TaxTMI 
TaxTMI 
2018 (4) TMI 621
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....ired basis. The assessee entered into similar agreement on the very day in identical terms with Shree Someshwara Darshan Samudike Kheti Sahkari Mandli Ltd., Part- 1 (registered body) pertaining to its land measuring 1012 sq.mtrs. comprised in R.S. 305, revenue estate of village Thaltej, Daskroi Taluka, Dist. Ahmedabad for Rs. 25lacs. It issued a cheque of Rs. 14.54lacs in favour of the said body. It further agreed to provide remaining sum of Rs. 10.46lacs on as and when required basis in the nature of interest free security deposit. The assessee's third development agreement came to be executed on 18.03.2008 with S/Shri Raghuvir Sinh Amar Sinh Vaghela and his son Balbhadrasinh Vaghela regarding their land admeasuring about 57,466 sq.mtrs. in R.S. 232, Village & Taluka Sanand, District Ahmedabad. There is no dispute that clause no. 24 in this third agreement stipulated the assessee to pay sum of Rs. 95 lacs on as and when required basis herein as well. 3. The Assessing Officer observes in his assessment order that these three owners paid the assessee respective sums of Rs. 2,22,27,804/-, Rs. 50lacs and Rs. 1.15crore; totaling to Rs. 3,87,27,804/- in relevant previous year in lieu....
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....ted that the stamp papers were not genuine documents. It re-narrated the entire modus operandi vis-à-vis assessee's real estate development agreement embedded therein followed by development, cancellation and settlement deeds leading to avoidance of tax as the damages in question had been claimed as capital receipts. The assessing authority was of the view that all this mechanism employed at assessee's behest defied business prudence. It thereafter took note of similar transactions in earlier assessment orders without any development activities undertaken. The Assessing Officer further took cognizance of meager capital gains in vendors'cases (supra) to observe that they had declined pittance figures of capital gain as against assessee getting sizeable exempt income of Rs. 3.87crores. He therefore made the impugned income addition in assessee's hands. 6. The CIT(A) upholds the impugned addition as follows: "2.2 The various issues involved in the case of the appellant along with my comments are discussed as under: A. There were three agreements entered into by the appellant with three different parties i.e. land owners, in two eases the appellant has enter....
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.... value in the court of law to claim the specific performance. Hence such a huge amount cannot be accepted as compensation received by the appellant against relinquishment of right to sue. That too in all cases in exactly similar fashion. F. From the plain reading of the development agreements it is clear that the compensation was an in-built part of the agreement. The compensation received by the appellant is the income received by it for loss of future income. G. The timing of the various transactions reflect a pattern in the actions of the appellant. Land Date of Dev. Agreement Date of sale to third party Date of termination Agreement Gap between the sale and termination agreement Total consideration (Rs.) Total Benefit to the owner/ owners (Rs.) Benefit to appellant (Rs.) Survey no. 232, Village Moje, 57466 sq mt 18-03-2008 15-09- 2008 27-09-2008 (stamp paper purchased on 5-09- 2008) 12 days 1,37,94,000 22,94,000 1,15,00,000 Survey no. 231/1+2, Village....
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.... reproduced as under; 6.11 It has been specifically agreed by and between the parties hereto that if the development project, because of the circumstances beyond the control of the developer or otherwise could not be commenced and/or executed or completed for any reason whatsoever, developers shall be entitled to receive such amount by way of compensation/damages or defamation charges for damaging the goodwill of developer in the event of termination of this agreement by the owners, as may be mutually agreed upon between the parties hereto for the termination, of rights arising in favour of developer under this agreement. 6.12 it has been further agreed by the owners that in the event of termination of this dollop and agreement as mentioned herein before in para 6.11 and/or for any reason whatsoever, then in that case pre-emptive right to purchase the said land shall remain with the party of the other part(Developer) It has been further agreed by and between the parties hereto that in ease the party of the other part exercises the pre-emptive right to purchase the said land then the requirement of obtaining all necessary sanctions and permissions from the....
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.... of Rs. 81 lacs if the development agreement went through. However on cancellation, they have gained only to the tune of Rs. 5.84 lacs whereas the appellant have benefited by a whopping sum of Rs. 2.27 crores and that too without investing a single rupee. J. If the appellant's claim of relinquishment of right to sue is to be accepted then such swift action does not seem to be with the realm of human probability. K. It needs to be reiterated that no amount whatsoever was paid by the appellant to either W the above two land owners at the time of execution of development agreement and even the possession of land was taken by the appellant. L. In the case of the agreement; with society, similar provisions exist except that the advance of Rs. 1454000/- was actually given by the appellant to the society with the commitment of payment of additional Rs. 1046000/-. Further the role of the appellant was termed as that of a 'Project consultant and Organiser'. However the; clauses relating to pre-emptive purchase possession of land remained similar to the other two agreements. Even specific clauses in respect of compensation to the appellant in case of default ex....
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....s; All these clearly indicate that the termination was worked out amicably without any recourse to suing the owners, it was simply an agreement terminating the development agreement and the appellants were more than adequately compensated for the cancellation, this is clear from the findings given by the AO. The owners got very little consideration and the major part of the consideration was received by the appellant. S. In the information agreemend with individuals following clause is mentioned: "And whereas, as mentioned in clause number 6.11 and 6.14 of the said project consultancy agreement dated 30-03-2007, a party of the first part and a second part to this termination agreement have mutually agreed and decided that by virtue of existing development rights of the said land held by the party of the second part, the party of the second part shall be entitled to get the compensation /damages for the termination of the rights to Sue for pre-emptive purchase right arising to the party of the second part vide project consultancy agreement...." As is clear from the clause number 6.11 to 6.14 of the development agreement as reproduced above, the provision f....
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.... V. In normal course of cancellation of development agreement the compensation would be taxable as revenue receipt and the appellant would have to pay regular tax on the same. But by showing the income under the garb of compensation against right to sue, the appellant has claimed the consideration as capital receipt not liable to tax. Here I would think it appropriate to mention the famous Gourley principle. This has been relied upon by the Indian courts in plethora of cases of Income Tax. The principle is that a person must not fee placed in a better position as a result of a breach of contract than if the contract had actually been performed. The potential for being placed in a better position will arise in cases where: a. payment made from one party to another would be subject to tax in the event that the contract had been properly performed; but b. the damages are not themselves subject to tax. In the case of Sri Harindar Singh vs Wealth Tax Officer, 1967, 64 ITR 394 P H, Punjab-Haryana High Court has referred to the words of Earl Jowitt "in British transport Commission v. Gourley (1): "The obligation to pay tax-save for those in possessi....
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....quite clear that appellant was a silent party to the transaction. And the consideration on account of composition has been received in the regular course of business activities of the appellant. X. Whenever a termination agreement is signed between the parties to cancel the original agreement, than naturally the party receiving the compensation does indemnify the other party from any future legal course of action. Therefore the party receiving the composition naturally does not retain any right to take legal action in future. Such compensation, however, cannot be viewed as a compensation for relinquishment of the right to sue. Further legal actions will naturally not have any legal force in view of the receipt of compensation and has to be seen merely as a corollary to the compensation receipt. Y. A specific fight to Sue and its relinquishment will arise only When some action is taken by the party to show that it is capable of taking sortie legal action or it is willing to move to the courts to secure specific performance. In the case of the appellant no such action has been taken. z. In the case of Manoj B. Joshi v. Income-tax Officer [2009] 179 TAXMAN 3....
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....as paid the amount in issue so that no action in future was initiated against 'D' by the members of the proposed housing society for having failed to construct flats for them as was initially agreed by it. In other words, the assessee had received the aount in issue to indemnify 'D' against any action (that too, if any) that may be taken against 'D' in future. The amount in issue was not paid to the assessee towards any right/title/interest that he had in praesenti in any immovable property. [Para 14] The Tribunal was justified in holding that the amount in issue was paid to the assessee only to safeguard 'D' from any claim(s) likely to be made against him by the person who had booked the flats throuqh the assessee, since 'D' did not construct the flats as agreed by him earlier. [Para 15] Thus, considering all the facts and circumstances of the case and the factual findings retarded by all the three lower authorities, it could not be said that the amount in issue received by the assessee was not an income at all, as defined under section 2(24); and that alternatively, the income of the assessee was required to be treated as 'Income from long-term capital gain'....
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....ost of acquisition. Leaned counsel then takes us to Section 2(14)(a) of the Act defining a capital asset to be property of any kind. We are therein taken to Section 2(47) of the Act defining transfer in Income Tax Law not including in its ambit such a right to sue involved herein. 8. The assessee pleads that its above right to sue surrendered in lieu of getting compensation money is not a property as well so as to invite taxability of its compensation money as either capital gains or business income as per case law CIT vs. Ashoka Marketing Ltd. (1987) 164 ITR 664 (Cal.) and Govindbhai C. Patel vs. DCIT (2010) 36 SOT 0270 (Ahmedabad- Trib.) concluding that even paying damages for default as per an agreement without any transfer of a capital asset is not assessable as capital gains or business income. The above co-ordinate bench holds that Section 28(va) does not include such an income in specified cases therein. Mr. Shah takes us to assessee's paper book comprising of all development agreements, termination documents as well as registered conveyance deed alongwith necessary replies submitted in lower proceedings. 9. Mr. Shah's next submission is that its above development agre....
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.... and 49 of the Indian Registration Act, but, failed to notice the proviso appended to section 49 which has been incorporated by way of amendment subsequently. Thus, it is pertinent to take note of section 49 along with proviso which reads as under: "49. Effect of non-registration of documents required to be registered.- No document required by section 17 or by any provision of the Transfer of Property Act, 1882 (4 of 1882), to be registered shall- (a) affect any immovable property comprised therein, or (b) confer any power to adopt, or (c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered : Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1877 (1 of 1877), or as evidence of part performance of a contract for the purposes of section 53A of the Transfer of Property Act, 1882 (4 of 1882) or as evidence of any collateral transaction not req....
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....aid to be barred by section 17(1A) of the Registration Act, 1908. 13. Section 17(1A) merely declares that such an unregistered contract shall not be pressed into service for the purpose of section 53A of the Transfer of Property Act, 1882. Section 17(1A) of the Registration Act, 1908, does not, whether in specific terms or by necessary intent, prohibit the filing of a suit for specific performance based upon an unregistered agreement to sell, that records delivery of possession or is executed in favour of a person to whom possession is delivered and the proviso to section 49 of the Indian Registration Act, 1908, put paid to any argument to the contrary. 14. We, therefore, hold that : (a) a suit for specific performance, based upon an unregistered contract/agreement to sell that contains a clause recording part per- formance of the contract by delivery of possession or has been executed with a person, who is already in possession shall not be dismissed for want of registration of the contract/agreement; (b) the proviso to section 49 of the Registration Act, legitimises such a contract to the extent that, even though unregistered, it can form the b....
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....he right to obtain registration of sale deed acquired by him by virtue of agreement dated 4.4.2008, is a capital right, therefore, the transfer would result capital gain. It will be taxed in the hands of SDS. This aspect has been dealt with in a large number judgment discussed by us in issue no.(i). Thus, the ld. Revenue Authorities have failed to notice distinction between a valid and genuine contract under the general law vis-à-vis a contract having effected for the purpose of section 53A of TP Act." 10. Learned counsel concludes his arguments after once again reiterating assessee's stand adopted throughout that it had entered into a valid development and cancellation agreements. Its case accordingly is that the compensation in question of Rs. 3.87 crores has been wrongly held to be income assessable under the head business income despite the settled law that it is a capital receipt which is neither capital gains nor business income. Case law (2009) 179 TAXMAN 30 (Bom.) Manoj B. Joshi vs. ITO, M/s. Ansal Properties & Industries Ltd. vs. CIT ITA No.183/2008 decided on 19.11.2010 (Delhi High Court), CIT vs. Hiralal Manilal Mody (1981) 131 ITR 421 (Guj.), (1985) 149 ITR 21....
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....ase (supra), Section 17 r.w.s. 49 of the Indian Registration Act and Section 53A of the Transfer of Property Act. The Revenue's further case is that the assessee is in the business of entering into such development agreement followed by identical compensation receipts being received from the vendors concerned. Both the lower authorities therefore have rightly assessed it under the head business income regarding the impugned compensation receipts in relevant previous year. It therefore seeks to confirm the addition under challenge. 14. Next come assessee's submissions in rebuttal. Mr. Shah reiterates his argument made earlier. He pleads that the lands in question were all agricultural at the time of development agreement being executed in all three cases. Section 63 of the Bombay Tenancy & Agricultural Lands Act as applicable in Gujarat state bars such transfer of agricultural lands to a non agriculturist without getting conversion certificate from Collector's Office. The assessee accordingly explains that it could not have got the above agreements registered in view of said statutory bar. It clarifies that its possession in development agreement was in the capacity of a licensee....
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.... any consideration money nor carried out any development activity. It had merely obtained a licensee right to enter into possession into three parcels of land not creating any easement or interest therein as per Section 52 of the easement law. We further observe that the assessee developer could not have entered into full fledged possession in performance of the agreement in view of statutory bar u/s. 63 of the Bombay Tenancy and Agricultural Land Act, 1948 (applicable in Gujarat state). There is no material indicating the above lands being converted to non agricultural. The same sufficiently indicates that assessee's license right existed on paper only. Hon'ble Bombay high court's decision in Manoj B. Joshi's case (supra) holds that such an amount is not to be taxed as income u/s.2(24) of the Act. This tribunal's co-ordinate bench decision in Govindbhai C. Patel's case (supra) also is of the view that an identical compensation sum as in facts of the instant case is not a business income as well since not covered under specific instances u/s.28(va) of the Act. The Revenue's stands therefore holding both development and cancellation agreements in all cases is not sustainable in view....