Act. Thus, in our view, the Assessing Officer has rightly held that the assessee has factually transferred 6.29 acres of land out of which the assessee would benefit by way of 4,90,000 sq.ft. of built-up area and 50% consideration and the balance consideration includes car parking, terraces and other benefits for the transaction with PEPL to hold that the transaction taken place amount to transfer of capital asset and exigible for capital gains/capital gains tax and he has rightly invoked section 50C of the Act for arriving at a right figure of capital gains by taking value of Rs. 4,000/- as sq.ft. cost and the ld. CIT(A) is fully justified in upholding the action of the Assessing Officer in view of the discussion held with the support of case law cited and applied. While concurring with the finding of the ld. CIT(A), we uphold his action and dismiss the ground taken by the assessee in this regard. 9. As regards, other contention of the ld. Counsel for the assessee that the transactions are in pursuant to share allotment agreement and not for joint venture agreement is concerned, it is seen that in a return of Rs. 115 crores pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ld. CIT(A) upheld the action of the Assessing Officer on this point and because of which, the assessee has come up in further appeal and while reiterating the submissions as made before the Assessing Officer and the ld. CIT(A), it was pleaded for treating the lease rent received from Diana Hotel as business income instead of income from other sources as held by the Assessing Officer and confirmed by the ld. CIT(A). 11. As regards shifting income from 'Business Income' to "other sources", it was, statement of facts filed with appeal papers and at the time of hearing, submitted that the assessee has leased out 72 grounds of land at 183, N.S.K. Salai, Vadapalani, Chennai to M/s. Diana Hotels Ltd., Hyderabad. For this, the assessee company has entered into a memorandum of revenue sharing leave and license arrangement dated 6.6.2005. A hotel by name Green Park has been constructed with buildings on the land leased out and is run by M/s. Diana Hotels Ltd. The assessee company has admitted a gross receipt of Rs. 2,28,52,471/- during the previous year relevant to the assessment year 2007-08 for leasing out the land. The lessee company has described the payment to the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dum of appeal and endorsement to this effect has been made by the ld. Counsel for the assessee on the bottom of grounds of appeal at page 3. Therefore, this ground of appeal is dismissed as not pressed. 13. As a result, the appeal of the assessee gets dismissed. Abraham P. George, Accountant Member - Despite discussions, deep study of the order of Ld. Judicial Member and despite giving considerable thought, I find it difficult to subscribe to the view taken by the Ld. JM that there was a 'transfer' within the meaning of Section 2(47) of the Act of 6.29 Acres of land or any part thereof during the relevant previous year, by the assessee to M/s. PEPL. I am also unable to subscribe to the view that consideration for the alleged transfer was correctly worked out by the Assessing officer. Again I find it difficult to confirm the order of the Ld. JM that a sum of Rs. 2,28,52,4671/- was correctly treated as income under the head 'Income from other sources', whereas assessee returned the sum under 'Profits and Gains of business/profession'. I therefore proceed to write a separate and dissenting order on these aspects. Before giving reasons it would be necessary to dwell on certain facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exure 1 to this agreement and hereinafter referred to as Schedule Property for the sake of convenience and brevity. Whereas the First Party acquired absolute ownership over the Schedule Property in terms of the documents of title, morefully described in Annexure 2, to this agreement and the First Party represent and warrant that, ever since the date of acquiring the Schedule Property, the First Party is in peaceful possession and enjoyment of the Schedule Property without any let, claim or hindrance from anyone and that its title to the Schedule Property is free from all encumbrances, charges, claims of any kind, demands acquisition proceedings, restrictive covenants and servitudes. Whereas the First Party further represents that the Schedule Property is a commercially classified land and capable of being developed into commercial building/s and that there is no legal impediment/s to develop the Schedule Property into commercial building/s under any law for the time being in force. Whereas a portion of the Schedule Property is developed into a hotel, large part of the Schedule Property still remains undeveloped with old dilapidated buildings which are no longer required by the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping Mall with a total super built-up area of not less than 980,000 sft. In putting up this construction, it is clearly agreed and understood between the First Party and the Second Party that the Second Party shall be entitled to utilize FSI of the entire Schedule Property, wherever possible and permissible by the concerned authorities. 3. Second party's right to develop: (a) The First Party hereby irrevocably authorizes, empowers and permits the Second Party to undertake development of the Schedule Property into an Office Building and a Shopping Mall with a total built-up area of not less than 980,000 sft. and in that connection get prepared the necessary concept drawings, architectural designs, sanction drawings by appointing an Architect of its choice and both the parties shall mutually finalise these plans and designs to achieve the aforesaid built-up area. (b) Pursuant to the above, the Second Party shall also be entitled to apply and secure all approvals and sanctions as are necessary to commence and complete the development. (c) The Second Party shall also be entitled to select, appoint contractors, consultants, engineers, and other agencies as may be n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the Second Party in implementing the project. (c) On the Second Party bringing in totally Rs. 115 crores investment into the project in the manner stated above, the First Party shall allot such number of shares as may be required so as to make the Second Party 50% equity shareholder and the Second Party thereby becoming entitled to the remaining 50% of the total built-up area along with 50% of all other benefits such as car parkings, terrace, and other benefits in the building/s to be built on the Schedule Property or any portions thereof, hereinafter referred to as the Second Party's Constructed Area. While so allotting the shares, the value of each share considered over and above the face value of each share will be treated as share premium. (d) All additional investment to be made in the project for construction and completion of the buildings in the Schedule Property shall be borrowed in the name of the First Party or be raised by disposing off built up areas in the office building to be built in the Schedule Property to the interested purchasers in open market at the rates to be decided by the parties hereto. For the purpose of borrowing, the built up ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control of Second Party and all other conditions being normal, the Second Party shall complete the project within 36 months from the date of commencement of construction with a grace period of 3 months. (iv) Upon completion of the project or during the implementation of the project the Second Party shall be responsible for tenancy programming, finalizing the leasing terms in consultation with the First Party. (d) Compliance of Statutory Requirement: In construction and completion of the project, the Second Party shall fully adhere to the sanction plans, permits and licenses issued by the concerned statutory authorities and keep the First Party and all its present directors fully indemnified against action, loss or claim on account. 6. Covenants and obligations of the first party : The First Party represents and covenants with the Second Party that : (i) the First Party is the sole and absolute owner of the Schedule Property and apart from the First Party no one else has/have any right title or interest in the Schedule Property. (ii) the Schedule Property is free from nil encumbrances, charges, lien, claims of any kind, litigations, acquisition/requisition procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the plan attached as Annexure-1, with not less than 980,000 sq.ft. of built up area. To achieve this built up area it shall be lawful for the Second Party to utilize the unused FSI of the rest of the Schedule Property. It is further agreed between the parties hereto that upon sanction of Construction plans by the Statutory Authorities, it shall be lawful for the First Party to dispose of in any manner the portions of the Schedule Property other than the about six acres of land reserved for the Office Building and the Shopping Mall. The First Party shall be free to undergo the process of merger and demerger for separating the portions of the Schedule Property, without altering the shareholding pattern and all such process including clearance of statutory liabilities arising of such transactions shall be completed by the First Party before allotment of shares to the Second Party in terms of this agreement. (b) The First Party has also agreed to clear/discharge all liabilities, including contingent liabilities and dispose of all other assets as appearing in its books of account, before allotment of shares to the Second Party. As at the time of allotment of shares to the Second Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Second Party and also sue the Second Party for the damages/losses incurred by the First Party on account of such breach. (v) In case of delay in completing the project beyond agreed time, after the grace period of 3 months, the Second Party shall be liable to compensate the First Party @ Rs. 25,00,000/- per month of delay out of its own funds and expenses until completion of the project. (C) By the First Party: Failure on the part of the First Party to observe and perform all its obligation: detailed under clause 6 above and any misrepresentations shall constituted breach by the First Party. (D) Rights/Remedies Available To The Second Party : The Second Party, apart from being entitled to specific performance shall also be entitled to sue the First Party to refund all the amounts invested by it Second Party in the project. Since the POA dated 5th January, 2007 also has a bearing on the issue this is also reproduced hereunder except for the schedule thereto. By this power of attorney, we, Vijaya Productions Private Limited, a Company incorporated in India, under the Companies Act, and having its registered office at 183, NSK Salai, Chennai, Tamil Nadu, represente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as may be required by the concerned authorities. 4. To appear on our behalf and in our name and to represent our interest before the Survey Authorities, Land Revenue and Assessor of Municipal Rates and Taxes, Town Planning Authorities, and Municipal Offices and other Government and Semi-Government Offices for the renewal or grant of Licences and Permits or for any other purposes as may be necessary under any local Act, Rule or Regulations and also to appear before any public or Government Office or other Authorities whomsoever in connection with the Schedule Property. 5. To make applications for water and sanitary connections, electricity supply and other incidental requirements which may be required in the Schedule Property from the Chennai Water Supply and Sewerage Board and/or concerned authorities. 6. To appear for and represent us before any and all concerned Authorities and parties as may be necessary, required or advisable for or in connection with the development of Schedule Property and to make such arrangement and arrive at such arrangements as may be conducive to development of the Schedule Property. 7. To institute, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto, or is treated by him as, stock-in-trade of a business carried on by him, such conversion of treatment; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.-For the purpose of sub-clauses (v) and (vi) 'immovable property' shall have the same meaning as in clause (d) of section 269UA. 4. No doubt the definition is an inclusive one. It is trite law that an inclusive definition, increases the reach of the word so defined, to the items specifically mentioned under such inclusion, over and above its natural meaning. We cannot say that the agreement transferred anything from assessee to anybody, in the normal sense of that word. Hence each of the 'inclusions' has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articipation in the equity to be issued in the assessee company and to be subscribed as and when the amount infused by M/s PEPL reached Rs. 115 Crores. More importantly clause 4(b) says that operation of the bank account in which such sum is deposited, though in the name of assessee company, shall be by M/s PEPL. Or in other words M/s PEPL held the right to withdraw the money deposited in such account and operations thereof. By implication, M/s. PEPL had parted with nothing on the date of agreement viz. 26.05.2006. It is here that the letter dated 9th March, 2010 written by M/s. PEPL produced by the assessee before learned CIT(A), becomes relevant. This is reproduced hereunder:- Sub : Confirmation of transaction with Vijaya Productions Pvt. Ltd., 183, NSK Salai, Chennai-26 - reg Ref : Appeal No. ITA 79/09-10 AY 2007-08 With reference to the above appeal, and as per the request from Vijaya Productions Pvt. Ltd., we wish to state as under: 1. We have entered into an Agreement with Vijaya Productions Pvt. Ltd., Chennai on 26-05-2006 and also a shareholders agreement dt. 26-05-2006 with the shareholders of Vijaya Productions Pvt. Ltd., Chennai. 2. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) which says that assessee was to demolish old structures in the property and clause 6(vii) which says that assessee was to evict all occupants in the property, within one month of obtaining sanction and approvals for construction. Paper Book Vol. I pages 36 to 38, pages 39 to 43, pages 44 and 45 are approvals from Tamil Nadu Fire And Rescue Services Department, Ministry of Environment & Forests, BSNL and Airports Authority of India, dated 10.12.2009, 12.06.2007, 11.06.2007 and 9.11.2009 respectively, whereby various sanctions have been given for construction, by such authorities. The dates were well after the relevant previous year and a few fell in financial year 2009-10. Even otherwise, it would be naive to presume that assessee would have parted with the possession of a valuable property for a simple promise for construction and a promise to subscribe to its shares, which were the only consideration mentioned in the agreement dated 26/05/2006. As per the Assessing Officer himself, the total amount brought in by M/s PEPL before the end of the relevant previous year was Rs.55 lakhs only. Agreements entered between private parties have to be understood in accordance with the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Tamil Nadu Fire & Rescue Services Department (PB-Vol. I-pages 36 to 38), environmental clearance dated 12-06-2007 from Ministry of Environment & Forests (pages 39 to 43), NOC dated 11-06-2007 from BSNL (page 44) and NOC dated 9-11-2009 from M/s Airports Authority of India (page 45) were all in the name of assessee. We cannot in such circumstances say that assessee had extinguished any of its' rights in the property. 7. Now taking up clause (v) of Section 2(47), can we say that there has been a part performance of the nature referred in Section 53A of the Transfer of Property Act (TP Act). The ingredients required to be satisfied for applying Section 53A of TP Act have been succinctly set out by Hon'ble Apex Court in Nathulal (supra) as under: "(i) there must be a contract to transfer for consideration any immovable property; (ii) the contract must be in writing, signed by the transferor, or by someone on his behalf; (iii) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained with reasonable certainty; (iv) the transferee, in part -performance of the contract, take possession of the property, or of any par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to M/s PEPL, so as to facilitate equity participation by M/s PEPL and there was no reduction of any share capital mentioned or contemplated by the parties anywhere in the agreement. Hon. Apex Court in the case of Khoday Distilleries Ltd. v. CIT [2008] 307 ITR 312/[2009] 176 Taxman 142 has held that word allotment indicated creation of shares by appropriation out of inappropriated share capital and such creation did not amount to transfer. Second finding is that after the agreement dated 26-05-2006, there was reduction in shareholding pattern to 50%. In the first place there was no allotment or transfer on shares during the relevant previous year by the assessee or its' shareholders. In the second place, shares can never be allotted by a company, by reducing its' share capital. Third finding of the learned JM is that through the agreement there was a transfer. I have already mentioned at paras-4 to 8 above, as to why I cannot find any transfer to have been effected in the relevant previous year. Fourth finding is that both parties had agreed to share the building 50:50. In my opinion this was not possible to be achieved through the above agreement, since on a breach by M/s PEPL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale consideration Rs. 2,50,89,44,000 (a)" The above working is, in my opinion incorrect and irrational. In the first place, assessee never received any land in the transaction. What it received was a promise that it would be given 4,90,000 sq.ft constructed area in lieu of half of the land. To presume that construction cost per sq.ft will be equal to guideline value of land per sq. ft. is illogical. They were not comparables. The value will have to be limited to net present value (NPV) of the probable construction cost of 4,90,000 sq.ft. and this has to be worked out based on industrial norms. Construction cost has to be discounted for getting the NPV, since the point of time at which assessee would receive the constructed area of 4,90,000 sq.ft. would be, as per clause 5(c)(iii) of the agreement, 36 months after the date of commencement of construction, with a further grace period of 3 months. Calculation made by the AO and confirmed by ld. CIT(A) were based on presumptions and surmises. Hence the NPV has to be worked out on the lines mentioned above by the AO, in the event capital gains is to be considered. Thus I cannot subscribe to the view of the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ads, I am in full agreement with the view taken by the ld. JM. 14. Hence out of concise grounds 1 to 10 filed by the assessee grounds 3 to 4 and 7 are allowed, ground No. 5 is partly allowed, ground No. 9 is allowed for statistical purposes and ground No. 6 and 8 are dismissed. Concise ground 1, 2 and 10 are general needing no specific adjudication. 15. In the result appeal of assessee is partly allowed. Reference under section 255(4) of the Income-tax Act, 1961 As there is difference of opinion between the Members constituting the Bench with regard to two issues so following questions are formulated and referred for nominating Third Member : 1. In view of the facts, circumstances and material on record, whether the addition of Rs. 231,99,11,568/- made by the Assessing Officer and confirmed by the ld. CIT(A) as income from capital gain could be upheld or deleted. 2. Whether in view of the facts, circumstances and material on record, the action of the ld. CIT(A) in confirming the order of the Assessing Officer in treating a sum of Rs. 2,28,52,471/- as income from other sources against declared as business income could be upheld or matter in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed before the Commissioner of Income-tax(Appeals). The learned Judicial Member, who proposed the order for the Bench, has held that the grounds raised by the assessee company are liable to be dismissed. He agreed with the findings of the assessing authority and the Commissioner of Income-tax (Appeals) and sought to dismiss the appeal filed by the assessee. 6. The learned Accountant Member, on the other hand, proposed a dissenting order. The learned Accountant Member accepted the contention of the assessee company that in the matter of the development agreement entered into with the Bangalore company, there was no transfer of any asset in the relevant previous year and as such there was no question of any capital gains arising in the hands of the assessee company in the impugned previous year. The first ground raised by the assessee company was allowed by the learned Accountant Member. 7. The learned Accountant Member also disagreed with the view of the learned Judicial Member on the quantification of the long term capital gains, in the event of the joint venture agreement being treated as a transfer liable for capital gains taxation. 8. The learned Accountant Member has further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d almost by consensus that the Third Member may reframe the question, if found necessary in the light of the findings arrived at by him in respect of the two questions already framed by the dissenting Bench. 16. In the light of the above prelude, I proceed to consider the issues placed before me. 17. Even though the learned Members of the dissenting Bench have stated the facts of the case, it is necessary for the sake of convenience and clarity that the bare facts of the case may be repeated in an absolutely condensed manner. 18. The assessee, M/s. Vijaya Productions Private Limited (VPPL) is the owner of the property consisting of land and buildings in Survey No. 5/23 at Vadapalani, Chennai. The property is known as 'Vijaya Studios', for the reason that the assessee is running a movie processing studio by name Vijaya Studio. The assessee earns income from studio hire charges. The assessee is also running kalyanamandapams by name Vijaya Seshmahal and Rani Mahal, earning hire income. The assessee is having other properties let out for rent. The assessee has used a portion of the land to run a hotel, from which the assessee company is getting share of the hotel business income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sisting of office buildings and shopping malls alongwith 50% of all other benefits such as car parking, terrace, etc. to be developed in the schedule property, to each of the parties. The Bangalore party PEPL is further entitled for the right to utilize the FSI of the entire property whenever possible and permitted by concerned authorities. The exact wording of this consideration in the agreement read that an extent measuring approximately 6.29 acres identified in the red colour portion in the plan annexed as Annexure-I to the agreement shall be developed by constructing thereon an office building and a shopping mall with a total super built up area of not less than 9,80,000 sft. and in putting up this construction it is clearly agreed and understood between the parties that M/s. PEPL shall be entitled to utilise FSI of the entire schedule property wherever possible and permitted by the concerned authorities. 18.5 In a nutshell, the relevant components of the development agreement are the following:- * The assessee, VPPL, commits 6.29 acres of its property valued at Rs. 115 crores as its 50% contribution towards the JV. The JV is a special purpose vehicle to dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity shareholder in the assessee company VPPL. In order to maintain the above ratio of 50% of the equity shareholding it was also agreed upon in the joint development agreement that the assessee company shall not increase its issued and paid-up capital by issuing additional shares to the existing shareholders. It is for the purpose of executing the above conditions stipulated in the development agreement that the shareholders of the assessee company have entered into another agreement with PEPL by name 'shareholders agreement' on 26-5-2006. The salient features of the shareholders agreement are:- * The agreement has been entered into between the shareholders of the assessee company, namely Shri G. Harischandra Reddy, Ms. G. Syamala, Ms. G. Parvathy, Shri A. Damodar Reddy, Shri A. Murali Krishna Reddy, Ms. A. Indira, Ms. G. Anuradha, Ms. G.V. Sanjana, Ms. G. Mallika, Shri G. Saratchndra Reddy and Shri G. Saba Nayagam, on the one hand and the Bangalore company PEPL on the other hand. * The shareholders on the first part owned 99.89% of the paid-up equity shares of the assessee company VPPL and the remaining 0.11% is owned by the remaining shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PEPL, the dominant shareholders of VPPL have entered into another shareholders agreement with PEPL to undertake the responsibility of allotting 50% of equity shares to PEPL. 19. It is in the above framework, that the whole scheme of developing the property has been arranged as a JV between VPPL and PEPL. 20. In the above factual scenario, the Assessing Officer examined the nature of the development agreement concluded by the assessee with PEPL. The Assessing Officer examined the annual reports and accounts of the assessee company, the development agreement entered into between the assessee and PEPL, the shareholders agreement entered into with M/s. PEPL, a detailed sworn statement given by the managing director of the assessee company and the detailed submissions furnished by the assessee company to the various propositions made by the assessing authority. After examining the facts and circumstances in a detailed manner, the Assessing Officer came to the conclusion that the development agreement entered into by the assessee company with PEPL has resulted in the transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961 and, therefore, the gains a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances, the Assessing Officer completed the assessment on a taxable income of Rs. 234,81,72,680/-. 25. The assessment was taken in appeal. The Commissioner of Income-tax (Appeals) confirmed that the joint venture agreement entered into by the assessee company was in the nature of transfer of a capital asset and the assessee was liable for capital gains taxation. He accordingly confirmed the addition of Rs. 231,99,11,568/- under the head long term capital gains. The Commissioner of Income-tax (Appeals) also confirmed the action of the Assessing Officer treating the business income of Rs. 2,28,52,471/- as income from other sources. The Commissioner of Income-tax (Appeals) has also upheld the other additions and disallowances. The first appeal was thus dismissed. 26. When the assessment was taken in appeal before the Tribunal, three grounds were raised by the assessee company: (i) To delete the addition of long term capital gains of Rs. 231,99,11,568/-; (ii) To allow depreciation as claimed by the assessee company; and (iii) To treat the sum of Rs. 2,28,52,471/- as business income as claimed by the assessee as against the Assessing Officer treating the same as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out by the assessing authority is not correct, as the method of computation adopted by the assessing authority is erroneous. 32. As the learned Members of the Bench have differed in their views on two issues as discussed above, questions were framed for reference to Third Member and as such the matter is placed before me. 33. The first question to be considered is whether in the facts and circumstances of the case, the addition of Rs. 231,99,11,568/- made by the assessing authority as long term capital gains is justified or not. 34. I heard both sides in detail and considered the relevant materials available on record. The Assessing Officer has come to the conclusion that there was a transfer of property within the meaning of section 2(47) after discussing the issue in the light of the Annual Report and accounts of the assessee company, the joint development agreement and shareholders agreement entered into with the Bangalore company PEPL and the sworn statement furnished by the Managing Director of the assessee company. 35. The crucial instruments relied on by the assessing authority to hold that there was a transfer of capital asset are the joint development agreement e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the agreement entered into between the shareholders of VPPL and PEPL. All the above features make out a case of a JV for developing a modern commercial complex by contemplating reconstruction in the control and capital structure of the assessee company; by adjusting rights in the immovable properties by providing the vacant land and in return getting a share in the undivided right over the land as well as in the built up area and by redefining the density of shareholding of the existing shareholders of the assessee company. 39. As far as the previous year relevant to the impugned assessment year is concerned, nothing has happened other than the execution of the agreements and bringing a small initial amount by PEPL and initiating the commencement of the project activities. The transfer of an immovable property always contemplates transfer of an existing property, i.e. a property in praesenti. The question in the present case is whether there is a property existing to be transferred by the assessee company VPPL. As far as the land of 6.29 acres is concerned, there is only an agreement. It is to be seen that the proposed JV is still to be born as the offshoot of the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rights of the assessee company and PEPL are with reference to the property to be built in future. Therefore, there cannot be a case of extinguishment of any right in the property held by the assessee. 41. The assessing authority has made a fundamental error in knocking down the wholesome business arrangement into independent segments and to treat certain segments as instances of transfer. The Assessing Officer concludes that providing 6.29 acres of land for the purpose of JV is a transfer. It is to be seen that the consent given by the assessee company to provide its land for developing the commercial complex is one of the necessary stipulations of the whole scheme. There cannot be an independent agreement per se, in assessee company permitting somebody to construct a commercial complex on its land. The provision made for 6.29 acres to facilitate the implementation of the JV is to be read always alongwith equally important other stipulations of the agreement. The investment of Rs. 115 crores by PEPL is again subject to the allotment of an appropriate number of shares in the equity capital of the assessee company to PEPL. 42. All these matters bring home an important point that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sort of right in favour of PEPL. 45. It is necessary to consider in this context that the only way for PEPL to acquire its rights in the properties of the joint venture project is to subscribe to the shares of VPPL in future, as stated in the shareholders agreement. If at all there could be a case of Transfer of an asset to PEPL, the said Transfer will not happen until PEPL has subscribed shares in the equity capital of the assessee company VPPL. As far as the previous year relevant to the impugned assessment year is concerned, the rights conferred on the assessee company VPPL and others are inchoate. 46. In the facts and circumstances of the case, I agree with the view taken by the learned Accountant Member and hold that the lower authorities have erred in concluding that the joint venture agreement entered into by the assessee company and PEPL has resulted in transfer of capital asset Therefore, I hold that the addition of Rs. 231,99,11,568/- made towards long-term capital gains has to be deleted. 47. On the question of treating the business income of Rs. 2,28,52,471/- as income from other sources, I find that the assessing authority has not discussed anything to that effect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company to PEPL. All these matters have to be determined on the basis of the development of the project year after year. The final line may be drawn on induction of the agreed funds and consequential allotment of shares to PEPL and on completion of the project. Anyhow the issue will have to be considered afresh, as and when it arises. 52. In short, I have to state that on both the questions referred to me, I agree with the views expressed by the learned Accountant Member. 53. Now, this file will be placed before the Regular Bench for passing orders to finally dispose of the case on majority view. ORDER Abraham P. George, Accountant Member - On account of difference between Members constituting the Bench, two issues were referred to Third Member by Hon'ble President. The said issues are reproduced hereunder:- (1) In view of the facts, circumstances and material on record, whether the addition of Rs. 231,99,11,568/- made by the Assessing Officer and confirmed by the ld. CIT(A) as income from capital gain could be upheld or deleted? (2) Whether in view of the facts, circumstances and material on record, the action of the ld. CIT(A) in confirming the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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