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TMI Blog2012 (10) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... p;5. The CIT (Appeals) has erred in concluding that entering into a development agreement tantamount to transfer of legal possession. 6. The CIT(Appeals) has erred in not considering the submission of the assessee that taxing the capital gains in the current year results in double taxation. 7. The CIT (Appeals) has erred in sustaining disallowance of interest expenditure of Rs. 9,83,824 in M/s. R.S. Arora Rubber Crop (Proprietary concern of assessee). 8. The CIT (Appeals) has erred in sustaining disallowance of interest expenditure of Rs. 3,64,479 in M/s. Fixo Seal Stoppers and Profiles (Proprietary concern of assessee). 3. The Revenue raised the following effective ground of appeal: The CIT(A) erred in directing the Assessing Officer to adopt the cost of land at Rs. 22,000/- per sq. yard as against Rs. 25,000 as adopted by the Assessing Officer to calculate the capital gains as the rate of Rs. 25,000 per sq. yard is supported by the letter of SRO, Marredpally which is available on file. 4. First we will take up assessee's appeal. Brief facts of the issue are that the assessee did business in the name of M/s. R.S. Arora Rubber Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which is absent in the present case. At best, the developer merely had the right to enter the property to do construction but does not have the right of legal possession exclusive of the owner that is the assessee. This fact is totally overlooked by the assessing officer. The other very important requirement of section 53A of the Transfer of Property Act is that the transferee (developer) must have performed or be willing to perform his part of the contract. In the present case, till the end of the previous year the developer has not performed his part of the contract. Because the Developer has not completed construction of the property, he cannot even be willing to perform his part of the contract. The developer can be considered to be willing to perform his part of the contract only when the construction is complete, if for some reason he does not deliver possession. This is not the case of the assessee. Hence the other important ingredient of section 53A of the Transfer of Property Act, does not get fulfilled. This fact is also overlooked by the assessing officer. As such, capital gains cannot be said to accrue during the current previous year. 7. The AR further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer has not given to the assessee any copy of the document on which he placed reliance which is in gross violation of natural justice. Therefore, placing reliance and making an addition based on the documents not offered to the assessee for rebuttal is bad in law. Thus even on this ground the addition made by the officer deserves to be deleted. 10. The learned AR submitted that the assessing officer has erred in adopting the SRO value as the basis of computation of consideration and the resulting capital gains. Though not admitting, for the sake of argument. if it is assumed that capital gains arises in the year in which the development agreement was entered into. though the developer was not in a position to perform his part of consideration and if it is further assumed that adoption of market value of land as per SRO is also as correct, the assessing officer ought to have considered the SRO rate applicable for the AY 2007-08 for computing the capital gains. In this regard the a copy information relating to market value of land in the month of April 2006 obtained from Sub-Registrar of Maredpally dated 2nd January 2010 is placed on record. Though adoption of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have taken place when the possession was handed over by the assessee to the developer and not on the date of agreement when only a small portion of cash consideration was received as earnest money on the date of agreement and possession was given long after fulfilment of other terms of the agreement and, therefore, the date of agreement was not relevant to decide the year of chargeability of capital gains. (c) Dy. CIT v. Asian Distributors Ltd. [2001] 119 Taxman 171 (Mum.) (Mag.) wherein the Tribunal held that the case of the AO precisely is that by virtue of the amendment to s. 2(47)(v) of the IT Act, there is a "transfer" of immovable property in the year under consideration. In order to appreciate as to whether the facts suggests "transfer" of immovable property in the year under consideration, it is necessary to bear in mind the facts and circumstances of the instant case and the specific clauses in the agreement dt. 29th July, 1987 as amended by the supplementary agreements dt. 24th Sept., 1987. Admittedly, the last instalment falls due in the month of May, 1988. For the assessment year under consideration, the previous year ends on 31st March, 1988. The clauses in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reements is not taxable under the head 'capital gains' in this year. (d) Ms. K. Radhika v. Dy. CIT [2011] 47 SOT 180/13 taxmann.com 92 (Hyd.) (URO) wherein the Tribunal held that that is clearly an erroneous assumption, and an the provisions of deemed transfer under Section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has received only a 'meager amount' out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor/l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 19-12-2003] The purpose of introducing sub-clause (v) in conjunction with sub-clause (vi) is to widen the net of taxation so as to include transactions that closely resemble transfers but are not treated vas such under the general law ...... In order to be 'transfer' within the meaning of sub-clause (v), there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. Secondly, such taking or retention of possession, as is well known, is a facet of the equitable doctrine of part performance of contract falling within the scope of section 53A of the Transfer of Property Act, 1882. Section 53A is not a source by which title to immovable property could be acquired but it only serves as a shield to defend one's lawful possession obtained pursuant to a contract for transfer of immovable property for a consideration..... Determination of date of transfer for purpose of section 2( 47) (v) There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill become exclusive possession of developer/transferee after he pays full consideration ....... Further, what is spoken to in sub-clause (v) of section 2(47) is the 'transaction' which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession or the instances of possessory acts exercised is not very relevant. The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. It is enough if the transferee has, by virtue of that transaction, a right to enter upon and exercise acts of possession effectively pursuant to the covenants in the contract. That tantamount to legal possession. Payment of entire sale price: That expression which reflects the language of later part of the second limb of section 53A of the Transfer of Property Act is not of much relevance in the context of the instant case ....... The fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) of the I.T. Act. While doing so, the CIT(A) relied on the decision of ITAT Pune Bench in the case of Taher Alimohammed Poonawala v. Addl. CIT [2009] 124 TTJ 387 wherein the Tribunal observed as under: "Where owners (assessees) had entered into an agreement for development of property and certain rights were assigned to developer who in turn had made substantial payment and, consequently, entered upon property and constructed flats, fact that legal ownership continued with owners to be transferred to developer at a future distant date really would not affect applicability of section 2(47)(v) and capital gain would arise in year in which agreement for development of property was entered into .... " 17. The learned DR relied on the decision in the case of Dr. Maya Shenoy (supra) wherein the Hon'ble ITAT Hyderabad observed as under: "Development agreement under which developer was to hand over 45 per cent of constructed area as consideration to assessee could not merely amount to granting of licence to builder to carry on development activities but would be a case of transfer under section 2(47)." The Hon'ble ITAT after analysing the issue further held that "In the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year shall be chargeable to income-tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place". 21. Thus the fundamental features which determine the taxability of capital gain, are that the gain ought to be from the transfer of a capital asset. This section has a large scope of its operation due to the presence of deeming provision which says that the gain shall be the deemed income of that previous year in which the transfer took place. This phrase can be interpreted in the manner that the total profits may actually be received in any other year, but for the purposes of S. 45, the gain shall be the deemed income of the year of transfer of the capital asset. It shall not be out of context, at this juncture, to mention an observation of the Hon'ble Authority of Advance Rulings in the case of Jasbir Singh Sarkaria (supra) that the expression used in sec. 45 is "arising", which cannot be equated with the expression "received" or even with the expression "accrued" as being used in the statute. The point which deserves notice is that the amount or the consideration settled may not be fully received or may not technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferee has taken or continued in possession, other than a right expressly provided by the terms of the contract: Provided that nothing in this section shall effect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof." 24. The doctrine of "part performance" is undoubtedly based upon the doctrine of equity. If one party has performed his part of duty then equity demands that the other party shall also perform his part of the obligation. If one party stood by his words then it is expected from the other party to also stand by his promise. Naturally an inequitable conduct of any person has no sanction in the eyes of law. 25. In the light of the ingredients of this section, which has been argued from both the sides, now we proceed to examine the factual matrix of the case in hand, herein below: (a) Starting words of s. 53A are "where any person contracts" which means just the existence of a contract. The assessee is the "person" who has entered into a contract with the developer vide agreement dated 12.4.2006. (b) This sections says "to transfer" means the said contract is in respect of a transfer and not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are concerned mainly with two certainties; one is passing of substantial consideration and second is passing over of possession. As far as the payment of consideration is concerned, we have already noticed that it is in the form of both cash as well as kind and payment made to the assessee has not been brought on record by the lower authorities and the same to be examined and considered by the CIT(A). (e) The other factor which governs the happening of transfer is the handing over of possession. This section says "and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession continues in possession in part performance of the contract and has done some act in furtherance of the contract". Retention of possession is open of the facet of part performance of contract. The agreement in question can be said to be a distinct transaction that has given rise to the event of allowing the contractor to enter into the property. What is contemplated by s. 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance. It is at that po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re all incidental to demonstrate the willingness of the transferee. On one hand, the power of JDA grants bundle of possessor rights to the developer simultaneously and on the other hand transferee's gesture of payment of consideration coupled with development work can be said to be a positive step towards willingness to fulfil the commitment. Facts of this case thus suggest that the developer had never intended to walk-out of the project and the flats were constructed by the developer. Being so, the transfer cannot be ruled out. 26. To sum up the owners have entered into an agreement for development of the property and certain rights were assigned to the developer who in turn had made the substantial payment and consequently entered into the property and thereafter if the transferee has taken steps in relation to construction of the flats, then it is to be considered as transfer u/s. 2(47)(v) of the I.T. Act. The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of s. 2(47)(v) as per the reasons assigned hereinabove. If the transferee was undisputedly willing to perform its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to Rs. 40,71,489, investment in SD Road amounting to Rs. 40,32,320 and some deposits amounting to Rs. 3,74,914. The Assessing Officer disallowed interest payment of Rs. 9,83,324 u/s. 36(1)(iii) on the ground that the above loan amount was not utilised for the business purpose but was diverted in making the investments. Similarly, on perusal of the Balance Sheet in the case of M/s. Fixo Seal Stoppers and profiles, it was noticed by the Assessing Officer that the assessee debited an amount of Rs. 52,01,765 from friends and relatives under the head unsecured loans and paid interest amounting to Rs. 3,64,479. Correspondingly, the assessee withdrew the capital and had a negative balance. Therefore, the Assessing Officer disallowed an interest of Rs. 3,64,479 u/s. 36(1)(iii) as the funds were not utilised for the business purposes and added back to the income of the assessee. 30. The learned AR submitted that the assessing officer disallowed interest of Rs. 9,83,324 in RS Arora Rubber Corp and interest of Rs. 3,64,479 in Fixo Seal Stoppers and Profiles holding that the funds were used for making investments, deposits and for assessee's personal use and were not used for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,809 and deposits of Rs. 3,74,914 appearing in the Balance Sheet both aggregating to Rs. 84,78,723 are considered as the personal assets of the assessee by the assessing officer. Since the assessee was proprietor of all the three business the assessing officer ought to have looked at the availability of aggregate of assessee's own capital in all the three firms to arrive at sufficiency of funds to meet the investments. From the above it is clear that the assessee had sufficient capital of his own to invest. These facts are overlooked by the assessing officer while completing the assessment. Thus the disallowance of interest made by the assessing officer is erroneous and accordingly, the AR requested to delete the disallowance. The AR further submitted that from the consolidated balance sheet it can be appreciated that the non-interest bearing unsecured loans available for investment are Rs. 64,28,456. Thus the aggregate capital and the non-interest bearing funds available to the assessee are Rs. 2,63,84,867. In view of this fact, assessee's capital and the non-interest bearing funds are sufficient to cover the investments and deposits aggregating to Rs. 84,78,723. 33. From the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 only can be said to have been funded from interest bearing unsecured loans. Thus the interest disallowance in the firm of Fixo Seal Stoppers should have been Rs. 2,27,663 (i.e., interest proportionate to Rs. 13,90,160). 36. The learned DR submitted that the investments were made in the properties at MG Road and SD Road and some deposits, It is seen that the assessee is a proprietor of M/s RS Arora Rubber Corporation, M/s Fixo Seal Stoppers and profiles and M/s. R.S. Constructions. The assessee filed the aggregate of the capital in all the three businesses in a tabular form which amounts to Rs. 1,99,56,411. The total investments made in the two properties namely at MG Road and SD Road amounted to Rs. 81,03,809 and the deposits made were Rs. 3,74,914 making a total of Rs. 84,78,723/-. The assessee in his submissions segregated the interest bearing and non interest bearing unsecured loans, out of the unsecured loans procured from friends & relative in two firms namely M/s. R.S. Rubber Crop. & M/s. Fixo Seal Stopper and Profiles. The assessee in his arguments during appellate proceedings worked out a formula by arriving at difference between the investments and non-interest bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance loans to sister concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. 38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not prese ..... X X X X Extracts X X X X X X X X Extracts X X X X
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