TaxTMI 
TaxTMI 
2017 (6) TMI 515
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....cts leading to the controversy are that the assessee is a partnership firm and engaged in the business of real estate including purchases, procurement, acquisition of right in the land and real estate properties, integrated development of properties, etc. The assessee entered into an Agreement to Sale dt.2.4.2002 in respect of four properties referred to therein. As per the terms of the Agreement dt.2.4.2002, the assessee agreed to sell / transfer the constructed area to M/s. Manipal Infocom Pvt. Ltd. (MIPL) against the total consideration of Rs. 22 Crores which was received by the assessee in advance at the time of agreement. It is pertinent to mention that in the meantime the name of M/s. MIPL was changed to M/s. Manipal Universal Learning Pvt. Ltd. (MULPL). Further due to the legal restriction of acquiring the real estate interest by MIPL, the right/interest in said four properties was assigned to M/s. Caraka Academy of Lifelong Learning Pvt. Ltd. (CALL) vide Agreement dt.5.4.2005. Since the assessee failed to deliver the property within time frame as stipulated in the Agreement and revised Agreement a dispute arose in respect of the quantum of compensation to be paid by the ass....
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....ed Authorised Representative of the assessee has submitted that the income arising from such transaction done through Shri P. Dayananda Pai in the earlier year i.e. Assessment Year 2004-05 has been offered to tax and accepted by the Assessing Officer while completing the assessment under Section 143(3) on 16.03.2005. He has also referred to the details of various transactions entered into in the name of Shri P. Dayananda Pai which has been recorded in the books of accounts of the assessee and the income from those transactions were offered to tax and accepted by the Assessing Officer. Thus the learned Authorised Representative has submitted that Shri P. Dayananda Pai and other partners as per prevailing business practice entered into agreements in their own names with the intention to acquire the properties for and on behalf of the assessee firm. The acts of Shri P. Dayananda Pai and other partners are with consent of all other partners and duly recorded in the books of accounts of the assessee. The learned Authorised Representative has referred to the balance sheet as on 31.3.2005 and Schedule showing property advances paid and submitted that profit arising from these transactions....
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....ee negotiates with the potential buyers and gets land / property directly to the buyers from the original land owners. For rendering of such service the assessee received substantial consideration as aggregator of land and as a consenting party in the transfer and title deed. The assessee also acts as a venture capitalist contributes towards cost of the projects and creates rights, interest and title over the property. The advances paid to the property owners are shown as asset and advances received against the properties are shown as liability in the balance sheet. Thus the assessee need not to be the owner of the property and still enter into a contract with promoters to sell such property to deliver in future to the buyer of the property. The learned Authorised Representative of the assessee has pointed out that this nature of business of the assessee has been accepted by the department and particularly by the Assessing Officer for the Assessment Year 2008-09. It is clear from the Agreement dt.2.4.2002 that the assessee agreed to sale part of its rights and entitlement in the properties being developed by other developers. The financials of the assessee disclosed various propert....
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....rty and it occurred liability to pay compensation of higher amount which stand corroborated by the award given subsequently to the date of balance sheet. Thus the learned Authorised Representative of the assessee has argued that as per AS-4, the assessee has correctly valued its liability based on the event occurred after the date of balance sheet. He has relied upon the following decisions : (i) ACIT Vs. Allied Gems Corporation (Bombay) 163 ITR 56 (Bom) (ii) Bharat Earth Movers Vs. CIT 245 ITR 428 (SC) 8. Alternatively the learned Authorised Representative of the assessee has submitted that in case the liability has not crystallized in the Assessment Year 2005-06 then the Assessing Officer may be directed to allow the deduction in Assessment Year 2006-07. The learned Authorised Representative has further pointed out that the amount of compensation received by the other party has been accepted by the Assessing Officer. In support of his contention, he has relied upon the following decisions : (i) Perfect Equipments Vs. DCIT 85 ITD 50 (AHD). (ii) Ajay Devagan Vs. Addl. CIT in ITA No.514/Mum/2007 dt.9.10.2009. (iii) JCIT Vs. Mukund Limited 291 ITR (AT) 249 (Mum) (SB....
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.....2006 and prior to the expiry of the said extended time limit no damages can be claimed. Therefore the liabilities to pay any damages or compensation would not arise or crystallize before 10.03.2006 as extended time limit vide agreement dt.10.03.2004. The Assessing Officer has given an opportunity to the assessee and also considered the submissions of the assessee however the assessee failed to establish that it was the owner of the property or any right in the properties in question. The learned Departmental Representative has further contended that the Tribunal has clearly left the matter open to the Assessing Officer to complete the assessment as per law. The assessee has not brought any record to suggest that there was some information which the Assessing Officer has missed taking into account. He has contended that liability was not crystallized during the year under consideration. He has relied upon the orders of the authorities below. 11. In rejoinder the learned Authorised Representative of the assessee has submitted that the payment to acquire the property was admittedly made by the assessee. One of the property was belonging to the sister concern and the assessee was h....
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....the assessee shall be given a fair opportunity of hearing and the assessee also shall co-operate with the revenue authorities in speedy disposal of the case." Thus it is clear that in the remand proceedings, the Assessing Officer was required to examine the parties to the agreement and also to examine the JDA. The Assessing Officer while passing the order dt.30.12.2011 in pursuant to the directions of the Tribunal has observed and held in paras 1.1, 2, 3 to 6 as under : 1.1 The AO disallowed the claim of the assessee to the extent of Rs. 64.74 crores being compensation paid. The matter was confirmed by the CIT (A) and the assessee preferred further appeal before the ITAT. The ITAT, in its order dated 10.11.2010, in ITA No. 406(BNG)/2010 has remanded the mater back to the file of the AO to decide it afresh with a direction to examine the other parties to the agreements (M/s. MIPL and also M/s. Caraka Academy of Lifelong Learning P. Ltd), to examine the joint development agreements to find out the pith and substance of the agreements. 2. During the course of remand proceedings, the assessee was called upon to submit the joint development agreement entered into by it with the....
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.... K Jeenabai and 10 others represented by their Attorney Holders, Mr. K.B. Lakshman and Mr. Ashwin Pai under registered Power of Attorney dated 6.10.2003 and three confirming parties (including Sri. P. Dayananda Pai and Mr. K.B. Lakshman ) in favour of M/s. Global Associates. (b) An agreement of venture executed on 19.3.2004 between Mr. P. Dayananda Pai on the first part and Mr. H.J. Siwani and Mr. M.J. Siwani on the second part. The sale deed mentioned at (a) above, at para XXI at page 10, it is mentioned that the confirming party No. 2, Mr. K.B. Lakshman not being desirous of taking conveyance of the said property agreed to assign his rights to the property to the confirming Party No. 3 ie. Mr. P. Dayananda Pai, who has agreed to purchase the same property and paid to the confirming party No. 2 the entire sale consideration which is inclusive of reimbursement of the amount paid by confirming party No. 2 to confirming party no. 1 and the vendors. Further, para XXII at page 11 of the sale deed mentions that "Whereas confirming party No. 3 (Sri P. Dayananda Pai), who thus became entitled to take conveyance of the same property has contributed the same as his share o....
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....d office KIADB allotted the land for industrial use which was confirmed later by handing over the possession to the said company vide possession certificate bearing No. KIADB/SUC-14586/815/2003-04 dated 24.6.2003. P. Dayanada Pai representing the firm had entered into agreement orally with HM Constructions for development of commercial space in the schedule property within the period of 24 months from the sanction of plans and shall be completed in all respect as per the specification agreed between the parties. After the allotment of the land by KIADB a formal joint development agreement dated 29.4.2005 ANNEXURE 11 was entered into against which the assessee firm through his group concern was entitled for 75,000 sq. ft of commercial space and the same was agreed to be sold for a consideration of Rs. 7.5 crores to Manipal group of companies. M/s. HM Constructions were not able to get plan sanction for commercial building because the zoning regulations under the new CDP promulgated by BDA. Hence, the project is delayed and as on date also M/s. HM Constructions have not been able to obtain sanction of plans for commercial building. Hence the assessee firm are not able to give 75,0....
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....ce sheet of Canara Housing Development Company. Out of the entitlement of 2,00,000 sq. ft P. Dyananda Pai agreed to sell area of 50,000 sq ft at the rate of Rs. 700 per sq. ft for a total consideration of Rs. 3.50 crores Manipal Inforcom Pvt. Ltd could not wait for the delay and hence withdrew the offer of assessee firm of buying 50,000 sq. ft of residential apartment" The assessee has produced an agreement dated 17.2.2005 between Sri Ravindra Pai, son of Sri P. Dayananda Pai, Sri P. Ashwin Pai and Sri Dev S. Patel, partners representing M/s. Surya Builders and Developers and M/s. Sterling Developers Pvt. Ltd. for development of property situated at Kundanahalli Village, KR Puram Hobli, Bangalore East Taluk. M/s. Surya Builders and Developers is entitled to 34% of the built up area. It is pertinent to note here that from the land records obtained from the Revenue Authorities, Sub-Registrar KR Puram, it is observed that M/s. Surya Builders and Developers acquired this land only on 17.2.2004 which is almost two years subsequent to the agreement dated 2.4.2002 offering to sell the built up area to MIPL by the assessee. In the light of the above facts, it is noticed that the assesse....
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....ledge Park in favour of the assessee or Mr. P. Dayananda Pai. Hence, it is clear that the now settled the dispute and want an award on the basis of a compromise, it was not necessary to go into the question of nature of disputes between the parties. Hon'ble Arbitrator, by referring to Sections 30 & 31 of Arbitration and Conciliation Act, 1966. has accepted the compromise and Award is passed in terms of the compromise petition. The date of appointment of the Arbitrator is 27.6.2005, the date of filing of Claim Petition before the Arbitrator was on 11.7.2005. Compromise Settlement Petition was filed on 5.8.2005 and the final Arbitrator's Award based on the compromise was passed on 30.8.2005. From the sequence of events, it appears that the assessee along with M/s. MIPL have approached the Hon'ble Arbitrator with a predetermined purpose of getting the stamp of arbitration to their mutually agreed transaction and it is an act of colourable device to claim the expenditure by the assessee. (vi) This expenditure on account of compensation paid is not an expenditure for the purpose of the business of the assessee because it is connected with the properties which never formed....
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....agreement to sell them to M/s. MIPL. (iv) No person can transfer or agree to transfer a property which is neither owned by him nor has any right of ownership over that property enabling him to sell the same. (v) In the Arbitration Award. Hon'ble Arbitrator mentions that a claim petition was filed by the claimant claiming refund of amount and compensation and interest and the total claim is Rs. 95 crores. It is also mentioned that respondent Sri P. Dayananda Pai. representing M/s. CHDC and M/s. BHDI has not yet filed the statement of defense and in the meantime, the parties to the petition reported that they have settled the dispute and a compromise petition duly signed by both the parties has been filed before him. In/ | paragraph 2 of the Award, it is also mentioned that since the parties have the Arbitrator was appointed on 27.6.2005, the claim petition by MIPL / CALL was filed on 11.7.2005 before the Arbitrator making a claim for Rs. 95 crores, the Compromise Petition for settling the claim at Rs. 86 crores was filed on 5.8.2005 and final Arbitration Award came on 30.8.2005. In this regard, the assessee was asked to justify his why its claim should be allowed in the....
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....g the proof of correctness of depreciation. This is not relevant considering the facts of the present case. (v) Bharath Earth Movers (supra); This is on the issue of deciding the provision for encashment of accrued leave. It was claimed as a deduction. This is not relevant considering the facts of the present case. 5. In this connection, decision of the Kerala High Court in the case if Asuma Cashew Co. v. CIT [1990] 182 ITR 175. 1989 (2) TMI 23 the Lordships have held that Liability to pay damages arises only on passing award by arbitrator and not on the date of breach of contract and further it has been held that Liability can be said to have crystallized only when the damages is determined and accepted by both the parties either by private negotiation or determined by an arbitrator or court. Finally, the Honourable High Court has further held that that enforceable liability can be deemed to come into existence only when it was determined and fixed by the arbitrators and not when the breach has occurred. This has been further confirmed by the Hon'ble Supreme Court. 5.1 The above referred decision clearly supports the fact that the liability of compensation payme....
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.... the case of Deepak Deewan Vs. ITO (supra), Delhi Bench of the Tribunal while dealing with an issue arising from the order passed by the Assessing Officer in pursuant to the remand order by the CIT (Appeals) has held in paras 5 to 7 as under : " 5. After recording these findings the Commissioner (Appeals) restored the matter to the file of the Assessing Officer on the limited point for making necessary investigation after giving the assessee due opportunity of being heard in the matter. 6. Whereas the Commissioner (Appeals) did ask the Assessing Officer to make further enquiry and investigation and record a finding, certain aspects of the matter as have been highlighted above had been decided by him. Revenue did not challenge the order of the Commissioner (Appeals). Therefore, these findings have become final. When we see the order of the Assessing Officer and that of the appellate authority in the second round, we do not find any fresh material having been collected by the Assessing Officer for taking a different view. The only enquiry made by the Assessing Officer after the matter was set aside was regarding Shri Sachdeva. As is clear from the records, the Assessing Officer....
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....s having rich experience in acquisition of land and developing diem through Joint agreement activity and relying upon such experience is entering into agreement depositing huge amounts. AND WHEREAS the Second party has decided to invest a sum of Rs. 22.00 Crores (Rupees Twenty Two Crores only) with the First party for the purchase of various properties belonging to the First party. AND WHEREAS the First Party being in control of vast valuable Real Estate in Bangalore City and has entered into arrangements to jointly develop some of the properties with various reputed Builders. AND WHEREAS the First party has now offered to the Second party portions of the builtup areas out of the First party's entitlement in following four valuable' properties being developed by various Builders and considered to be good investment. (a) In the land admeasuring 28 Acres for a Group Housing Scheme in 8th Phase J.P. Nagar, Bangalore, wherein as per the Joint Development Arrangement, the First party is entitled to get free of cost about 6,00,000 sq.ft. of builtup area together with proportionate undivided share in the land by way of Residential Apartments. (b) The First party has....
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.... party that it will complete the construction and hand over the possession on or before 31st March 2005 failing which the First party will refund the deposit with additional compensation to enable the Second party to acquire similar buildings. (1) The First Party has offered to sell the following builtup areas in 4 of the properties owned by the First Party at the rate mentioned hereunder in consideration of the investment made by the Second Party. (a) Property in 8th Phase, J.P. Nagar, Bangalore to be developed by M/s. H.M. Constractions, the builtup area being offered is 1,00,000 sq.ft. at the rate of Rs. 700/- psf amounting to Rs. 7.00 Crores. (b) An area of 75,000 sq.ft. of commercial space in the property situated on the main Airport Road to be jointly developed by M/s H.M. Constructions at the rate of Rs. 1,000/- psf amounting to Rs. 7.50 Crores. (c) An area of 50,000 sq.ft. of residential Apartments to be developed by M/s Ettina Land Developers, situated on Brooke Field Road, near the Airport Road at the rate of Rs. 700/- psf amounting to Rs. 3.50 Crores. (d) 50,000 sq.ft. of commercial builtup area in the land bearing Corporation No.4/1, owned by the First Pa....
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....ost and expenses to be incurred in acquiring similar property. (12) That all disputes and differences which shall arise between the parties hereto, in any matter shall be referred to arbitration by a sole Arbitrator to be appointed by mutual consent and shall be decided in accordance with the prevailing Arbitration Act. 14. Thus the properties to be developed and built up area in those properties to be transferred by the assessee to the other party were duly identified in the said agreement dt.2.4.2002. The assessee agreed to deliver the constructed area in the projects in future and within the time period as provided in the agreement. The parties to the agreement had no doubt and ambiguity about the properties to be developed under JDA and therefore the question of having the ownership of the property at the time of agreement does not arise. The assessee produced all the JDAs in respect of the properties in question and therefore the assessee acquired rights in these properties and particularly in the constructed area of the properties through the JDAs and part of which was to be transferred to MIPL / MULPL / CALL. Therefore the properties which are particularly lands were i....
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....income from the transaction of purchase and sale of property through Shri P. Dayananda Pai and therefore this practice of the assessee partnership firm of doing the transaction through Shri P. Dayananda Pai was very well recognized and accepted by the Assessing Officer except this particular transaction where the assessee paid the compensation to the other party. Once the transactions are recorded in the books of accounts of the assessee partnership firm and the receipt and payment in respect of the purchase and sale of the properties are made by the assessee firm then it is a clear case of mutual understanding and consent between the partners of the assessee firm as well as the parties to the transaction that Shri P. Dayananda Pai acted on behalf of the assessee partnership firm and not in his personal individual capacity. Section 14 of the Partnership Act deal with the property belong to the partnership firm if rights and interests in the property originally brought into the stock of the firm. For ready reference, we quote Section 14 of the Partnership Act, 1932 as under : "14. The property of the firm. --- Subject to contract between the partners, the property of the firm inc....
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....over the lands which were created by way of agreements, token receipts, Memorandum of understandings, etc., The assessee identifies agricultural/converted lands in and around Bangalore City, which are located as contiguous parcels belonging to various persons, and gets the land transferred either to its name or to its nominees. Further, the assessee identifies potential buyers and enters into Memorandum of Understanding and sells them directly. The assessee enters into agreements with land owners and creates interest, right and title over the properties without getting it actually registered to its name/nominees. After acquiring the rights over the properties, the assessee negotiates with potential buyers and gets the land transferred directly to the buyers from the original land owners. For this service the assessee receives substantial consideration as an aggregator of land and as a consenting party in the transfer and title deeds. In this process, the buyers are either identified by the assessee or by the land owners. The assessee further acts as a venture capitalist in real estate transactions. He contributes towards the initial cost of the real estate project done by oth....
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..... Therefore in view of the facts and circumstances of the case as well as above discussion, we are of the considered opinion that the transactions in question under the Agreement dt.2.4.2002 are in the normal course of business of the assessee through its Principal Partner by Shri P. Dayananda Pai and therefore all these transactions were duly recorded in the books of accounts of the assessee then the genuineness of the transaction cannot be questioned merely on the ground that the properties were not registered in the name of the assessee or the Agreements were executed by Shri P. Dayananda Pai. CRYSTALLISATION OF LIABILITY 16. The Assessing Officer has held that as per the Revised Agreement dt.10.03.2004 the assessee was to deliver the constructed area within two years and therefore the liability to pay the compensation would not arise prior to 10.03.2006. Hence the Assessing Officer was of the view that the liability has not been crystallized during the year under consideration. As per the terms of the Revised Agreement dt.10.03.2004, the assessee was required to deliver the property during the extended period of two years. The relevant part of recital and clauses of the A....
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....t. Failing which the assessee would be liable to make good for all losses and damages to the other party as provided in Clause 12 of the Agreement. 16. The objection of the department is that the time period for delivery of the constructed area was to expire on 10.03.2006 and therefore liability was not crystallized as on 31.3.2005. It is pertinent to note that it is not a case of sale of good but it is an agreement for transfer of constructed area in the project to be constructed under JDAs. Therefore it depends on the progress of the work of construction and very well be judged in advance whether the assessee would be able to fulfill its commitment / obligation within the time limit as provided in the agreement. Thus when the assessee realized that the status of the construction of the project under JDA has not reached to the stage as expected and therefore it was not at all possible to deliver the completed property to the other party within the time limit then the assessee is free to take a decision to protect its business interest and minimize the losses which would be suffered by it in future. Though the event of final amount of compensation happened after closing of Finan....
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....preme Court again in case of Sutlej Cotton Mills v. CIT 116 ITR 1 held that the entries in the books of accounts are not conclusive of matter if the same are not in conformity with the accounting principles. What is required is the true nature of the transaction and whether it has resulted in profit or loss to the assessee. Therefore, it is settled proposition that regardless of entries in the books of accounts taxability of income or transaction is always based on the provisions of Act, substance which brings the true state of affairs and financial results. If a transaction, treatment and claim of the assessee is legal, valid and Bona Fide then the same has to be accepted. The Mumbai Bench of the Tribunal in the case of ACIT Vs. Applied Gems Corporation (Bombay) 163 ITD 56 (Bom) while dealing with an identical issue has held in para 4.4 as under : " 4.4 We have carefully considered the rival submissions. It is quite well understood that section 4 of the Act, charges income tax in respect of the total income of a previous year relevant to the concerned assessment year. Section -5 of the Act, prescribes the scope of total income and so far as we are concerned, the dispute relates....
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....had claimed an expenditure by way of purchases of a sum of Rs. 6,39,124/- representing additional liability towards foreign suppliers in respect of books imported on credit up to the end of 31/05/1966. The said additional claim was based on account of devaluation of Indian currency, which had taken place on 06/06/1966 i.e. after the close of the accounting year. Such a claim was disallowed on the ground that it did not pertain to the previous year ending 31/5/1966 and that the event of devaluation had taken place only on 06/06/1966, which was after the close of the accounting period. The claim of the Assessing Officer was that since assessee was maintaining its accounts on mercantile system, the liability on account of devaluation of the Indian currency could not be said to have accrued during the accounting period ending on 31/5/1966 as devaluation took place after the end of the accounting period. The Tribunal allowed the claim of the assessee holding that though devaluation of Indian currency took place after the end of the previous year, but assessee was justified in determining his liability on the basis of the actual figures available when accounts for that year were yet not ....
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....their business / obligation and therefore the said claim of deduction is in the revenue field. 18. Though the Assessing Officer has questioned the manner in which the Arbitration Award has been passed on the basis of mutual consent of the parties however, it is pertinent to note that when the compensation is determined between the parties as per the fair market price as on the date then merely because the assessee agreed to settle the dispute by mutual compromised terms cannot be a reason of doubting the genuineness of the claim. Further the actual payment of the compensation has not been disputed therefore, when the assessee has realized in definite terms that it would not be possible for it to honour the commitment and obligation under the agreement then the liability arises under the agreement is a certain liability though the quantum of the same could have been determined subsequently. The Assessing Officer has relied upon the decision of Hon'ble Kerala High Court in the case of Asuma Cashew Company Vs. CIT 162 ITR 175 however, we find that the dispute in the said case was liability to pay damages as determined by the Arbitration was held to be crystallized on the date o....