TaxTMI 
TaxTMI 
2006 (12) TMI 170
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....A) in the matter of assessment under s. 143(3) r/w s. 147 of the IT Act, 1961, for the asst. yr. 1996-97. Grounds of appeal, as set out in the memorandum of appeal, are as follows: "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding the reopening of assessment under s. 147 of the IT Act, 1961, was proper and thereby erred in confirming the reopening of assessment. Looking to the facts and in the circumstances of the case and in law, the appellant submits that CIT(A) ought to have held that reopening of assessment is bad in law and void, and ought to have quashed the assessment. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 5,27,13,079/- on account of alleged capital gains on the sale of plot of land. Looking to the facts and circumstances and in law, the appellant submits that learned CIT(A) ought to have held that the additions made by the AO is incorrect and invalid and ought to have deleted the same. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not adjudicating upon the ....
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....96 15.5.1996 50,00,000 On conclusion 31.5.1996 4. All the above payments were to be made along with the interest for delays in payments, as agreed to by the parties. The supplemental agreement, whereby the payments were rescheduled, also, inter alia, provided as follows: "The said Lok Housing (i.e. intending buyer) have issued postdated cheques, in favour of said Shamvik and the said General Glass (i.e. the assessee before us) for the payment of the instalments of the purchase price as also for payment of interest calculated upto the revised dates of payments as per particulars mentioned hereinabove. The said Lok Housing gives a warranty to the said Shamvik and the said General Glass that ail the said postdated cheques may be presented by the said Shamvik and the said General Glass for encashment on the respective due dates and that the cheques will be honoured on presentation. Further that the Lok Housing will not issue stop payment instructions in any circumstances nor put forward any excuses of any type to avoid presentation and consequent encashment of the said cheques on their respective due dates. Further encashment of the said cheques on presen....
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....eals are also finalised and substantial amounts are receivable on execution of agreements for the same. We are vigorously following up both these avenues and we are hopeful to get substantial funds in a near future. In the event of our getting these funds, we shall definitely inform you and prepone the instalment payments. With regard to additional interest payable by us due to the suggested reschedulement, the same shall be paid separately. We hope, you will understand the difficulties and will accommodate us by accepting our proposal for further reschedulement of the instalments as suggested in this letter and oblige. In case you feel necessary, we shall sit together tomorrow and finalize the reschedulement. Meanwhile you are requested to present only one of the two cheques dt. 8th March, 1996 as mentioned above and to deposit the second cheque after a week." 6. The fact that group did not discharge its payment obligations is also evident from the following extracts arbitration petition No. 48 of 2001, as General Glass Co. (P) Ltd vs. Lok Housing & Construction Ltd., filed by the assessee before the Hon'ble Bombay High Court-a copy of which is placed befo....
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....he respondent had also given letter by way of an undertaking whereby they undertook that in the event of default of payment of the purchase price installments the licence to enter the property was to stand ipso facto terminated as well as the supplemental MoU dt. 12th Oct., 1995. The respondent also undertook not to part with possession of the tenements constructed by them under the aforesaid licence till the full purchase price along with interest had been paid. It is clear from the above that, the respondent has acted mala fide and consequently failed to act in good faith in making the payment due and payable by them to the petitioner the respondent had failed and neglected in fulfilling, its financial obligations, liabilities and commitments. The respondent by its conduct/act of refusing to bring into existence the aforesaid security, viz. the flats at "Lok Everest" has resulted in depriving the petitioner of its security. The respondent has also committed breaches of its payment obligations under the supplemental MoU dt. 12th Oct., 1995, the petitioner is therefore desirous of referring to Arbitration all the aforesaid differences and disputes pursuant to cl. (31) of the MoU, d....
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....kh only) by Pay Order No. 465441 dt. 12^th July, 2001 issued by State Bank of India, Marol Branch, Mumbai, in favour of the petitioner, General Glass Co. (P) Ltd. (b) In addition to the above payment, the respondent has today handed over to the escrow agent M/s DSK Legal, 3 (three) postdated cheques, viz. (1) Cheque No. 774618 dt. 16^th Aug., 2001 for Rs. 35,00,000/-, (2) Cheque No. 77420 dt. 31st Dec., 2001 for Rs. 50,00,000/- and (3) Cheque No. 774622, dt. 30th June, 2002 for Rs. 1,00,00,000/-, respectively, all drawn on State Bank of India, Marol Branch, Mumbai, in favour of the petitioner, General Glass Co. (P) Ltd., for a total value of Rs. 1,85,00,000/- (Rupees one crore eighty five lakh only), to be held in escrow and released in the manner more specifically spelt out in the escrow agreement entered into by and between M/s Shamvik Glasstech Ltd., General Glass Co. (P) Ltd., M/s Lok Housing Construction Limited and M/s DSK Legal dt. 16^th July, 2001; a copy of which is attached hereto as Annexure D (hereinafter referred to as "escrow agreement"). These cheques have been duly signed by Mrs. Meena Merchant and Mr. Uni Krishnan and the respondent undertakes and declares....
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....ered of equal value. The parties agree that this statement is accurate and undertake to this Hon'ble Court to challenge or dispute the same. (3) It is further certified and accepted by the respondent that the valuation of the said flats has been done at the rate of Rs. 1,500 per sq. ft. built up area. This value shall remain constant irrespective of what the price may be on 30^th June, 2002 and at every stage thereafter. The respondent expressly undertakes to this Hon'ble Court not to raise any dispute or the grounds that prices of flats have risen subsequently. Similarly the petitioner undertakes not to raise any such dispute if the prices should fall below Rs. 1,500 per sq. ft. (4) On or before 30th June, 2002 the respondent shall construct and deliver vacant possession to the petitioner 30 (thirty) flats fully completed in 'ready to use' condition, viz. 8 (eight) flats in building 'B-1' bearing flat Nos. 003, 006, 104, 405, 605, 703, 705, 706, 3 (three) flats in building 'B-2' bearing flat numbers 001, 104, 403, 4 (four) flats in building 'B-3' bearing flat numbers 001, 002, 203, 304, 11 (eleven) flats in building 'B-....
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....ll then be refunded to the respondent. (8) In the event that possession of flats has been handed over as abovementioned on 30th June, 2002, the escrow agent shall forthwith return to the respondents the 6 (six) postdated cheques for the period including and subsequent to 30th Sept., 2002 of the value of Rs. 2,60,00,000/- (Rupees two crores sixty lakhs only) as spelt out under the escrow agreement. (9) Therefore, the respondent undertakes to this Hon'ble Court, that, the respondent shall pay to the petitioner the amount of each instalment on the date they fall due as per Annexure-A for the exact amount in each instance. The respondent may however request 30 days' extension from due date if such an application is made in writing to the escrow agent, and a copy thereof is sent to the petitioners not later than 10 days prior to any of the stipulated due dates, in the manner as spelt out under the escrow agreement. Only one extension can be asked for or granted per scheduled date of payment. In all such cases, the respondent shall, along with the payment of instalment, also pay interest for the extended period at the rate of 15 per cent (fifteen percent) per an....
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....e if exercised and actually paid for within one month of the aforesaid instalment date shall be at the rate of Rs. 1,600 per sq. ft. and if within two months at the rate of Rs. 1,700 per sq. ft. The essence of this option, is not merely the intent to buy but the actual payment. Thus if despite expressing a desire for the option the respondent does not actually make payments at the above rates and within the above stipulated time, the petitioners shall be forthwith released of any further obligation to the respondent in this behalf and may then sell the said flats in the open market and at market rates without further reference to the respondent. The respondent undertakes to this Hon'ble Court that in case they do not repurchase the said flats in the time specified above they shall not raise any objection or create any obstruction to the open market sale of the said flats by the petitioners. (11) If despite the above undertakings the respondent defaults in giving ready possession flats to the petitioners as abovementioned on or before the 30th June, 2002, then the respondent undertakes that till the next payment becomes due, i.e. 30th Sept., 2002 he will not part with p....
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....cally agreed by and between the petitioners and the respondent that if, however, due to any act of God or natural calamity or if by reason of any injunction of any competent Court of Law in India the work on the entire project called 'Lok Nisarg' wherein the said buildings 'B-1' to 'B-5' and 'B- 7' being subject matter of these minutes is being constructed, physically stops, and the respondent is directly as a consequence thereof not in a position to arrange for the amount as mentioned in the aforesaid postdated cheques on their respective due dates, then, and in that event only, the respondent and/or its directors shall not be held liable and responsible for any criminal liabilities including criminal proceedings under s. 138 of the Negotiable Instruments Act. The respondent shall forthwith intimate to the petitioner the fact of any litigation civil/criminal being initiated against them as regards the said project. (15) The balance liability then outstanding, if any, shall remain and the respondent shall continue to acknowledge the same in writing so as to save limitation, until the same is paid. The petitioners shall, in any such case reta....
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....red by this order, or respondent handing over the flats mentioned in Annexure 'A' as per cl. 4 and flats mentioned in Annexure 'B' as per cl. 20 whichever is earlier, the petitioners shall return the aforesaid 12 flats in Lok Everest or such as remain after setting off the petitioners' claim, to the respondent. (19) In the meanwhile, the respondent undertakes to this Hon'ble Court that they have not at this date sold the said 12 flats listed in Annexure-C hereto in Lok Everest nor created any charge or third party rights therein and will not sell, part with or otherwise create any third party rights in the same. (20) The respondent further hereby expressly undertakes to this Hon'ble Court that the respondent shall also construct and complete, on or before 31st March, 2003 another building identified as B-7 in the complex/project known as "Lok Nisarg" situate on the property bearing CTS 3, 3/1 to 8 at Mulund, Taluka Kurla, Dist. Mumbai Suburban and hand over to the petitioners vacant peaceful and physical possession with clear and marketable title free of any encumbrances 20 (twenty) flats therein calculated at the rate of Rs. 1500 per s....
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....etitioners shall execute their respective conveyance/power of attorney as may be desired by the respondent. (24) It is hereby agreed and understood by and between parties hereto that they shall duly comply with all the terms and conditions of the supplemental MoU dt. 12th Oct., 1995 r/w the MoU dt. 10th May, 1995 and the supplemental MoU dt. 12th Oct., 1995 r/w the MoU dt. 28th Dec., 1994, as also any supplementary writings attached thereto which are not expressly dealt with and/or covered by this order. (25) All undertakings given by both parties herein are accepted and both parties are directed to ensure due compliance with the same. (26) Both parties undertake to this Hon'ble Court to apply to the arbitrators for appropriate orders related to the arbitration proceedings. (27) Both the petitions disposed of accordingly. No order as to costs." For the time being, we are not really concerned about the developments beyond this point of time. 7. On these facts, the AO reopened the assessment of the assessee company mainly on the ground that the capital, gains arising to the assessee as a result of transfer of plot of land, in the asst. yr....
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.... year under consideration. As a result, this ground of appeal is dismissed." 8. Aggrieved by the stand so taken by the CIT(A), the assessee is in further appeal before us. 9. We have heard the rival contentions at considerable length. We have also perused the material on record and duly considered factual matrix of the case as also the applicable legal position. Learned representatives have addressed us on different aspects of the matter-right from the legality of service of notice, to the correctness of the reasons recorded, furnishing of reasons recorded, to merits of the case. However, for the reasons we shall now state, it is not really necessary to go into all these aspects. We would first like to address ourselves to the core issue of taxability of capital gains in this year. 10. As Revenue has placed heavy reliance on the judgment of Hon'ble Bombay High Court's in the case of Chaturbhujdas Dwarkadas Kapadia vs. CIT, and it is based on this judgment that the impugned addition has been made by the AO, and sustained by the CIT(A), it is necessary to first appreciate what this judgment lays down, and perhaps even more important that that, what it does not lay do....
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.... guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the AO is entitled to take the date of contract as the date of the transfer under s. 2(47)(v)" 14. It is important to bear in mind that s. 2(47)(v) refers to 'possession to be taken or retained in part performance of the contract of the nature referred to in s. 53A of the Transfer of Property Act" and in the case before Hon'ble Bombay High Court, there was no dispute that the conditions of s. 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under s. 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of s. 53A which is a sine qua non for invok....
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.... to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract." 17. Elaborating upon the scope of expression" has performed or is willing to perform", the oft quoted commentary "Mulla-The Transfer of Property Act" (9th Edn. : Published by Butterworths India), at p. 448, observes that: "The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee's willingness to perform his part of the contract in terms covenanted thereunder. Willingness to perform the roles ascribed to a party in a contract is primarily a mental disposition. However, such willingness in the context of s. 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his ....
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....order, we have taken note of the developments leading to litigation before the Hon'ble High Court and the consent terms arrived at by the parties which were decreed by the Hon'ble High Court. All these factors unambiguously establish that not only the transferee never performed his obligations under the agreement but the transferee was, at least until the matter travelled before Hon'ble High Court, not even willing to perform his obligations. As we have not examined the position as to what was the position after the consent terms were arrived at before the Hon'ble High Court, it is not necessary to go into whether or not the transferee was 'willing to perform' his obligation under these consent terms, it is sufficient to take note of the fact that the matter travelled to Hon'ble High Court in the year 2001, i.e. much after the end of the relevant previous year. When transferee, by his conduct and by his deeds, demonstrates that he is unwilling to perform his obligations under the agreement, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee's obligations which can give rise to the situati....
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....es that the assessee "has made agreement and supplemental agreement for granting licence to enter plot and start developmental activities" and that "as a result of this, your company received payment of Rs. 73,92,380/- during the financial year 1995-96. This action falls within the purview of s. 53A of the Transfer of Property Act and such part performance has been defined as 'transfer' as defined under s. 2(47) of the IT Act". When we analyze these observations made in the letter of the AO, we find that there are factual inconsistencies and glaring errors. At one stage, the AO states that the seven cheques of Rs. 8,78,478/- each, out of these cheques two these cheques two cheques remained unencashed, were received by the assessee in May, 1996 which was at the end of the relevant financial year, but then the AO also includes the value of these cheques in the amounts said to have been received in the financial year 1995-96 itself. In this letter itself, the AO himself refers to the MoU dt. 12th Oct., 1995, and, therefore, it is clear that the AO was aware of the contents of this agreement which, inter alia, laid down that Rs.. 2,80,00,000/- was to be paid by the transferee w....