AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 103
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.... in law, the Id.CIT(A) has erred in deciding that section 5OC is not applicable for transfer of development rights and deleting the addition of Rs. 2,49,20,949/- under the head capital gains and accepting the income/loss offered under the head business 2. The Id. CIT(A) deleted the addition without appreciating the fact that development rights are part inalienable of any land or building. 3. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the A.O. be restored." 3. The brief facts of the case are that assessee is partnership firm engaged in the business of builders and developers. During the course of assessment proceedings u/143(3) read with Section 143(2) of the Act, it was observed by the A.O. that the assessee has purchased and sold land and has incurred loss. The assessee purchased land for Rs. 26,35,000/- and on which the expenses for development of the same was claimed for Rs. 20,29,541/- and the conveyance deed for the said land was executed in the assessment year 2007-08. It was observed by the A.O. from the Balance Sheet as on 31st March, 2006, that the assessee is showing the advance for the land as under:- INVES....
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....the property consisted of 10 plots out of which three plots were surrendered and remaining seven plots retained. The three plots were surrendered as they were not having marketable title and as such could not be sold/transferred freely. The intention of the assessee was to hold the asset as a current asset and not as investment. The assessee drew the attention of the Revenue to the clause 12(a) of the tax audit report wherein the assessee has shown method of valuation of closing stock employed which clearly indicates that the land was included therein and was valued at cost. The assessee submitted that mere classification or nomenclature does not change character of the asset which was held as business asset. Thus, it was submitted that development rights were held by the assessee as business assets and were consistently valued at cost and the profits arising there-from had been offered as business profits. It was submitted that in the past also the Revenue has accepted the income arising from sale of land and development rights which were assessed as business income. It was submitted that since the land was held as business asset, hence, the said land does not fall within the purv....
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....lace : MUMBAI Date : December 22, 2009" While in Tax Audit report dated 09-10-2007 in clause 12-(a), it was mentioned by the same tax-auditors earlier as under:- (a) Method of valuation of closing stock employed in the previous year. The assessee does not have any stock. However, the assessee is a co-venturer in Dattani Development# 7 & partner in Dattani Foundation Main. The method of valuation of closing stock in trade followed by the joint venture is as under: 1. Work-in-progress: At cost plus 6% 2. Land: at cost (b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss No deviation. The A.O. considered the reply of the assessee which was not acceptable to the AO whereby the A.O. observed that the assessee in its books of account had shown the advance paid to the owners of the property as investment only and not as stock-in-trade. The intention of the assessee whether the land is held as 'investment' or 'stock-in-trade' is reflected from books of accounts of the assessee. The AO observed that the assessee has not conv....
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....tate and they did not have closing stock of the finished good as on 31.03.07, hence the remark against the said clause. The referred assessee has always held land for the purpose of development/sale and treated the same as business asset and not as capital asset and valued the same at cost. The above referred tax audit report may be read subject to the correction/clarification as mentioned herein above." The A.O. observed from the above statement of the auditors that the audit is an statutory audit and the audit report has a legal sanctity , and hence a post dated clarification/correction by the chartered accountant which has a potential to give the opposite interpretation to what was contained originally in tax-audit report cannot be accepted. The auditors clarification was rejected by the A.O. as the column 12(a) in audit report refers to the method of valuation of the closing stock irrespective of whether it is land or finished goods. It was also observed by the AO that there is a legal mechanism for converting capital asset into stock-in-trade as provided u/s 45(2) of the Act and a mere clarification cannot be accepted to convert the purported capital asset in to stock in tr....
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.... Act as the assessee had always admitted the income in respect of properties shown under the head 'investment in properties' in the balance sheet in the past as the income from business and the same was not disputed by the A.O. in the assessment order. The assessee argued that as per the principle of consistency, the A.O. ought to have assessed the income only under the head business and not under the head capital gains. It was submitted that the assessee purchased the property for the purpose of development and as per sale agreement dated 15th August, 1994, the assessee was authorised to sell the flats, shops, garage etc. which might be constructed on the said properties which proved that the land was purchased only for business purpose. It was submitted that the assessee agreed to purchase the land which was having defective title and the property was occupied with tenants and assessee did not obtain vacant possession of the land when it entered into sale agreement in year 1994. It was submitted that the seller had already entered into sale agreement with M/s Sweet Home and the assessee purchased the property which could not have been for investment purpose and since the assessee....
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....that the assessee has entered into agreement dated 15th August, 1994 for purchase of land from Mr. Rebello and others for a total consideration of Rs. 7,50,000/- wherein the agreement was unregistered. The payments made to Mr. Rebello and others by the assessee were accounted in the balance sheet under the head 'Investment in properties'. The assessee has also registered the deed of confirmation in its name in respect of the property mentioned in the agreement dated 15.8.94 on 9th January, 2007. Mr. Rebello and others in the capacity of land owners and the assessee as confirming party entered into development agreement dated 17th February, 2007 with the developer and received the consideration. The registered deed dated 17th February, 2007 is not an absolute sale deed but only development agreement and the purchaser obtained irrevocable power of attorney from Mr. Rebello and others. Although the amounts paid in respect of this property was shown under the head 'Investment in property', the assessee was admitting income under the head 'income from business' in respect of all other properties which were shown under the head as 'Investment in properties' including Manu Nivas and which....
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....e said Stanley have also executed a Power of Attorney dated 29th December,1979. The vendors will terminate the same; (q) The venders have represented to the purchasers that save and except as provided herein tile said agreement is not acted upon and the same was abandoned by the said Rocky Rebello and the said Stanley Joseph Rebello and the Sweet Home and there is no communication or correspondence of any nature whatsoever from the said M/s Sweet Home; 3. The vendor has informed the purchasers as follows:- (a) The vendors and their three co-owners viz. said Rocky Rebello, Catherin Leslie Fonseca and Rita Waiter Rebello, are not in possession and occupation of the said property; (n) That there is no proper right of way and access available to the said property from the public road. The purchasers shall at their own costs and expenses obtain necessary right of way and access to the said property." It was observed by the learned CIT(A) from the agreement that the assessee agreed to purchase the land for the purpose of constructing flats, shops, garage etc. as per clause 7 of the agreement. As per clause 16 of the agreement, the assessee was entitled to put up and/ or er....
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....ars. Thus there was no justification to bring to the tax the aforesaid business income under the head capital gains during this year. It was also observed that the assessee has entered into agreement for purchase of land on 15th August, 1994 though there were defects in the property and obtained the deed of confirmation registered on 9th January, 2007 and transferred the development right as a confirming party on 17th February, 2007. The development agreement cannot be construed as sale deed and section 50C of the Act is applicable only in respect of sale deed in respect of land or building or both. The assessee had relied on the decision of the Tribunal in the case of Smt. Kishori Sharad Gaitonde in ITA No. 1561/Mum/2009 for the assessment year 2005-06 vide order dated 27th November, 2009 whereby the Tribunal held that section 50C of the Act is applicable only when the land or building or both are registered by sale deed and it would not be applicable for transfer of tenancy right even though it is a capital asset as the same is not land or building or both. Thus, the ld. CIT(A) held that Section 50C of the Act is not applicable to the facts of the case under consideration and the....
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....9 with Sweet Homes . It is stated in the agreement that the original title deeds will be handed over to the advocates for Sweet Homes but the same were not handed over by the sellers. The sellers have executed power of attorney dated 29-12-1979 in favour of Sweet Homes and the sellers are also not in possession and occupation of the property and this property does not have approach road and also there is no right of way and access to the said property. The said land was also having tenants/kuls . He submitted that the assessee is in the business of purchase and sale of land and construction of building thereon but in the instant case no construction was ever done by the assessee since 1994 when an unregistered agreement was executed by Rabello's in favour of the assessee. The assessee did not had any intention to develop the land as it was suffering from several defects and encumbrances. The assessee made investment in the land carrying several defects with a view to earn gains with efflux of time as well by removal of defects in the title of the land. Section 50C of the Act was rightly been invoked by the A.O. . The assessee transferred the development right in the land for a cons....
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....C of the Act . The ld. D.R. submitted that assessee made an investment in land in 1994 with a view to make gains with efflux of time and by removal of defects in the said land. No approval has been obtained by the assessee for construction on this land in the form of IOD and CC from the authorities since 1994 when the interest in the said land was acquired by the assessee The intention of the assessee since beginning was to hold the land as an investment since it acquired interest in the land in the year 1994. The assessee has not incurred any development charges on this property since 1994 when it acquired interest in the said land. The ld. D.R. relied on the assessment order of the A.O. 8. The ld. Counsel for the assessee submitted that assessee is a partnership firm. The assessee is in the business of development of properties. The development right has been transferred hence Section 50C of the Act cannot be invoked as there is no transfer of land or building or both relying on decision of ITAT, Miumbai in the case of Kishori Sharad Gaitonde (supra) . By an agreement dated 28th December, 1979 , the owners agreed to sell the entire property to M/s Sweet Home, a partnership con....
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....nd realtors and to undertake, execute and to purchase lands and construct building or buildings thereon and carry on the contract works or constructions of building, structure, canals, irrigation, bridges, factories, workshop, warehouses, industrial estates, factory sheds and also the work of site supervision of construction works on percentage basis etc., selling flats, shops, garages, office and other tenements or building and/or any part thereof on ownership or other basis or such other business or business as the partners may from time to time decide. Thus , the learned counsel for the assessee submitted that the assessee is engaged business of development of land and construction of building and the said land cannot be treated as capital asset. The ld. Counsel has also drew our attention to the sale deed of development rights and conveyance deed which was registered in favour of the Rushi Constructions, which are placed at paper book page 306 to 710 for transfer of the interest in land and submitted that section 50C of the Act is not applicable to the assessee as the assessee has not transferred land or building or both. The ld. Counsel for the assessee submitted that detailed....
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....ship firm, copy of deed of partnership is placed at paper book page 806-828 filed with the Tribunal. The objects of partnership are mentioned in clause 3 of the partnership deed whereby the business of the partnership is that of investors and realtors and to undertake, execute and to purchase lands and construct building or buildings thereon and carry on the contract works or constructions of building, structure, canals, irrigation, bridges, factories, workshop, warehouses, industrial estates, factory sheds and also the work of site supervision of construction works on percentage basis etc., selling flats, shops, garages, office and other tenements or building and/or any part thereof on ownership or other basis or such other business or business as the partners may from time to time decide. The assessee had purchased the title and interest in the land from the Rebello Family in 1994. The purchase agreement dated 15-08-1994 are placed in paper book page 1-94 filed with the Tribunal. The land so purchased by the assessee from the Rebello family in the year 1994 was subject to several encumbrances and defects which are also listed in the purchase agreement dated 15-08-1994 . The sa....
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.... the conveyance/confirmation deeds executed by the assessee in favour of the buyers, it is clear that the assessee in-fact sold the land with all attached rights of ownership to the buyers for Rs. 58 lacs with further rights to sell, construct etc. in favour of the buyers. These development agreements along with conveyance deed/confirmation deeds entered into by the assessee with the three parties are placed in paper book page 95-787 . Thus, if the facts and circumstances are seen in totality , it is crystal clear that the assessee made an investment in the year 1994 by acquiring interest in the land knowing fully well that there are several encumbrances/defect in the land so acquired by the assessee from Rebello family and the assessee can gain profits by way of appreciation in the value of land with efflux of time as well by removing defects / encumbrances with which the land was then saddled with at the time of acquisition of title and interest in the land and also knowingly well that in the revised development plan of 'R' Ward sanctioned by the State Government, the portion of the land is reserved for secondary school and residential purposes . The assessee was fully aware at t....
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.... already held that in-fact the assessee has not only sold development rights in the land but the assessee sold the entire land with ownership rights in the land if the development agreement are read in conjunction with deed of confirmation / conveyance executed by the assessee which are placed in paper book filed with the Tribunal. Thus, the land which was sold during the previous year by the assessee, thus keeping in view our above discussions in the light of facts and circumstances of the case, was a capital asset within the provisions of Section 2(14) of the Act and the valuation of the land as per stamp duty valuation authorities as per section 50C of the Act was rightly adopted by the AO as full value of consideration but in our considered view the gains arisen to the assessee in the instant case thereon shall however be long term capital gains as the interest and title in the land has been acquired by the assessee in the year 1994 itself from Rebello family and the assessee shall also be entitled for benefit of cost inflation indexation while computing cost of acquisition and improvement thereon as per provisions of Section 48 of the Act . Thus, to the extent it was held by t....