9911796707
TMI Blog2012 (6) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... 31,50,000 Indexed cost of land 9,18,10,345 Long term capital gain 1,00,39,655 2.1 During assessment proceedings, the Assessing Officer found that no evidence was available regarding the aforementioned development expenses claimed by the assessee. He also noticed that the Director Sri Raj Kumar Malpani had himself admitted during the course of survey that no such expenditure had been incurred. Accordingly, the development expenditure claimed above was disallowed. Further, it was also brought out from the record by the Assessing Officer that on 5.4.2002, Mr. Mohd. Khazim Ali Khan, the land owner entered into a Memorandum of Understanding (MOU) with Sri Raj Kumar Malpani. This was entered into by Mr. Malpani in his personal capacity wherein he received the rights of development of land from the landlord i.e., Mr. Khazim Ali Khan. He also received the rights to sell the land. The assessee company was not in existence at that time and was incorporated during the financial year 2004-05. Thereafter, the assessee-company entered into a MOU with the landlord on 09.01.2006 whereby the above mentioned rights were given to the assessee company. A portion of the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The learned AR submitted that there is no accrual of income at all and no part of the advance received of Rs. 4,00,00,000 is liable to tax because of there was no transfer of the property by the assessee in favour of Prakruti Infrastructure & Development Co. Ltd. The property which was agreed to be purchased from Mohd. Kazim Ali Khan was under litigation and title is not established. There was not even delivery of possession for any deemed transfer to be inferred by the assessee. The assessee did not have any possession of the property at all. What was received was merely an advance which is liable to be refunded if the transfer is not completed. The memorandum of understanding dated 23.2.2006 shall stand cancelled. Accounting entries do not bring about any accrual of income and what is to be considered is the legal effect of the transaction and not the accounting entries. 4.1 The AR submitted that the issues that arise for consideration before the Tribunal are as whether there was any transfer of property, what is the nature of receipt of the amount received by the assessee and whether there was any accrual of income and whether entries in books bring about accrual of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The assessee has not acquired the right to receive income because the assessee has not rendered the services which it has undertaken which would have created a debt in its favour. There is no enforceable right on the part of the assessee company to retain the amount received by it as its own without refunding it. Any property transfer pending litigation cannot defeat the rights of the true owner. Prime properties were declared to be the owner by the Hon'ble High Court. Therefore no rights flowed to the assessee under agreement dated 9.1.2006 and also under M.O.U. dated 23.2.2006. For the above reasons, the counsel for the assessee submitted that on the facts available on hand, there is no accrual of income at all upon the execution of MOU dated 23.2.2006. 4.3 The learned AR further submitted that mere accounting entries do not determine the accrual of income. He invited our attention to the following decisions which are directly on the subject: a. CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) b. CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 (SC) c. CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) d. CIT v. Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in land. The sum of Rs. 4 crores paid during the year accrued to the assessee. Disputes are continuing and the amount of Rs. 4 crores has not been refunded. Reference is made to the decision of the Bombay High Court of Estate Investment Co. Ltd. v. CIT [1980] 121 ITR 580/[1979] 1 Taxman 543 that where the assessee shows price as having been received, profit accrues even if a sale deed is not executed. Reference is made to the decision of the Supreme Court in CIT v. Bangalore Transport Co. Ltd. [1967] 66 ITR 373 in support that in business whatever money is received would contain element of income. No development was done on the land. Broadly above are the reasons on the basis of which the learned Commissioner of Income tax reduced the assessable income without accepting the assessee's basic contention that no income accrued at all. 4.8 The AR further submitted that the above observations of the CIT(A) do not establish the accrual of income because the agreement dated 9.1.2006 by the assessee with Mohd. Khazim Ali Khan is for development of the property after settlement of claims. It is clearly understood that the assessee will hold an extent of 25 acres of land for its own purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bangalore Transport Co. Ltd. (supra), the learned AR submitted that it may be true that where money is received, it may contain element of income. However, the requirement is that the money should be received as own money and there should be enforceable right to receive the money and of merely receive it as an advance to be refunded in case the obligations are not complied with. Therefore, both the decisions referred to are inapplicable. 4.11 The AR submitted that it is true that no development could be made on the land for the reason that the assessee hoped that the litigation will come to an end that it would be able to obtain the possession of property and that it can start the process of development. This has not taken place. On the contrary title was held to be in favour of someone else by the A.P. High Court and the possession of land is also not with the assessee. In the given set of facts, it was not possible to start the development activity. It was not as if the assessee did not want to start any development. The circumstances so conspired which led the assessee not being able to start the work. Hence, the conclusion and the understanding of the learned CIT(A) of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as per which "business" includes any trade, commerce, or manufacture. "Trade" in the contest of definition is a wider concept than an adventure in the nature of trade. An adventure in the nature of trade cannot, therefore, by itself be described as a trade, but should obviously imply in itself some at least of the elements of the trade. In the present case the assessee's intention in entering into the MOU on 9.1.2006 with Md. Khazim Ali Khan for purchase of land and development of this land and settlement of all legal disputes with a view to make profit out of this transaction and is a trading transaction. The MOU entered on 9.1.2006 with no intention of making investment. This is evident from clauses (2) and (3) of the MOU dated 9.1.2006 which reads as follows: "THEREFORE THIS MEMORANDUM OF UNDER-STANDING WITNESSETH AS UNDER 1. The First Party hereby transfers, assigns 100 acres in his 50% share, which he holds in the firm in favour of Second Party and the Second Party hereby became the holder of 100 acres of 50% share in the firm with all rights to share the asset of the firm i.e. land in survey No. 1007 of Kukatpally Village, R.R. District ad measuring 100 acres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of land i.e. 100 acres in Survey No. 1007, Kukatpally, R.R. District." 8. The above agreement shows that the assessee has no intention to hold the property as an investment and derive income from it. The assessee sold the same when there is appreciation in its value. Had the assessee had intention to sell the property at a later date at a higher value it could be transaction of capital gain and nothing commercial about it? It is a realisation of capital and conversion of one form of asset into another form. In the present case, the property has been committed to a trade and the assessee earned profit in the course of carrying on the business which an adventure in the nature of trade and in this course i.e., in the operation of property, the assessee earned profit and it is not just realisation of property. In our opinion, the assessee never intended to be owner of the land in question and it was not a simple purchase and sale transaction. Rather, the assessee facilitated the development and sale of land in question apart from taking responsibility of getting the process of disputes with respect to the land settled expedited. Therefore, it is clear that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms with the First Party and under the consent of Sri Mohd Khazim Ali Khan and the sale consideration was fixed at RS.12.5 acres and the Second Party has agreed to pay the same." 10. In our opinion, there are organised efforts by the assessee to earn profit. The surrounding circumstances suggest that the motive of the assessee is nothing but carrying on business. The presence of organisation set up for carrying out business and business operations carried on by the assessee suggest that the assessee earned income through business transactions that should be considered as business activity of the assessee. In our opinion, having regard to the nature of activities carried on by the assessee it has to be construed as trading activity of the assessee and the income emerged from this transaction has to be considered as income from business. Further, in our opinion, through the MOU dated 23.2.2006, the assessee is entitled to receive Rs. 12.5 crores and it is accrued to the assessee as the assessee has right to receive the same. As the assessee has been following the mercantile system of accounting and the whole amount of sale should be considered as accrued to the assessee. The CIT(A) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) and CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321/38 Taxman 195 (SC). In these cases it has been the consistent view of this court that if a receipt is a trading receipt the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt. It is the true nature and quality of the receipt and not the head under which it is entered in the account books which are decisive. This court has further observed that eventually if the amount so collected is passed on to the State Government or refunded to the purchasers, the assessee would be entitled to claim deduction of the sum when so paid or refunded. 13. In Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 (SC), the assessee carried on business as a distiller of country liquor and sold the produce to licensed wholesalers. The Government devised a scheme entitling the distillers to charge the wholesalers a price for the bottles in which the liquor was supplied, at the rates fixed by the Government which price was bound to be repaid on return of the bottles. The distiller collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke any difference in our opinion. Firstly, the consistent view of various courts, as noticed hereinabove, is that merely maintaining as liability under a heading given by the assessee would not alter the nature of the receipt if it actually be a trading receipt. Secondly, nothing is available on record to find out how and in what manner it was maintained by the assessee. 16. Learned counsel for the assessee relied on various decisions by different Courts and submitted that in identical facts and circumstances it was held not to be a trading receipt of the assessee and hence not liable to tax. We have carefully perused the decisions. It is clear from the facts stated by the Courts that in each of the cases the assessee's right to realise the amount was the subject-matter of dispute pending in the High Court. Thus the receipt of the amount by the assessee was clearly associated with a liability to refund the amount, which liability was ascertainable and quantified. Such is not the case at hand. We have also gone through the judgment of Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra). The facts of the case before the Supreme Court were that certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 85,30,257. 20. Brief facts of the issue are that the addition of Rs. 85,30,257 on account of indirect expenses added to the work-in-progress of the projects under construction. The Assessing Officer noticed that the assessee company was constructing a commercial complex in Himayathnagar, a 5 Star Hotel in Banjara Hills as well as another hotel in Abids, Hyderabad. The assessee-company classified the construction expenditure and related interest on these projects as capital work-in-progress. It was further noticed that the total expenditure of the company with respect to the projects, contracts and running of a restaurant was Rs. 7.6 crores approximately. The expenditure in respect of contract works and restaurant was Rs. 1.15 crores. Therefore, the Assessing Officer observed that 84% of the work of the company during the year related to the projects under construction. However, the assessee-company had not allocated any indirect expenditure other than interest to the projects under construction even though these accounted for 84% of the assessee's business. This resulted in artificially decreasing the profits. Accordingly, placing reliance on the decision of the Apex Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being allocating indirect cost relating to its construction project to its restaurant business, it does not imply that the mistake has to be perpetuated. Moreover, the onus lies squarely on the assessee to show that a particular indirect cost pertains to its running business and not to its construction project. During appeal proceedings the assessee did not present any evidence regarding the same. It is against human probability that out of Rs. 41.84 lakhs of administrative and general expenses, salaries to staff of Rs. 42.32 lakhs etc., not a single penny related to the construction project and the entire expenditure related to the restaurant and running business. 23. We have heard both the parties and perused the material on record. It is an admitted fact that the assessee not properly allocated the indirect expenditure other than interest to the project under consideration. The assessee considered the indirect expenses as a business expenditure and claimed as deduction instead of apportioning the same to the cost of the projects i.e., construction of commercial complex in Himayathnagar as well as a hotel in Abids, Hyderabad. The learned AR made contention before us that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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