TaxTMI 
TaxTMI 
2016 (5) TMI 473
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....rders and heard the rival contentions. The question to be answered by us are (i) Was there any intention by the parties to form an AOP. (ii) If there indeed was an AOP is there an incidence of capital gain. (iii) If there indeed was an AOP would the non-filing of return by such AOP affect the stand or claim of the assessee. (iv) If there indeed was an AOP, would the money received by the assessee as a member thereof on extinguishment of the AOP be deemed as capital gains. (v) If there was no AOP what was the date of transfer of subject property to M/s. Parkway Developments Pvt. Ltd., i.e, whether such transfer was (a) AT the time of MOU? (b) At the time of principal agreement? (c) At the time of settlement deed? (d) At the time of execution of conveyance deed? 17. Taking up each of these questions, in a sequential manner, first we will check whether there was any AOP. For this it is required to have a look at the legal parameters, which can throw light as to under what circumstances existence of an AOP can be substantiated. Section 4 of the Act creates a charge in respect of total income of ev....
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....first in the series of agreement/understandings is the MOU dated 22.05.1995 between the assessee and Shri Pradeep Kumar Sharma. This MOU as appearing in Paper Book pages 17 to 23 is reproduced hereunder: "This memorandum of understanding is made on this the 22nd day of May One Thousand Nine Hundred and Ninety Five (1995) between (1) Gopalakrishna Gowda, son of late Lonkappa, residing at Voderally, Thathaguni Post, Bangalore South Taluk; (2) Ind - Sing Developers Private Ltd, a Company registered under the Companies Act, 1956, having its Registered Office at 208, Westminster Complex, No.13, Cunningham Road, Bangalore 560 052, represented herein by its Director S. Eswar Prasad, hereinafter together called "the First Party" and Pradeep Kumar Sharma of 73, Meyer Road, Singapore, or HIS nominees, hereinafter called "the Second Party". Whereas: 1. The First Party represents to the Second Party: A. That the first member of the First Party has, under two separate agreements dated 6th July 1990 and dated 22nd June 1989 registered as No.3343/89-90 agreed to purchase all that piece and parcel of land in Survey Nos. 19 and 20 together measuring 9 acres of Am....
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....nconditional and without any obligations on the project. 4. Divert the overhead electric cable now passing through the land and obtain permission of the State Government (Irrigation Department) for the use of the pipeline land for passing and repassing. Provision to be made for adequate supply of water during construction of project and later until supply from B.W.S.S.B Mains is established. The First Party and the Directors of Ind-sing Developers Pvt. Ltd., will agree to keep and hold the Second Party and his nominees indemnified and harmless against any loss or damage arising due to defective title of the owners to the land. Separate indemnity bonds to be executed in due course. II. Obligations of the second party 1. Preparation of the project layout plan, building plans, typical floor plans, specifications and furnish the relevant plans to the First Party for submission to the BDA for approval. 2. Appointment of Architects, Civil Engineers, surveyors and supervisors and core project team to oversee the project. 3. Manage and execute the project in accordance with the approved plans and specifications. 4. All legal do....
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.....07.1995 between assessee and Shri Pradeep Kumar Sharma. After reciting the narration of the events starting from the MOU dated 22.05.1995, it is mentioned as under at paragraph b & c of the preamble. "B. In terms of the said MOU, the First Party' has substantially established the title of the present owners to the above immovable property and has now started the process of securing the title to the above land from the present owners. C. Pending the First Party securing the transfer of title to the property and pending compliance with the obligations at clauses 2, 3 and 4 of the MOU, this Agreement is being entered into by the parties to place on record the terms and conditions agreed upon by them" 22. Shri Pradeep Kumar Sharma undertook to develop the subject property and construct residential apartments therein vide the above agreement. Articles 1 to 15 of this agreement are reproduced have under. "ARTICLE 1 This Agreement is in addition to and not in derogation of the MOU dated 22nd May 1995. However, should there be any inconsistency between this Agreement and the MOU, the provisions of this Agreement shall prevail. ARTICLE 2 ....
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....d Party shall be responsible for rendering contract property free of all encumbrances before the title is passed on to the intending purchasers. ARTICLE 5 The Second Party shall be exclusively entitled to market the residential flats to the intending purchasers on such terms and conditions as agreed and in consultation with the First Party. ARTICLE 6 The price for the sale of undivided share in the land payable by the intending purchasers shall be at Rs. 150/- per sq.ft of the undivided share required to be purchased by the intending purchasers which the Second Party shall upon receipt from the intending purchasers credit to a separate account in its books and shall pay to the First Party after completion of each phase of the development as per Article 8. ARTICLE 7 7.1 The Second party has at the time of entering this Agreement paid the First Party a sum of Rs. 2,500,000/- (Rupees Two and a half million only) vide Demand Draft No. 162654 dated 12-7-1995 drawn on Canara Bank, Lavelle Road, Bangalore. This amount and Rs. 5 lakhs already received by the first Party under the MOU and further amount of Rs. 70 lakhs to be paid shall be a deposit with t....
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.... for the duration and full implementation of this Agreement in all respects. 9.3 The First Party shall perform its obligations at clause Nos.2, 3 and 4 of the MOU within thirty (30) days hereof. As regards provision of water for the project, the First Party shall provide the source of water at its cost and the cost of infrastructure for drawing the water from the source shall be that of the project. Upon the tenants vacating the shops the First Party shall ensure that the shops are demolished and the land occupied by the shops in annexed to the main land and fenced. 9.4 The First Party hereby agrees and undertakes to indemnify the Second Party and keep him indemnified against any cost, expenses, loss, damages whatsoever that the Second Party may suffer or incur by any reason of the whole or any part of the aforesaid representation and declaration of the First Party of the aforesaid representation and declaration of the First Party being incorrect or due to any act or omission of the First Party and any person claiming through or under them. ARTICLE 10 The First Party further agrees and covenants as follows: 10.1 At its own cost and expense, it....
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.... carry out marketing campaigns for the sale of the completed development. 11.3 To maintain proper accounts of all the expenses incurred for the development, promotion and marketing campaigns and all other expenses in fulfilling his obligations under this Agreement. ARTICLE 12 The parties herein covenant as follows: 12.1 The operations of the parties hereto is based on a friendly, close and balanced relationship as participants in the development of the contract property. 12.2 Each of the parties undertakes that it / he will at all times act on the principles of good faith in the widest sense and in a bona fide manner and in the best interest of both the parties. 12.3 All obligations and rights expressed herein are to be honoured and exercised in conformity with the principles of good faith and with mutual regard. 12.4 Matters not provided herein shall be decided through consultation conducted with sincerity between the parties. ARTICLE 13 The parties, during the term of this Agreement and thereafter, shall maintain secrecy of all confidential or proprietary information or data belonging to any party or any of thei....
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....n fixed at Rs. 150/sq.ft which was to be paid only after completion of each phase of the project. Apart from this, a sum of Rs. 1 crore was paid/payable by Shri. Pradeep Kumar Sharma to the assessee. Both parties had specific obligations set out in this agreement. 24. The supplementary deed dated 17.06.2002 which happened after a considerable period of time revised the profit sharing ratio from 40:60 to 20:80. But for this there were no major changes in the principal agreement. A general power of attorney was also executed by the assessee on 20.11.2002 which clearly showed that by that point of time, assessee had acquired the subject property on which development was being carried out. Clause 12, 13 & 16 of this POA is reproduced hereunder. "12. To negotiate for sale of the undivided interest in the land situate in the said property and / or the built area in the proposed construction either as a whole or in such parts as our attorneys shall deem fit, to enter into agreements for sale of undivided interest, agreements to build, Memorandum of Understanding etc., and to receive from the purchaser or purchasers any earnest money and also the balance purchase money an....
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....duce profit. 26. Once we conclude that there indeed was an AOP, the 2nd question is whether there was an incidence of capital gains. For answering this a look at section 45(3) and Section 45(4) of the Act are necessary. These sections are reproduced hereunder:- Sec.45(3) : The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a cooperative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) o....
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....e second party in pursuance to the said powers of attorney as to the project viz., "Spring fields" the various steps taken. The second party through their nominee shall be entitled to continue to exercise all powers under the said Power of attorney. Article-II- Development Agreement: (1) In consideration of the representations made, obligations undertaken, covenants to be observed mutually and the consideration reserved herein, the parties have mutually agreed to enter into this agreement. (2) Due to the dispute infra, the parties have agreed that it is no longer feasible to proceed with developing the Schedule Property as per the scheme provided in the Development Agreement and therefore even through the entire project has not yet been completed and sale proceeds have not yet been entirely realized and Phase III of the project SPRINGFIELD is yet to be launched it is in the best interest of each party to come to a settlement. The consideration agreed to be paid herein is not based on the benefits accruing to the first party or second party under the Development Agreement and whereas it has been arrived at with the help of the Conciliator and on mutual agr....
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....second party or their nominees or assigns. (4) The Consideration of Rupees Twenty Crores (Indian Rupees) for foregoing the rights of the first party under the Development Agreement and for the sale and purchase of the Schedule Property shall be paid by the second party to the first party in the following manner: a. The second party shall pay the first party a sum of Rupees Fourteen Crores by i. Appropriating a sum of Rs. 1,36,54,500/- only already paid by the second party to the first party the receipt of which the first party admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. ii. Appropriating a sum of Rs. 75,12,001/- (Rupees seventy five lakhs twelve thousand and one only) already paid by the second party to the first party the receipt of which the first party admits and acknowledges the receipt thereof, which is as per the appropriation receipt appended hereto. iii. The second party shall pay the first party a further sum of Rs. 4,92,65,092/- (Rupees four crores ninety two lakhs sixty five thousand and ninety two only) within 60 days from this day. iv. &nb....
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....pees fifty lakhs drawn on Lord Krishna Bank, all dated this day, iii. The balance sum of Rs. 2,49,80,000/- (Rupees two crores, forty nine lakhs eighty thousand only) shall be paid by the second party to the first party simultaneously and on executing a Deed of Conveyance conveying the absolute right, title and interest of the Schedule Property to the second party or their nominees or assigns and such sale shall be free from all encumbrances, claims, lis, charges, third party interest, minor interest, acquisition proceedings etc., iv. The Original Deeds of Title of the Schedule Property has already been delivered to the Second Party by the First Party as stated herein above. Article IV Possession and Development: (1) In view of the rights enjoyed and steps taken by the second party under the Development Agreement the first party affirms and reiterates that they have and now irrevocably permitted and authorized the second party to carry out construction/development on the Schedule Property by entering upon the Schedule Property. The second party is entitled to continue to carry out the developments and construction as provided therein f....
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....an end to the AOP and transfer of title in the land to M/s. PDP was nothing but distribution of the capital assets of the AOP on its dissolution. 28. This bring us to the next question as to whether AOP having not subjected itself to tax by filing a return of income, would render the assessee liable to pay tax on the transfers effected by AOP. In our opinion, this question is academic. It is for the reason that the issue here is whether the assessee was taxable to capital gains in the impugned assessment year for the sum of Rs. 14 crores. That the AOP had not submitted itself for taxation or the failure of the AOP to make a return of income, would not shift the tax incidence to its members. Especially so, since charging Section 4 of the Act in contrast to Section 3 of the 1922 Act does not give any power to the assessing officer to tax a member of AOP in lieu of taxing the AOP. 29. This bring us to the next question as to whether the money received by the assessee based on the settlement which happened in the relevant previous years could be charged to capital gains in assessee's hand. The settlement clearly showed that the AOP as such stood terminated. The di....