9911796707
TMI Blog2015 (4) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... /s.143(3) of the Act, the AO did not think it fit to invoke provisions of Sec.45(2) of the Act either because he overlooked the applicability of those provisions or because he thought that the point of time at which tax is to be levied u/s.45(2) of the Act, viz., sale of the stock-in-trade had not occurred during the previous year. AO has relied on two important factors viz., (i) assessee has executed POA in favour of developer and the fact that assessee received refundable and nonrefundable deposits under the JDA, and (ii) the fact that several courts have held that capital gains is liable to tax on account of JDA entered into by the land owners with the builder on handing over of the possession of the property for joint development. In coming to the aforesaid conclusion, the AO has placed reliance on the decision of the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT, (2003 (2) TMI 62 - BOMBAY High Court) which was much before when the AO concluded the original assessment proceedings u/s. 143(3) of the Act on 31.12.2007. The other decision referred to by the AO in the reasons recorded is CIT v. T.K. Dayalu [2012 (6) TMI 405 - Karnataka High Court] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty development. For the A.Y. 2005-06, the assessee filed a return of income on 31.10.2006 declaring a loss of ₹ 2,22,77,004. Assessment u/s. 143(3) of the Act was concluded by order dated 31.12.2007. One of the issue that came up for consideration in the course of assessment proceedings u/s. 143(3) of the Act was as to, whether a sum of ₹ 14,27,65,043 which was debited to the P L account under the head compensation in lieu of cancellation of contract and claimed as deduction while computing income from business can be allowed or not? 5. The material facts with regard to the aforesaid claim made by the assessee are as follows. The assessee was in possession of around 100 acres of non-agricultural land situated in Whitefield area (hereinafter referred to as Whitefield land ). On 17/5/96, it entered into a shareholder s agreement with M/s Unitech Ltd. [ Unitech ] to jointly develop the land under a project called Shantiniketan . Under the terms of the agreement, Unitech was offered 50% shareholding of the company. The paid up share capital of the Assessee consisted of 20,000 equity shares of the face value of ₹ 1,000 for each share, i.e., total paid-up cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration of ₹ 37,50,00,000 paid to Unitech. The consideration was paid over a period between 30/12/04 and 21/2/05. The Assessee then entered into a new Joint Development of the property with Ms. Prestige Estate Projects Pvt. Ltd. [ PEPL ] on 5/2/05 to develop a residential complex by the name Prestige Shantiniketan . Consequent to the cancellation of the agreement, the assessee debited the difference between the payment made to Unitech Ltd. of ₹ 37.50 crores and payment received from them of ₹ 23.22 crores, being ₹ 4,27,65,043 to the P L Account for the previous year relevant to AY 05-06 as compensation in lieu of cancellation of contract. The question before the AO was as to whether the said claim for deduction can be allowed revenue expenditure for the previous year 6. According to the AO, the effect of the cancellation agreement dt. 28/2/05 was to free the title of the land from the encumbrance created in favour of Unitech. Taking into consideration the substantial increase in the value of land in the intervening period between 1999 and 2005, a premium of ₹ 14.27 crores was paid to Unitech and the said payment was for the purpose of ensuring As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of ₹ 14.27 crores as revenue expenditure for AY 05-06. The assessee owns land which has been negotiated for joint development. During the relevant previous year, it terminated its agreement with Unitech and renegotiated a joint venture with M/s Prestige Estate Projects. The assessee incurred a loss of ₹ 14.27 crores in terminating its agreement with Unitech. The point of dispute is whether the amount is allowable in the current year. The assessee has argued that the amount is revenue expenditure required to be al1owed u/s 37(1). The property was stock-in-trade of the company, and the loss was incurred in perfecting the title of the land. It is therefore admissible under S. 37(1). However the contention is the year in which the amount is to he a1lowed as revenue expenditure. The assessee has categorically stated that it is following project completion method for recognition of the profits from the joint venture development of the Shantiniketan Project. The amount of ₹ 14.27 crores is direct expenditure incurred on the land. Therefore the expenditure is allowable only in the year in which income arises from the project. This is the fundamental principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plex, commercial complex, office complex, hotel, mall etc. The said township has come to be known as Shanti Niketan situated at Whitefield, Bangalore. 5. LEVY OF CAPITAL GAINS ON STOCK TRANSFERRED : As per clause (k) of the JDA, the assessee company has passed all the necessary resolutions for the development and sale of the scheduled property and the person executing the agreement has been duly authorized to execute the agreement and all other consequential documents/deeds/including the power of attorney for transfer/surrender/relinquishment of right etc., vested in the stock. 6. From the Joint Development Agreement, clause (xviii) it is clear that the shareholders of the assessee company in their General Body Meeting held on 28-01-2005 had resolved and approved the joint development of the said property with M/s. PEPL and pursuant to which the Board of Directors have also resolved and approved the Joint Development of property with M/s. PEPL and to sign and execute all memorandum of understanding, development agreements, power of attorney, various other agreements and conveyances with and in favour of M/s. PEPL to successfully complete the development of the project. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stockin- trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him (emphasis provided) and, for the purpose of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.] 11. The above provision very clearly indicates that on sale of stock or other wise transferred the income so earned is the income which is required to be charged to tax. In the instant case the assessee company has executed JDA and further executed a power of attorney on 05/02/2005 and 01/03/2005 in favour of M/s. PEPL for transfer of stock for development. By such act of transfer/relinquishment /sale of stock to the developer and receipt of consideration is nothing but transfer by otherwise. That is, such kind of otherwise transfer made for gain through which the right/benefit/vested in the property is given away, all such transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given 2006-07 (9,00,00,000) Refundable deposit recovered 2007-08 (27,00,00,000) Refundable deposit recovered 2008-09 (11,00,00,000) Refundable deposit recovered 14. The above chart establishes that the assessee company has received non refundable/refundable deposit from the developer company. In this connection it must be mentioned here that for the sake of argument if the refundable deposits are considered as liability to the assessee, a question arises as to what would be the nature and treatment of the non refundable deposit. It must also be noted that why should there be a non refundable deposit and why should the developer give non refundable deposit, what is the consideration given towards the non refundable deposit by the assessee and why not such non refundable deposit is the income of the assessee company during the year of receipt. From the above analysis, it must be concluded that the nature of the non refundable deposit is nothing but the part of the sale consideration on transfer of sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundable deposits as per the JDA entered into. Subsequent to the JDA and in accordance with the JDA, the assessee company has received yearly amounts for handing over possession of the land. Considering the same the provisions of section 45(1) of the Income Tax Act are attracted in the case of the assessee. The capital gain arising on account of conversion of land held as investment into stock in trade is liable for taxation on account of transfer as per JDA dated 5-02-2005. The said JDA has fructified the built up land receivable by the assessee and non-refundable deposit received. The said sale of built up land has also been accounted by the assessee by receiving sale amount from M/s. PEPL. In view of the same, the capital gains liable for taxation on account of conversion of land held as investment into stock in trade during the course of Asst. year: 05-06 is liable to be taxed. 18. The capital gains is worked out as below: Total value of 100.02 acres of land as per guidance value of Govt. of Karnataka Rs.180 lakhs x 100.02 acres =Rs.180,09,00,000 68.23% of the same Rs.122,87,54,070 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the original assessment was completed u/s.143(3) of the Act, the AO did not think it fit to invoke provisions of Sec.45(2) of the Act either because he overlooked the applicability of those provisions or because he thought that the point of time at which tax is to be levied u/s.45(2) of the Act, viz., sale of the stock-in-trade had not occurred during the previous year. In the reasons recorded by the AO, the AO makes a reference to the provisions of Sec.45(2) of the Act and claims that the said provisions are applicable because the assessee had entered into agreement for development of the Whitefield property on 5.2.2005 with M/S.PEPL and further executed a power of attorney on 01/03/2005 in favour of M/s. PEPL for transfer of stock for development. According to the AO, the above act by the Assessee amounts to transfer/relinquishment /sale of stock by the Assessee to M/S.PEPL. According to the AO, the consideration so received has to be brought to tax as capital gains as per the provisions of the income tax Act. In para 12 to 15 of the reasons recorded the AO has narrated as to how capital gain had to be computed. In para-16 of the reasons recorded the AO has referred to judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year: 14.3 As per the proviso to section 147 of the Act, where an assessment u/s. 143(3) of the Act has been made in any assessment year and if after expiry of four years from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to disclose fully and truly all material facts necessary for the assessment of that year. All that has been stated in the order is that the assessee has appended the note and at no point of time, the assessee has disclosed as to the nexus between the amount of ₹ 10,06,617/- and the 10A unit. The disclosure has to be full and true. Both the criteria have to be met. In the assessee s case, by failing to bring out the nexus between the 10A unit and the interest income, the assessee has not discharged its responsibility of furnishing full disclosure of facts. As set out above, the note clearly sets out the interest income earned by the STP unit and the claim of the assessee for exemption under Section 10A. It is not the requirement of law that further the assessee should show the nexus between the amount claimed and 10A unit. When he has categorically stated that the interest, which is earned from STP unit, is eligible for exemption under Section 10A, even that nexus is manifest. The Assessing Authority has not properly applied his mind towards the statutory provisions and has not taken into consideration that the original assessment passed under Section 143(3) which was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147 of the Act was failure and therefore, the impugned notice u/s 147 of the Act, cannot be sustained. Identical question came to be considered by the Division Bench of this Court in the case of Kanak Fabrics Vs. Income Tax Officer in Special Civil Application No. 335 of 2001 and in absence of any such satisfaction by the Assessing Officer, the Division Bench of this Court has quashed and set aside the notice of reassessment u/s 148. In view of the above and for the reasons stated above notice of reassessment u/s 148 quashed and set aside. (emphasis supplied) 14.6 It was thus submitted by the ld. counsel for the assessee that reopening of the assessment should be held to be bad in law, as the AO in the present case has not recorded specifically that escapement of income was due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the A.Y. 2005-06. It was also submitted that factually there was no failure on the part of the Assessee to disclose fully and truly all material facts necessary of his assessment for AY 05-06. In this regard our attention was drawn to the fact that all facts relating to the Joint De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee filed all documents and accounts and other evidence from which material evidence could with diligence have been discovered by the AO, will not be conclusive in the matter. According to him, elaborate discussion in the order of AO while completing the original assessment will clearly show that there was a complete disclosure by the assessee of all material facts. According to him, there is nothing brought on record to show that there was failure on the part of assessee as contemplated by the proviso to section 147. Primary facts have been disclosed by the Assessee and the legal inferences to be drawn from such primary facts lies in the domain of the AO. The Assessee cannot therefore be said to have failed to disclose fully and truly material facts. In this regard, it was submitted by him that reasons recorded only mention the fact that assessee has not filed any information regarding capital gains u/s. 45(2) of the Act in the return of income filed. According to him, this allegation cannot tantamount to an allegation by the AO that assessee has failed to fully and truly disclose all material facts. 18. On the reopening of assessment being merely on a change of opinion, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be any change of opinion in the given circumstances. 20. With regard to the contention of the ld. DR regarding change of opinion, ld. counsel for the assessee brought to our notice the following observations of the Hon ble Supreme Court in the case of Kelvinator of India Ltd.:- On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act (w.e.f. 1st April, 1989), they are given a go by and only one condition has remained, viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words reason to believe failing which, we are afraid, s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of mere change of opinion , which cannot be per se reason to reopen. We must also keep in mind the conceptual differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact that property at Whitefield which was held as investment got converted into stock-in-trade during the previous year relevant to A.Y. 2005-06. It is also clear from the order u/s. 143(3) of the Act that AO was fully conscious of the fact that property at Whitefield having been given under joint development agreement to PEPL on 5.2.2005. In the said assessment order, the AO despite knowing the fact that property at Whitefield was stock-in-trade of the business of the assessee and that it was subject matter of joint development agreement, by which property was to be developed as a residential complex, did not consider the JDA dated 5.2.2005 as giving rise to a transfer within the meaning of section 45(2) of the Act. In the reasons recorded by the AO before issue of notice u/s. 148 of the Act, the AO has come to the conclusion that by virtue of JDA dated 5.2.2005, there was a transfer of the capital asset giving rise to capital gains u/s. 45(2) of the Act. In this regard, the AO has relied on two important factors viz., (i) assessee has executed POA in favour of developer and the fact that assessee received refundable and nonrefundable deposits under the JDA, and (ii) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truly disclose all material facts. In fact, the assessee had disclosed all facts in the original assessment proceedings u/s. 143(3) of the Act. 24. With regard to reliance placed by the ld. DR on Explanation to section 147, we are of the view that Explanation 1 only lays down that facts and circumstances of each case will have to be looked into to ascertain as to whether there was failure on the part of the assessee to fully and truly disclose material facts. As rightly contended by the ld. counsel for the assessee, the expression will not necessarily in Explanation 1 will only mean that facts and circumstances of each case will have to be seen as to whether production of books of account and other evidence before the AO will amount to full and true disclosure of material facts. In the present case, as we have already seen, evidence was produced before the AO in the course of the original assessment proceedings u/s.143(3) of the Act and the same was perused by the AO and he had not chosen to draw any conclusion that there was a transfer by the assessee to PEPL. The fact that assessee was following completion method of accounting for income from the JDA, has also been acknowle ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
