TaxTMI 
TaxTMI 
2015 (5) TMI 1251
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....n for transfer of land is chargeable to tax. The remaining common issues involved in these appeals are incidental to the main issue and they mainly relate to the determination of the quantum of income that is chargeable to tax in the hands of the assessee once the head of income is determined/decided. Since the issues involved in the case of all the fourteen assessee's as well as the facts relevant thereto are materially similar, we take the case of M/s. Goman Agro Farms Pvt. Ltd. for the purpose of narrating the facts in detail and considering and deciding the issues involved in the light thereof. 3. The assessee M/s. Goman Agro Farms Pvt. Ltd. is a company. It acquired lands in two pieces to the extent of seven acres in the financial year 2002-03 at Survey No. 194 Bachupalli Village, Ranga Reddy District. Thereafter, it incurred some expenditure on fencing, laying of roads, etc. in respect of the said land during the financial years 2002-03 to 2005-06. On 30.12.2005, the assessee company and thirteen other companies who had also owned lands adjacent to the land of the assessee company, entered into development agreement with M/s. Maytas Properties P. Ltd. As per the said d....
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....f the relevant factual background. On such examination, he recorded his findings/observations in detail as under- "5.1 The family members of Sri B. Ramalinga Raju entered into real estate business In a very planned, systematic manner by floating the companies and acquisition of lands in the vicinity indicates that. As part of it, various companies under their own family members management were floated, lands were acquired In the vicinity. The dates of acquisition of lands in the same survey numbers around the same time period clearly indicates that, fourteen companies acquired land in such a way that, if pooled they will form a single piece of continuous land that can be used on a future date without any hindrances. (The topography of the site with survey numbers is enclosed with this assessment order as annexure) The above also Indicates that at the time of purchase of lands itself, the clear intention of companies and the individuals involved in it was to develop them on future date and sell them after making profit. 5.2 All the land owning companies pooled up their land facilitating a joint mega venture by a common agreement with developer i.e., M/s. Maytas Pro....
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....eds executed for various flats/bungalows buyers', it is evident that for the registration of undivided share of land also, the pooled-up land was treated as "single piece of land". Even the sale proceeds received from various flat/bungalow buyers' were passed on to the land owning companies in the ratio of their land holding in the pooled up lands. 5.8 For all practical purposes such as sale of land, sharing of the sale proceeds etc., the activity was carried out as a single business venture only. The assessee-company and 13 other land owning 'companies with the help of the agreement with the developer carried out systematic, and planned activity of development of the area, construction of the apartments and bung lows, sale of the built-up area to various buyers, advertisement of the venture etc. 5.9 Though the lands were claimed to be agricultural lands, no agricultural activity was carried in these lands during any of the years. In fact, the land was subjected to various developmental activities such as, fencing, road laying etc., over a period of time. 5.10 On close observation of the financial statements of the assessee-company and 13 othe....
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....the assessee-company i.e. land became readily salable. Thus due to the initial development activities by the assessee-company and subsequent developmental activities by the developer, the land became easily salable at more profitability. d. As mentioned above, the land purchased was not sold as it was subsequently. There were certain Incidents i.e. various developmental activities and constructions thereon, were closely associated with the sale of land. e. The developmental activities, construction and systematic marketing are the usual activities associated with a regular business of construction of dwelling units. In the regular business of construction, the businessman will acquire the land, make it suitable for the developmental activities proposed,' construct dwelling units as per the requirements, market them, and sell to various buyers though its deployed staff. The activities of the assessee-company In the present case can also be closely compared with the regular activities in the business of construction of dwelling units. f. The purchase of the lands and sale of the dwelling units are repeated activities carried by the assessee company. It ....
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.... Properties Ltd. i. The following are the details of the neighboring lands which are owned by the sister concerns of the assessee-company are as under:- Details of the neighbours land S. No. Sy no. Extent North South East West 1 194 5.00 Sy. no 194 neighbours Sy. no 196 & 195 Nagavali GL Sy no.195p Himigiri GF Sy.No. 194p Himigiri GF 2 194 2.00 Sy. no 191 Nallamala A F Sy. no 196 Nagavali GL Sy no.195p Himigiri GF Sy.N o.194p Himigiri GF ...." 6. On the basis of the above findings, the Assessing Officer was of the view that the relevant transaction of the assessee company was not a simple case of disposing of a capital asset, but could definitely be viewed as plunge into the business activity which was nothing but an adventure in the nature of trade. According to him, the profit arising from such transaction therefore, was nothing but an adventure in the nature of trade. According to him, the profit arising from such transaction therefore, was required to be brought to tax under the head 'income from business or profession' and not capital gain. He therefore, afforded one more....
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.... income from capital gains to that income from Business/Profession. Accordingly, it is prayed that the income as admitted under the head capital gains may kindly be accepted for purpose of assessment." 7. The above explanation offered by the assessee was not found acceptable by the Assessing Officer. According to him, the same was general in nature not specific on any point raised by him in the show cause notice. He held that a mere treatment given by the assessee company to the land as fixed asset in the Balance Sheet stating that it was an agricultural company was not conclusive in this regard and all the facts of the case since the inception of the case till the disposal of the asset were required to be considered to decide the issue. Accordingly, based on the various findings/observations recorded by him, the Assessing Officer held that the transactions carried out by the assessee company was nothing but an adventure in the nature of the trade and the profit arising out of such transactions was required to be brought to tax in its hands under the head 'profits and gains of business or profession' and not capital gains. Accordingly, after deducting the cost of land of....
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....received in the process was liable to be treated as capital profit and not as a business surplus or a trading profit. It was also submitted that the sale of land as in the case of the assessee could not be compared to any other sale of commercial commodity and the decision of the Hon'ble Supreme Court in the case of Janaki Ram Bahadur Ram V/s. CIT (53 ITR 21) was cited to contend that transaction of purchase of land could not be assumed, without there being anything more, to be a venture in the nature of trade. Reliance was also placed by the assessee on the decision of the Hon'ble Madras High Court in the case of CIT V/s. Kastoori Estate P. Ltd. (62 ITR 578) in support of its contention that the best price realised on any investment made in capital asset, after developing the land would be construed as capital appreciation, which is chargeable to tax as capital gain and not as profit from an adventure in the nature of trade. It was contended on behalf of the assessee company that the entire income earned by it from the transfer of land as per the development agreement and further sale of flats and bungalows received as consideration for land was assessable in its hands und....
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.... entering into and conducting of a transaction which is the key determinant. Even a single transaction can take the character of business. The facts of the appellant's case are therefore examined in this light. (c) At the outset the most interesting aspect is the very method of computation of its income. The appellant linked its income and receipts to the income and profitability of the developer and the "income" of the appellant is "finalized" only after the developer Co. finalizes its accounts and allots 27% of the income to the land owning Cost is amount of 27% is in turn distributed among the land owning companies in the ratio in which they contributed land to the total project. It is interesting to note that even in the written submissions filed, the appellant had clearly stated that it was entitled to receive 27% of profit of the developer company as the share/due to the 14 land owning companies that had entered into the development agreement. Please see 1st item of submissions in the table at Para 5.. (d) The above practice of computing income is strange when the appellant claims that its income is taxable under the head capital gains. The appellant spe....
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....- 8a Difference between (6 and (7c) is due to cost of land and other expenses 15,19,366 8b Total income determined by AO after some disallowance of expenses 7,73,86,908/- (g) In the above table, the appellant having arrived at 7.9 crores as receipts/income did another interesting adjustment of split it between the long term and short capital gains. For this, the appellant "estimated" as to what would be the proportion of total cost of construction (debited in the developer books) that would match the net sales income/revenue/receipts of the Co. For the 14 land owning Cost, the net revenue (after costs) came to Rs. 97 crores (as against 101 crores in the table supra). To match this revenue, the construction cost was estimate at Rs. 62.95 crores. Both the Revenue (97.07 crores) an construction cost (Rs. 62.95 crores) were then apportioned to the 14 land owning Cost. The appellant's share came to 7.90 crores of revenue and 5.12 crores of cost of construction. This 5.12 crores was taken as long term capital gains and from this the cost of land (after indexation) was reduced to arrive at long term capital gains of Rs. 4.86 crores. From ....
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....also be at a lower rate and a the project nears completion, the rates shoot up. Thus, there would be escalation in the price over a period of three four years which the project would take to complete and the profits also would goes up as the project nears completion. Normally, only the sale proceeds from the flats/villas that belong to the appellant's share, and which were sold during the year, would have been reflected as receipts. The profits as result of incremental value additions and other charges and levies made by the developer would not be part of these receipts. The appellant clearly was looking for a part of these profits that accrue to the developer as well. (k) Secondly, by linking the profit to the developer's profit, which in turn can computed as percentage completion method, the appellant ensures that the incomes offered to tax are spread over a period and the tax payments are thus rolled over a span of 3 or 4 years (as long as the project takes to complete) instead of paying the bulk of tax liability at one go in the initial year when the land was transferred to the developer. (l) Thirdly, the profits offered to tax also would factor the co....
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....before the inking of the development agreement. This clearly showed that the land owning by a Co. was a legal device rather than any "agricultural objective." Secondly, the actual transaction as it was entered and executed is what that reveals the motive and intention to judge as to whether it is a business transaction or a transaction of "capital gains". (q) The transaction entered into, was clearly with an idea to do a real estate venture and profit. The appellant had therefore structured a real estate venture as a "development agreement" and that (sic), with its sister company under the same management. The profits were linked to the profits of the developer even though it had no business to do so as per the development agreement. This is the real reason for the difference in the execution of this development agreement when compared to other development agreements." 12. On the basis of the reasons given above, the learned CIT(A) held that the intention behind the entire transaction on the part of the assessee was clearly established as that of adventure in the nature of trade and therefore, profit arising from the said transaction was chargeable to tax under the head....
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....h the said return, negative income was shown by the assessee company as a result of increase in the estimated budgeted cost of construction and change in the method of recognition of income, which also resulted in reversal of income. It was submitted that the income for assessment year 2008-09 was recognized by following percentage completion method, which was calculated on the basis of budgeted cost of construction as originally estimated by the developer at Rs. 584,72,39,037. It was submitted that the developer company however, revised its budgeted cost estimate to Rs. 816,86,27,421 for assessment year 2009-10, as a result of which percentage completion was reduced in assessment year 2009-10 as compared to assessment year 2008-09, resulting in reversal of income. 16. It was claimed by the assessee in this regard that the percentage completion for assessment year 2008-09 was tagged to the projected cost of Rs. 584,72,39,037, but owing to the increase in the budgeted cost for assessment year 2009-10, the percentage completion was reduced for assessment year 2009-10 in comparison with assessment year 2008-09. This claim of the assessee was not accepted by the Assessing Officer. A....
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....er has passed certain reversal entries as a result of the request purportedly made by some customers for cancellation of the agreement for sale. He also noted that a similar treatment was given by passing reversal entries in respect of some other customers who had filed legal suits against developer. These reversal entries passed by the developer had resulted in decrease in the revenue recognition of the land owners companies including the assessee company. In this regard, the Assessing Officer noticed that neither the developer nor the assessee company had paid back any amount to the customers in the wake of the purported cancellation and legal cases. The Special Auditor had also reported in his report that there was no need to refund any amount in the wake of cancellation of the agreements for sale, as sought by some customers by filing legal cases. It was also found by the Assessing Officer that the collection of amount from the customers was to the tune of 87% of the agreements for sale entered into by the developer company and there was no way by which the assessee company could be denied its share by the developer of these receipts. According to the Assessing Officer, there w....
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....passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), raising various issues. The first and foremost issue raised by the assessee was relating to the change of method of accounting whereby Revenue was recognized only on the basis of registration of agreements for sale or handing over the possession of the flats/bungalows, as adopted in assessment year 2009-10 in place of the execution of the agreement for sale adopted as the basis for recognizing revenue upto assessment year 2008-09. In this regard, it was submitted by the assessee that following the problems faced by Satyam group of companies, a number of purchasers had tendered their applications for cancellation of agreements for sale and had also filed legal suits against the assessee as well as the developer. It was submitted that as a result of these cancellations/litigations, it was prudent not to recognize the revenue merely on the basis of agreement for sale unless the said agreements were registered or at least the possession of the flats/bungalows was handed over. It was contended that the cancellation/litigation created uncertainties in the generation of reven....
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.... was chargeable to tax in its hands, the assessee company reiterated before the learned CIT(A) the same submissions as made during the course of appellate proceedings for assessment year 2008-09 in support of its stand that the same was taxable under the head 'capital gains' and not 'profits and gains of business or profession'. Certain errors committed by the Assessing Officer while computing income for the year under consideration i.e. assessment year 2009-10, were also brought to the notice of the learned CIT(A) by the assessee company and a request made that although an application for rectification filed by the assessee for rectification of the said mistakes under S.154 was rejected by the Assessing Officer, a finding may be given on this aspect as well. 23. After considering the submissions made by the assessee and perusing the relevant material on record, the learned CIT(A) first decided the issue regarding the head of income under which the income determined by the Assessing Officer was chargeable to tax in the hands of the assessee. In this regard, he relied on the findings given by him on a similar issue as involved in the assessment year 2008-09 and fo....
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....o offer income under long term capital gains on account of land transfer and short term capital gains on sale of flats/villas. The relevant portion of the appellate order for A.Y. 2008-09 is therefore extracted below to illustrate the accounting methodology adopted in AY 2008-09:- ............................................................ The appellant cannot change the method to suit the current needs and especially so when it marks a fundamental departure in its very method of computation of income. (d) It is also to be stated that registration is only (sic) final culmination of a long process. Agreements are equally valid to recognize revenue on accrual basis. Further, it is not as if the entire consideration amount is being recognized. Only a part of it is being recognized by the developer by linking the revenue recognition of such receipts to percentage completion of work method. (e) The appellant had made much about the department's attachment proceedings u/s 281B and its stoppage of registrations. It is to be seen that the main developer/builder, who is also registering actual property and who is under actual fire and who is accounta....
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....uential and linked to the computation of income of the developer company, Viz. M/s. Maytas Properties Ltd. and since the issue of computation of income of M/s. Maytas Properties Ltd. was pending before the Dispute Resolution Panel, he refrained from deciding the issue and left the same open in respect of (a) change in the budgeted cost estimation and (b) reduction of receipts attributable to legal cases/cancellations, with a direction to the Assessing Officer to decide the same as per the findings of the DRP in the case of developer company on its adjudication. 26. As regards the mistakes pointed out by the assessee in the computation of income as made by the Assessing Officer, the learned CIT(A) found himself in agreement with the stand of the assessee that the income determined by the Assessing Officer as a result of mistakes committed was in excess by Rs. 40,90,710. Accordingly, he directed the Assessing Officer to reduce the income of the assessee company by Rs. 40,90,710. Accordingly, the appeal filed by the assessee before him for assessment year 2009-10 was partly allowed by the learned CIT(A). Aggrieved by the order of the learned CIT(A) for the assessment year 2009-10, ....
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.... show that the agricultural lands were purchased by the assessee company as stock in trade and the Assessing Officer as well as the learned CIT(A) ought to have looked into the intention of the assessee company at the time of purchase of land. He contended that they, however, decided this issue regarding the nature of lands relying on the subsequent events ignoring the intention of the assessee company as prevalent at the time of acquisition or purchase of lands, which was very clearly to acquire the said land as capital asset for carrying out agricultural operations. He contended that the allegation of the authorities below that the intention of the group as such right from the beginning was to acquire the land for the purpose of business of real estate development is baseless, as the developer company was incorporated only in the year 2005 whereas lands were purchased by the land owing companies in the year 2002. He contended that even the various events enumerated and relied upon by the Assessing Officer to hold that the entire activity was business activities have happened during the post-development agreement period and the said events, at the most, can only show that the acti....
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....ain relating to the undivided share of land attributable to such constructed area can be taxed in the hands of the assessee company and the amount received over and above can be taxed as business income. The learned counsel for the assessee also furnished a working showing how the entire income earned by the assessee company can be brought to tax in the hands of the assessee company partly as capital gains and partly as business income by applying the provisions of S.45(2) of the Act. The working furnished by the learned counsel for the assessee is as under- "Calculation of Capital Gain and Business Income u/s.45(2) # Particulars Amount in Rs. Amount in Rs. The Cost of the construction of 27%of the area to the land owner 1,10,70,00,000 Less: Indexed Cost of 73%of the land 7,42,34,336x73% 5,41,91,065 Long Term Capital Gain 1,05,28,08,935 2 Consideration of sale of proportionate constructed area - Ac 37.79 out of Ac 85.93 97,07,88,393 Calculation of cost price: 3 Proportionate cost of constructed area ....
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....ed on by the assessee as well as other thirteen land owning companies till the date of development agreement, expenditure was incurred by them for leveling of the land and laying roads, etc. There is, however, nothing brought on record to show that there was any intention on the part of the assessee company to carry on the business of real estate development by using the lands acquired by them as stock in trade. On the other hand, the primary evidence in the form of objects of the assessee company, entries in the books of account etc. was clearly in favour of the assessee to show that the lands were acquired and held by them up to the date of development agreement as capital assets and there is nothing to dislodge this position emerging from the primary evidence. 32. The Assessing Officer as well as the learned CIT(A) have relied on various events to arrive at a conclusion that the intention of the assessee companies right from the beginning was to acquire and hold the lands as stock in trade for the purpose of carrying on the business of real estate development. However, most of the events relied upon by the authorities below are subsequent events occurring after the date of de....
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....r consideration is what is the position during the period post development agreement in the sense whether there was any change in the nature of lands owned by the assessee as a result of events occurring after the date of execution of development agreement. At this juncture, it is necessary to take judicial note of the common practice being followed in the case of transfer of land as capital asset to the developer as per the development agreement. In many such cases, the consideration for transfer of land is being paid by the developer and accepted by the land owner in the form of certain percentage of built up area. For example, 30% of the total built up area of the project is agreed as consideration to be paid by the developer to the land owner as a consideration. In such a case, what the land owner effectively transfers to the developer is 70% of the total land, as the balance 30% of the total land area is retained by him, being the undivided share in the land attributable to the 30% built up area to which he is entitled to receive form the developer as consideration. The purpose or intention to accept sale consideration in the form of built up area on the part of the land owner....
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....of Mauritius 4. Maytas adopted percentage completion method to recognize revenue and determined profit. 27% of this profit was passed on to the land owning companies including the appellant company, who then shared this profit in the ratio of land holdings. 5. The assessee company too systematically followed revenue recognition by project completion method and its activities can be identified with a systematic business activity by any other company. 6. The development agreement was in 2005 and the lands were also taken over by the developer in 2005. Yet, the appellant/assessee company did not offer any income under the head capital gains in its relevant period. Thus, the assessee was itself not clear about the treatment of revenue received. 7. The assessee company never carried out any of its activities in isolation. All activities were undertaken jointly with other 13 land owning companies. As a single business venture for all practical purposes, verification of the sale deed executed in favour of various flat/bungalow buyers also indicated that for the registration of undivided share of land, the entire pooled land of about 85 acres was taken a....
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....ea, what the assessee company got on conversion was 27% of the total built up area of the project. The remaining 27% of the land area continued to be held by the assessee company, but as stock in trade on conversion. Thus, as a result of development agreement, there was conversion of capital asset into stock in trade as well as change in the form of asset in the sense that in place of 100% land area held as capital asset, the assessee company got 27% of the total built up area of the project alongwith proportionate undivided share in land as stock in trade, which became available to it for the purposes of dealing during the post development agreement period. 38. In so far as computation of capital gain on such conversion is concerned, S.45(2) specifically provides that the fair market value of the asset on the date of conversion for the purposes of S.48, shall be deemed to be the full value of consideration realised or accruing on transfer of the capital asst. In the present case, 27% of the built up area of the project was received by the assessee as consideration for transfer of 73% of the land area, and therefore, cost of construction of this 27% area can reasonably be taken ....
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....IT Area of land transferred as per Development Agreement 7,000 Sq. ft. Consideration for transfer of 7,000 sq. ft. 3,000 sq. ft. (constructed area) Rate of construction, say Rs. 1,500 per sq. ft. Cost of construction of 3,000 sq. ft. (To be taken as consideration/market value of 7,000 sq. ft. land area) Rs. 45,00,000 Consideration/market value of land (45,00,000/7000 sq. ft.) Rs. 643/- per sq. ft. Fair Market value of 10,000 sq. ft. land @ 643 per sq. ft Rs. 64,30,000 Less: Indexed cost of acquisition of 10,000 sq. ft. land say @ 193 per sq. ft. Rs. 19,30,000 Capital gain on conversion of 10,000 sq. ft. land Rs. 45,00,000 Capital gain to be apportioned on 3,000 sq. ft. built up area (stock in trade) on sale Rs. 1,500 per sq. ft. Cost of stock of 3000 sq. ft. 64,30,000 3000 Rs. 2143 per sq. ft. If stock in trade of 3000 sq. ft is sold as follows: I Year 1000 sq. ft. @ 3000 per sq. ft. 30,00,000 LTCG @ 1500 per sq. ft. 15,00,000 Profit @ 857 per sq. ft.(3000-2143) 8,57,000 II Year 1000 sq. ft. @ 3500 per sq. ft. 35,00,000 LTCG @ 1500 per sq. ft. 15,00,000 Profit @ 1357 per s....
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....s of registration of agreements for sale or handing over possession of the units to the agreement holders is a o based on prudential norms of revenue recognition and the same is supported by Accounting Standard 9, which clearly states that the key criterion for determining when to recognize the revenue from a transaction involving sale is that the seller has transferred the property in the goods to the buyer for a consideration. It is clarified that the transfer of property in goods results in or connotes the transfer of significant risks and rewards of ownership to the buyers. Further, there may be situations, where transfer of property in fact does not coincide with the transfer of significant risks and rewards of ownership. Cases may arise where delivery has been delayed due to the fault of the seller and the goods are at the risk of the parties at default. 36. As per AS-9, recognition of revenue requires that revenue is measurable and that at the time of sale, it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, Revenue recognition is postpo....
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....essment year 2008-09, the same was legally correct under the mercantile system of accounting followed by the assessee company. It is pertinent to note here that the AP State Consumer Dispute Redressal Commission, Hyderabad (vide its order at pages 38 to 55 of the paper book) as well as National Consumer Disputes Redressal Commission, New Delhi (vide order at pages 56 to 87 of the assessee's paper-book) subsequently allowed the claim of the agreement holders seeking cancellation of the agreements for sale and also directed the assessee company to refund the amounts paid by them along with interest, and even the SLP filed by the assessee against the order of the National Consumer Dispute Redressal Commission was dismissed by the Hon'ble Supreme Court. These subsequent events clearly show that there was an uncertainty in assessing the ultimate (sic) and revenue recognition was rightly postponed by the assessee company to the extent of such uncertainty involved by changing the method of recognition of income as well as providing for reversal of revenue already recognised earlier on the basis of cancellations/legal cases." Following our decision rendered in the case of M/s. H....