Double taxation and section 45(2) fail where project receipts were already taxed with no independent sale right

Project receipts from the real estate arrangement could not be taxed again in the assessee's hands where they had already been assessed in the holding company's hands, because the assessee had no independent right to sell the units and no separate taxable profit arose. The attempt to treat the assessee as a contractor and estimate profit at 8% of construction cost also failed, as the arrangement did not create a work-contract relationship or any contractual entitlement to contractor income. Section 45(2) was inapplicable because the godown right was not genuinely converted into stock-in-trade and no transfer by the assessee was shown. The appellate relief was sustained in full.

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Issues: (i) whether the sale consideration and alleged profit from the project "Lodha Supremus" could be assessed in the assessee's hands when the receipts were already taxed in the hands of the holding company; (ii) whether the assessee could be treated as a contractor and subjected to estimated profit at 8% of construction cost; and (iii) whether section 45(2) could be invoked on the footing that the godown right had been converted into stock-in-trade and transferred.

Issue (i): whether the sale consideration and alleged profit from the project "Lodha Supremus" could be assessed in the assessee's hands when the receipts were already taxed in the hands of the holding company

Analysis: The project structure showed that the land belonged to the holding company, the assessee had only an assigned godown right, and the right to use and occupy the constructed units was linked to the shareholding. The consideration from the project had already been accounted for and taxed in the hands of the holding company. In these circumstances, taxing the same project receipts again in the assessee's hands would amount to double taxation. The assessee, functioning as a special purpose vehicle, had no independent right to sell the units and therefore no taxable profit arose in its hands from the alleged unit sales.

Conclusion: The addition on account of alleged sale income was rightly deleted and the issue is decided in favour of the assessee.

Issue (ii): whether the assessee could be treated as a contractor and subjected to estimated profit at 8% of construction cost

Analysis: The contribution arrangement did not create a work-contract relationship or provide for any contractual profit or commission to the assessee. The assessee merely supervised the construction under the ownership and funding arrangement with the holding company, while the project receipts and resultant profit were already taken into account in the hands of the holding company. There was no factual basis to presume that the assessee earned contractor income.

Conclusion: The estimated addition at 8% as contractor income was unsustainable and the issue is decided in favour of the assessee.

Issue (iii): whether section 45(2) could be invoked on the footing that the godown right had been converted into stock-in-trade and transferred

Analysis: The godown right remained an investment in the assessee's books and was not shown to have been converted into stock-in-trade by any real transfer or sale of units by the assessee. Section 45(2) applies only where a capital asset is converted into stock-in-trade and thereafter sold, giving rise to a chargeable transfer. Since the assessee never sold the units and the project sales were taxed in the hands of the holding company, the statutory conditions for capital gains under section 45(2) were not met.

Conclusion: The capital gains addition under section 45(2) was unjustified and the issue is decided in favour of the assessee.

Final Conclusion: The Revenue failed on all disputed grounds, and the appellate relief granted by the first appellate authority was sustained in full.

Ratio Decidendi: Where project receipts and profit from a real estate development are already assessed in the hands of the entity legally entitled to the receipts, and the assessee has no independent right to sell the units or earn contractor profit, the same income cannot again be assessed in the assessee's hands; section 45(2) also cannot apply without a genuine conversion of a capital asset into stock-in-trade followed by transfer.

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