CHANDRA POOJARI, ACCOUNTANT MEMBER-These cross appeals by the assessee and by the Revenue are directed against the order of the CIT(Appeals) dated 30.5.2016 for the assessment year 2007-08.
2. The assessee has raised various grounds, which are required our adjudication, are as follows::
“2. The CIT(Appeals) erred in confirming the reassessment order passed u/s.143(3) r/w 147 of the Act and ought to have appreciated that the order of reassessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
4. The CIT(Appeals) erred in confirming the assessment of LTCG relating to the transaction the appellant had with M/s. Parsvanath Developers Ltd. in the previous year relating to the Assessment Year under consideration without assigning proper reasons and justification.
8. The CIT(Appeals) erred in confirming the disallowance of _ 93,730/- being the expenses estimated for earning of the tax free income for maintaining the investment portfolio on the application of sec.14A of the Act r/w Rule 8D of the Income Tax Rules, 1962 in the computation of taxable total income without assigning proper reasons and justification.
12. The CIT(Appeals) erred in confirming the disallowance of _7,95,000/- being the expenses incurred for business promotion/advertisement in sponsoring cricket tournaments and a corporate box in the cricket stadium by recording cryptic findings in para 5.4.1 of the impugned order in the computation of taxable total income without assigning proper reasons and justification.”
2.1 The Revenue has raised the following ground :
“2.2. The Ld. CIT (A) failed to appreciate that the AO has adopted sale consideration of _ 42,16,24,000/- as value of 27% of share of constructed area as per clauses 12.1 and 12.4 of JV agreement which represents market value of property on date of transfer.”
2.3 The Ld.CIT(A) has failed to apply the decision of Karnatka High in (2012) 26 Taxmann .com 166 in CIT Vs. Ved Prakash Rakhra 210 Taxmann 605 which has clearly held that the consideration received is market value on the date of agreement and the same has to be taken while computing capital gains.
3. The facts of the case are that the assessee company had filed a return of income on 30.10.2007 declaring total income of _37,91,560/-, which was processed u/s.143(1) of the Act. The assessment was reopened by issuing a notice u/s.148 of the Act on 26.3.2014. The assessee had entered into a joint venture agreement with M/s. Parsvnath Developers Ltd. and had received _ 7,02,54,000/-. Possession as well as development rights were given during financial year 2006-07 itself to M/s. Parsvnath Developers Ltd. and amount received of _ 7,02,54,000/- was shown as a liability in the balance sheet. The assessee objected to the reopening before the AO by stating that a notice u/s.143(2) of the Act dated 9.1.2015 proposing to tax long term capital gains on the application of sec.2(47)(v) of the Act with regard to the transaction entered into with M/s. Parsvnath Developers Ltd., New Delhi is bad in law. The said notice / proposal was assailed on various facets in the reply dated 11.3.2015. On the facts of the case, the reopening of the proceedings at the fag end of the limited period of six years from the end of the assessment year under consideration in terms of sec.147 of the Act is bad in law inasmuch as the notice issued for reopening on 28.3.2014 did not contain the reason for assumption for jurisdiction u/s.147 of the Act. Further, the reassessment proceedings commenced without tangible material is also not sustainable in law inasmuch as the reason to believe escapement of income should have a link with the materials in support thereof. In the absence of such materials justifying the escapement of income, the present proceedings would fall to the ground. The participation in the present proceedings would not confer the jurisdiction for framing the re-assessment inasmuch as the assessee is participating as well as responding to the queries issued in order to protect their interest and hence there should not be any adverse inference on their responses to the various notices issued in the present assessment proceedings. There was complete disclosure of the material facts for the purpose of framing the assessment in the original return of income filed on 30.10.2007 and hence there was no failure on the part of the assessee to disclose fully and truly such facts for framing the assessment.
3.1 According to the AO, the assessee has not furnished any reply in response to letter dated 11.3.2015. The assessee has stated in its letter dated 16.3.2015 that the notice issued for reopening on 28.3.2014, did not contain the reason for reopening u/s.147 of the Act. The assessee has not asked for reasons for reopening. But at the time of personal appearance of the assessee’s representative on 9.9.2014, the reasons for reopening the assessment is informed to him and requested to furnish the details called for vide notice u/s.142(1) dated 3.9.2014. In the above notice u/s.142(1), the assessee is requested to furnish the copy of purchase deed of land at Alathur and copy of power of attorney, if any executed in favour of M/s. Parsvnath Builders and therefore, it is clear that the reasons for scrutiny have been informed to the assessee.
4. Regarding reopening of assessment, ld.A.R submitted before us that there is no fresh material to re-open the assessment. Only on the basis of documents already on record was used for the purpose of reopening of assessment, and after four years of ending of the relevant to assessment year, re-open of assessment is bad in law. Ld.A.R prayed that though there was no assessment, and only processing of return u/s.143(1) of the Act, the re-assessment cannot be valid. He relied in the judgement of Delhi High Court in the case of CIT Vs. Orient Craft Ltd., in 354 ITR 536(Del.). He also submitted that reasons for reopening requested by the assessee for not furnishing to the assessee, as such re-assessment has to be quashed. For this purpose he relied on the judgement of Gkn Driveshafts (India) Ltd. Vs. ITO in [2003] 259 ITR 19 (SC).
4.1 On the other hand, ld.D.R submitted that re-assessment is valid in view of judgment of Supreme Court in the caseof Rajesh Jhaveri Stock Brokers P. Ltd., in [2007] 291 ITR 500 (SC).
5. We have heard both the parties and perused the material on record. The main contention of ld.A.R is that in this case the return was processed u/s.143(1) of the Act. The assessee has furnished all details to the AO at the time of filing of return of income and according to the A.R, there was no failure on the part of the assessee to disclose all material facts necessary for the purpose of assessment. He submitted that the reopening vide notice u/s.148 of the Act dated 26.03.2014, it is only a change of opinion. He submitted that the AO going through the same documents, which were already on record, wanted to reopen the assessment, which is nothing but review of the earlier opinion, which is not possible u/s.147 of the Act. In this case, the assessment was reopened after recording the reasons that there was an outstanding liability in the balance sheet at Rs. 7,02,54,000/- towards investment. It was noticed by the Assessing Officer from the agreement that the property has been transferred through Joint Venture Agreement dated 10.09.2006 with M/s.Parsvanath Developers Ltd., for which the assessee had received the said amount. According to A.O, this joint venture was resulted in capital gain to the assessee, which was not offered to taxation. 5.1 Admittedly in this case, there was no assessment u/s.143(3) of the Act. It is a settled law that on the basis of material, prima facie, available before the Assessing Officer, opined that income chargeable to tax has escaped assessment can be formed. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. In case the Assessing Officer has a cause or justification to know or suppose that income has escaped assessment, action u/s 148 can be taken. But obviously, there should be relevant material on which a reasonable man could have formed a requisite belief. Whether this material(s) would conclusively prove the escapement of income is not the concern at that particular stage. So what is required is the subjective satisfaction of the Assessing Officer based on objective material evidence. The reason was recorded as discussed above. The argument of the ld.AR is that where there was no fresh tangible material to reopen the assessment u/s 147, no action could be taken after the expiry of four years from the end of the relevant assessment year unless the assessee has disclosed fully and truly all material facts necessary for the assessment for that assessment year, inter alia.
5.2 As seen from the reasons recorded, it gives a clear picture that the Assessing Officer has got material evidence to form his opinion for taking recourse to section 147 r.w.s 148 of the Act. There cannot be two opinions. At the point of time when the reasons are recorded, forming opinion of ‘escapement of income’ is only relevant. Hence, this plea of the ld.AR is not tenable in the eyes of law. It is true that u/s 147, the Assessing Officer can either assess or re-assess but for taking action there under, he has to record reasons that income chargeable to tax has escaped assessment . It is also mandated by section 148(2) to record reasons in writing. The reassessment proceedings u/s 147 are further subject to sections 148,149,150,151,152 and 153. But in the present case, we are required to decide the limited issue regarding the validity of proceedings undertaken after four years of the assessment year in question. The Assessing Officer is required to see if the conditions laid in Explanation 2(c) are satisfied because in this case no assessment was completed u/s 143(3) of the Act. In case, (i) income chargeable to tax has been under assessed; or (ii) such income has been assessed at too low rate; or (iii) such income has been made the subjective of excess relief under this Act; or (iv)excessive loss or depreciation allowance or any other allowance under this Act has been computed, then the Assessing Officer would have valid cognizance u/s 147 of the Act. The reasons recorded by the Assessing Officer clearly speak for the under assessment of tax hence, the conditions laid above stand fulfilled in so far as re-assessment proceedings are concerned. In so far as the reasons recorded, extracted in the earlier portion of this order, we are satisfied that the Assessing Officer has ‘reason to believe’ that income has escaped assessment. This fact confers jurisdiction on him to reopen the assessment. The power to re-assess post 1st April, 1989 are much wider than these used to be before. But still the schematic interpretation of the words ‘reason to believe’ failing which section 147 would give arbitrarily powers to the Assessing Officer to reopen the assessment on the basis of mere change of opinion, which cannot be, per se a reason to reopen the case. The Act has not given power to the Assessing Officer to review but has only given power to re-assess. There is a conceptual difference between the two aspects as the Assessing Officer has no power at all to review the assessment. The reassessment, as stated above, has to be based on fulfillment of certain preconditions but the concept ‘change of opinion’ has to be taken into consideration otherwise it may give unbridled power to an Assessing Officer to reopen any and every assessment order which would simply amount to a review. The concept ‘change of opinion’ is an in-built test to check the abuse of power by the Assessing Officer. So, now only when the Assessing Officer has a tangible material to base his conclusion that there is an escapement of income from assessment and the reasons recorded have a link with the formation of his belief, he has the power u/s 147 of the Act.
5.3 In the present case, the assessee has not shown capital gain arising out of joint venture agreement dated 10.09.2006 with M/s.Parsvanath Developers Ltd., though the assessee has received an amount of Rs. 7,02,54,000/. As per Explanation 2 of Section147, it is very clear that due to nondisclosure of capital gain by the assessee, the income chargeable to tax had escaped assessment. The assessee has not produced anything before the Commissioner of Income Tax (Appeals) to show as to how there is no transfer of impugned property in assessment year and how the provisions of section 2(47)(v) is not applicable. Hence, the action of Commissioner of Income Tax (Appeals) and that of Assessing Officer is fully covered by the provisions of Explanation 1 to Section 147 of the Act is not correct. The said provision reads as under:
‘’Production before the Assessing Officer of accounts books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso’’.
It is possible that with due diligence of the Assessing Officer would have ascertained this fact at the time of assessment, if any also, but in view of the explanation (1) it does not mean that there was no default on the part of the assessee. Hence, reopening u/s.147 is held to be valid. The assessee has tried to take shelter under the exception provided in that section. But as stated above, when the assessee has not disclosed fully and truly the facts necessary for the assessment and there is no assessment u/s.143(3) of the Act, this proviso will not come to its rescue. Consequently, we hold that the entire reassessment proceeding in this case is valid and therefore, the action of the Assessing Officer is upheld.
5.4 In our considered opinion, the issue is squarely covered by the judgement of Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P. Ltd., [2007] 291 ITR 500(SC) Wherein it was held that the AO had jurisdiction to issue notice u/s.148 for bringing to tax income escaping assessment in an intimation under sec.143(1)(a) on the ground that the claim of deduction by the assessee was not acceptable as the conditions for allowance not fulfilled. Failure to take steps u/s.143(3) of the Act will not render the AO powerless to initiate reassessment proceedings when intimation u/s.143(1) has been issued. Further, in this case it is to be noted that there was no assessment u/s.143(3) of the Act, it cannot be said that there is a change of opinion by reopening the assessment. The assessee fails on this ground of reopening.
5.5 One more argument of the ld. AR is that the Assessing Officer has not furnished the reasons for reopening of assessment. As such the re-assessment is bad in law. In our considered opinion, there is no material on record to suggest that the assessee has asked for reasons for reopening after filing return of income in response to notice issued u/s.148 of the Act. If the Assessing Officer failed to furnish the reasons for reopening of assessment to the assessee, then only the assessee is having grievance. On the other hand, in the present case there is no written request made by the assessee after filing the return of income for reasons recorded for reopening and then also after participating the re-assessment proceedings, now the assessee cannot raise that ground. Accordingly, this ground of appeal of the assessee is rejected.
6. Now the next ground for our consideration is with regard to bringing to tax the long term capital gains by applying the provisions of Sec.2(47)(v) of the Act.
6.1 The AO brought to tax the long term capital gains aggregating to Rs. 39,77,60,547/- on the application of sec.2(47)(v) read with sec.45 of the Act, are that the assessee objected to the addition before the AO by stating that Sumeru Soft Pvt. Ltd. has purchased an extent of 31 acres 78 ¾ cents approximately agricultural punja land in village karungullipallam, Alathur Panchayat Board Limits,Thiruporu Panchayat Union, Taluk Chingleput, Kanchipuram District on 9.6.2001. During the assessment year,Sumeru Soft Pvt. Ltd. entered into a joint venture agreement with Parsvanath developers limited for developing a multi facility complex consisting of IT/TIES parks, commercial, service and residential apartments. The agreement was entered into on 10.9.2006 and pursuant to the agreement, a refundable security deposit of _7,02,54,000/- was received during the previous year relevant to the assessment year 2007-08. According to ld.A.R, the status of the property till date remains vacant with no development work. The developers have not carried out any activity relating to construction, as they feel that the project may not be successful.Under the circumstances, Sumeru Soft Pvt. Ltd. may be called upon to return the refundable security deposit and the refundable deposit have to be refunded to the developers on completion of the project as per clause 10.2 of the agreement. As regards the powers of attorney, according to para 16.1 of the joint venture agreement, two powers of attorney are contemplated. One is for the limited purpose of obtaining various approvals and other for authorizing developers to execute sale deeds in respect of undivided share of their portion of the land. Regarding the possession of the land/title deeds, para No.18 of the joint venture agreement was contemplated that legal, physical possession of the project land shall take place “on finalizing of the building plans and identifications of areas of the owners on the plans, the legal physical possession of the project land shall be deemed to have been transferred to the developers in terms of this agreement.” According to the assessee, permission is granted to the builder to enter the premises and construct the building and the possession is retained by the land owner, which will be handed over as and when the built up area is constructed and delivered and the transfer will take place only in the year in which built up area is received and not before, as the consideration is receivable in build up area to be constructed and handed over by the developer to the land owner.
6.2 The Assessing Officer observed that the assessee company received an amount of _ 7.02 crores as interest free deposit at the time of signing the agreement and it is mutually agreed by both the parties that the consideration of saleable areas are to be shared among them as under:
Owners : 27%
Developers : 73%
The AO further observed that out of the 27% earmarked for the owners, 4.5% of the areas of the project shall be sold back by the owners to the developer and the cost of the above shall be paid by the developer by the way of adjustment out of the interest free deposit of _ 7.02 crores. The AO observed that the owners have allowed the developer to enter upon the project of the land for the purpose of construction and have allowed the developer to pen a site office thereon and the owners agreed that the developer may in their own can raise any loan for development and construction of the project from any Banks / Financial institutions and for that purpose the developer shall deposit the title deed of the project land with banks / financial institutions.
6.3 According to the AO, as per the above agreement the assessee company, M/s. Sumeru Soft P. Ltd. executed General Power of Attorney in favour of the developer, M/s. Parsvanath Developers on 12.9.2006 and the same was registered before the Sub-Registrar, Mylapore vide DOC. No. 1515/2006 dated 12.9.2006 has given the rights to the developer as mentioned in the joint venture agreement. The AO observed that the transfer in terms of sec.2(47)(v) of the Act, took place on the date of execution of the joint venture agreement dated 10.9.2006. The General Power of attorney executed by the assessee on 12.9.2006 in favour of the developer unequivocally granted bundle of possessory rights including the right to mortgage the 77.5% of the property and raise loans from banks to the developer. The irrecoverable power of attorney executed by the assessee in favour of the developer has to be regarded as transaction in the eye of law which allowed possession to be taken in part performance of the contract of the transfer.
6.4 According to ld. Assessing Officer, the transfer in terms of sec.2(47)(v) of the Act, took place on the date of execution of the joint venture agreement dated 10.9.2006. The General Power of attorney executed by the assessee on 12.9.2006 in favour of the developer unequivocally granted bundle of possessory rights including the right to mortgage the 77.5% of the property and raise loans from banks to the developer. The irrecoverable power of attorney executed by the assessee in favour of the developer has to be regarded as transaction in the eye of law which allowed possession to be taken in part performance of the contract of the transfer. The AO was of the opinion that after General Power of Attorney was executed, the right of physical possession as well as legal rights, i.e., the right to mortgage was given. Hence, as per sec. 2(47)(v) of the Act, transfer took place on the date of execution of the joint venture agreement dated 10.9.2006. The capital gain arised in the above transaction was not admitted in the return filed for AY 2007-08. Therefore, there was failure on the part of the assessee to disclose fully and truly such facts for framing the assessment. No confirmation letter has been received from M/s. Parsvnath Developers as mentioned by the assessee vide its letter dated 16.3.2015. The Inspector of Income-tax had an enquiry about the present position of the above property. The ITI visited to the site at Karum Kuzhi Pallam Village on 19.2.2015 and furnished the report, wherein it was concluded that the property has been transferred and computed the capital gains at _ 39,77,60,547/-. Against this, the assessee went in appeal before the CIT(Appeals).
6.5 The ld. AR submitted, before the CIT(Appeals), that the entire order of the AO is vehemently assailed in the present appeal on various facets and according to the assessee, the reckoning of transfer in the previous year relating to the asst. year under consideration based on the presumption of giving possession to the developer upon entering into the said JV is not correct on the facts and in the circumstances of the case. The AO had not considered the subsequent events so as to presume the deemed transfer for the purpose of taxing LTCG in relation thereto. In the letter dated 16.3.2015, the assessee had brought to the notice of the AO that the proposed project of building residential and commercial space had never took off and hence, the taxation of capital gains on the presumption of deemed transfer of 73% of undivided share of land in favour of the developer is consequently not correct. The subsequent event of the non development of the land in question is very relevant factor for consideration in the reopened assessment under consideration and the reopening of the assessment took place from the issuance of a reopening notice on the assessee on 26.3.2014 inasmuch as even after the lapse of nearly eight years, the proposed project never implemented. Hence, the presumption of deemed transfer in such circumstances would fall to the ground. The taxation of deemed transfer as per sec.2(47)(v) of the Act could be pressed into service only in the context of a successful joint development arrangement and not otherwise. The AO while rejecting the stand of the assessee had placed reliance on the Income Tax Inspector’s (ITI) site visit report and observed that the property under consideration was transferred in favour of the developer in the previous year relating to the asst. year under consideration based on the possession. Effectively, the ITI’s report was backed by few photographs taken and sent for the consideration of the AO and the report of the ITI and the photographs taken by him which formed part of his report were not furnished to the assessee at any stage. Therefore, the reliance on the said report would get vitiated in the light of the admitted gross violation of the principles of natural justice. Even on the observations/extracts of the said report reproduced in the impugned/re-assessment order, there was absolutely no indication of the development of the property/progress on the development of the property. It is to be kept in mind that the ITI had apparently visited the site after lapse of 9 years and even going by the said report, it is clearly established that the joint venture agreement under consideration is a failed arrangement. The assessee in order to fortify their stand has placed on record a bunch of photographs taken on 18.12.2015 and the said photographs would establish the failed attempt of the parties in developing the property even after a lapse of nearly 9 years. According to assessee, the planning permission for construction of the buildings in the said property was not applied by the developer and hence, not obtained. Therefore, the development of the project is only on paper even on this date and according to the assessee, the JV agreement had only visualized the sharing ratio of housing cum commercial project without detailing the finer aspects of the project. In fact, there was no mention about the proposed area of construction of residential as well as commercial in the said JV agreement. The project in the JV agreement could not be equated to any project executed by the parties with detailed specifications for the purpose of presuming the applicability of sec.2(47)(v) of the Act and the JV agreement under consideration is not akin to the agreements which could be presumed to be the agreements for the purpose of reckoning transfer and consequential computation of LTCG. The AO apparently placed reliance on the failure of the assessee in getting a confirmation letter from the developer to justify his computation of LTCG and because of the failed project, the difficulty in obtaining the confirmation letter under the complex situation was not appreciated by the AO in the impugned order. The assessee argued before the Learned Commissioner of Income Tax(A) that there was no prohibition for the AO to cross verify with the developer independently in order to ascertain the correctness of the assessee’s submissions. The failure of the AO in conducting cross verification with the developer independently would vitiate his decision completely. Therefore, the presumption of transfer u/s.2(47)(v) of the Act is not correct and is liable to be interfered with in cancelling the reassessment under consideration in all respects.
7. The assessee submitted before the Learned Commissioner of Income Tax(A) that the taxation of LTCG especially in the context of the legal presumption of deemed transfer cannot be considered as automatic on the entering into the related agreements as well as putting the other party/developer into possession for implementing the arrangement/agreement. The events which would occur after the execution of the arrangement/agreement for development are very much relevant for the purpose of invoking the deemed transfer provisions in the Act and the failure of the implementation of the project for various reasons including financial reason would be decisive for the purpose of considering the applicability of the deemed transfer provisions under the Act. The assessee placed reliance on the judgement of the Punjab & Haryana High Court rendered in the case of C.S.Atwal in [2015] 378 ITR 244(P&H) dated 22.7.2015 wherein held that for the purpose of considering the scope of the said sec.2(47)(v) of the Act and according to the Court, the compliance of the conditions prescribed in sec.53A of the T.P. Act, would be paramount for applying the provisions of sec.2(47)(v) of the Act inasmuch as the failure to establish the compliance of the conditions in sec.53A of the T.P. Act, the presumption for transfer under the Act would fall to the ground. According to the Court, the provisions of the T.P. Act, namely sec.53A of the T.P. Act were bodily lifted and incorporated in sec.2(47)(v) of the Act and hence, the requirement of complying with the conditions prescribed in the said sec.53A of the T.P. Act would be crucial. As per the provisions in sec.53A of the T.P. Act, the registration of the sale agreement/joint development agreement is mandated and non registration of the said document would be fatal to apply the said provisions of the T.P. Act, read with sec.17 of the Registration Act. On the facts of the case, it is an admitted position that the joint venture agreement is not a registered document and hence the provisions of sec.53A of the T.P. Act, cannot be invoked so as to apply sec.2(47)(v) of the Act to compute the LTCG for the purpose of taxation. In the light of the law declared by the Court in the above mentioned decision, the computation of capital gains in the impugned order is not justified and the assessee pleads for cancelling the re-assessment framed for the asst. year 2007-08 in the interest of justice. It was argument of the assessee that the encumbrance certificate obtained for the period covering from 1.1.1989 to 5.1.2016, there is no indication of creation of charge/transfer by the assessee in favour of any other party which would negate the presumption of transfer by the AO in the impugned order. Moreover, the computation of LTCG which is extracted fully as part of this notes of argument is wholly inaccurate and not in tune with the facts of the case. This argument is canvassed without prejudiced to the main arguments advanced in the preceding paragraphs on the non applicability of sec.2(47)(v) of the Act. The AO equated the security deposit received to the extent of _7.02 crores to the value of constructed area of 4.5% of the total entitlement of the constructed area to the assessee at 27% and accordingly the AO proceeded to quantify the value of the 27% of the constructed area at _ 42,15,24,000/- for adopting such sum as sale consideration for the transfer of 73% of UDS in land in favour of the developer. The said approach of the AO was based on clause 12.4 of the joint venture agreement which is extracted herein after for immediate reference :
“12.4 Out of the 27% areas earmarked for the Owners, 4.5% of the areas of the project shall be sold back by the Owners to the Developers or their nominees together with proportionate undivided share of land @ _ 1000/- (Rupees One thousand per sq.ft.) Such 4.5% of area shall be out of each category i.e. residential apartments, service apartments, commercial complex and IT Park. The consideration amount for the purchase of said 4.5% of the areas out of owners designated areas shall be paid by the Developer by way of adjustment out of the interest free deposit amount in terms of clause 10.1. Such amount, if any, exceeding the amount of interest free deposit shall be paid by the Developer at the time of completion of the 50% of the Project and thereafter the Owner will be entitled to only 22.5% of the developed area of the Project. Provided that the buy pack of 4.5% of built up area at the rate of _ 1000/- per sq.ft. in terms of this Agreement will be a pre-condition for the Owners to execute the power of attorney to enable the Developers to execute sale deeds in respect of 73% of the project land in undivided shares to prospective purchasers of the Developers designated areas.”
7.1 It was plea of the assessee that on the plain reading of the said clause would clearly indicate the perversity of facts in the impugned order passed by the AO and the security deposit was wrongly equated to the value of the buy back arrangement envisaged in clause 12.4. As per clause 10.2, the security deposit was provided by the developer for the performance of the contracted terms and as per the said clause, the security deposit was refundable on achieving certain milestones in the proposed project. There are two methods of arriving at the sale consideration in the context of deemed transfer and one acceptable method is in obtaining a certificate from the developer / contractor to estimate the cost of construction of the area relatable to the land owner which would constitute the sale consideration for the surrender of the percentage of UDS in land in favour of the developer. The said method would pose some difficulties to adopt for the purpose of quantifying LTCG for taxation and as per the JV agreement, there was no indication on the exact area in terms of sq.ft. allocable to favour of the land owner as well as for the developer. In fact, there is absolutely no indication on the total area of the residential and commercial to be constructed and in the absence of the said figure, the ascertainment of the cost of construction of the portion relatable to the land owner would become impossible. The other method is to ascertain the stamp duty value / guideline value so as to quantify the value / sale consideration of the UDS in land surrendered in favour of the developer under the JV agreement which method is also legally permissible as per sec.50C of the Act. The assessee also pleaded before the CIT(A) that alternatively appropriate directions may be given to the AO to quantify/revise the LTCG for the purpose of taxation in accordance with sec.50C of the Act. The said stand of the assessee is alternative to the main stand of the non applicability of sec.2(47)(v) of the Act.
7.2 The CIT(Appeals) observed that the capital gains are taxable in the year of possession of property and not transfer of title under the IT Act. Further, the CIT(Appeals) observed that the possession is handed over to M/s. Parsvnath Developers by the assessee in the year under consideration. The Tribunal, Mumbai Bench in the case of Gripwell Industries Ltd. v. ITO [284 ITR (AT) 188] has held that where there is an agreement of sale between the assessee and the vendee and the physical possession of the factory along with factory land, building and other assets is actually given in one financial year whereas the legal title to the property is transferred in the next financial year, the capital gains would be deemed to accrue in the year in which the possession is actually given and not in the later year when the legal transfer of title is effected. This judgment is of great importance for all persons possessing property and interested in transferring it.
7.3 The CIT(Appeals) observed that the submission of the assessee is that the AO has relied upon the report of IT Inspector, a copy of which was not furnished to the assessee. It must be borne in mind that the said report with photographs are not relevant, as the same were obtained during the course of assessment proceedings, whereas this is entirely a legal issue. Further, the CIT(Appeals) observed that the plea of the assessee is that the JV agreement is not akin to other agreements. However, law is applicable alike to all such agreements. Before the CIT(Appeals), it was the submission of the assessee that it is a failed project but the aforesaid JV agreement was never cancelled and the money received was not refunded and the CIT(Appeals) observed that the assessee did not furnish any confirmation letter from the developer. According to the CIT(Appeals), the onus is on the assessee to prove its contentions. Further, the ld. AR relied on the decision of the Punjab & Haryana High Court in the case of C.S.Atwal dated 22.7.2015, wherein it is held that compliance of provisions of sec.53A is crucial for applying provisions of sec.2(47)(v) of the Act and submitted that JV agreement is not a registered document and therefore, provision of sec.2(47)(v) do not apply as condition of sec.53A of T.P.Act cannot be applied. The CIT(Appeals) relied on the judgment in the case of Suraj Lamps & Industries Pvt. Ltd. (183 (2011) DLT 1(SC)). The gist of the case law was reproduced in paras 5.2.7 of Ld.CIT(A)’s order.
7.4 According to the CIT(Appeals), observed that unless there is a proper registered sale deed, of an immovable property does not pass. The Supreme Court has however reiterated that which are created pursuant to sec.53A of the TP Act, 1882 dealing with doctrine of part performance, an irrevocable right of a person holding a power of attorney given for consideration coupled with interest as per sec.202 of the Contract Act, 1872 and devolution of interest pursuant to a Will. Therefore, no doubt, a person strictly may not have complete ownership rights unless there is a duly registered sale deed, however, certain rights can exist in an immovable property pursuant to the provisions of sec.53A of the TP Act, 1882, sec.202 of the Contract Act, 1872. There also takes place devolution of interest after the death of the testator in terms of a Will.
7.5 The CIT(Appeals) observed that in case of joint development agreement, question arises when the incident of capital gains tax arises. It purely depends upon the terms of development agreement. When the agreement is of such a nature that possession is given in part performance of a contest, the liability of capital gains tax will arise on the handing over of such possession. It is not the case of the assessee that only a license is given to the developer and possession shall be given on completion of project. It is not necessary that entire sale proceeds be received by the owner to attract the provision of sec.2(47)(v) of the Act. Therefore, according to the CIT(Appeals), the action of the AO in holding that the property has been transferred and the transaction would attract capital gains u/s.2(47)(v) of the Act is justified. While computing the capital gains, the AO has adopted sale consideration, being _42,15,24,000/- as value of 27% of share of constructed area as per clauses 12.1 and 12.4 of the JV agreement. According to the CIT(Appeals), stamp value of the aforesaid land has also to be kept in consideration while calculating capital gains as per requirements of sec.50C. The alternate ground of the assessee is regarding calculation of long term capital gains in accordance with the provisions of sec.50C of the Act. Therefore, he directed the AO to apply the provisions of sec.50C while computing LTCG and partly allowed the ground of appeal. Against this findings of the CIT(A), both are in appeal before us.
8. We have heard both the parties and perused the material available on record with reference to the contentions of the assessee with regard non-chargeability of capital gains in respect of the land. We have also gone through the various case law cited by the parties and considered the additional evidence filed by the assessee. According to the authorised representative, which was not 'transferred' but only given for development. We may refer to the provisions of section 2(47)(v) which reads as follows :--
"(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882)"
8.1. The importance of the word "transfer" is due to the reason that under the charging section, viz., section 45, and the capital gain is taxable on "transfer of a capital asset". Precisely, this section prescribes that "any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to Income-tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place".
8.2 Thus, the fundamental features which determine the taxability of capital gain, are that the gain ought to be from the transfer of a capital asset. This section has a large scope of its operation due to the presence of deeming provision which says that the gain shall be the deemed income of that previous year in which the transfer took place. This phrase can be interpreted in the manner that the total profits may actually be received in any other year, but for the purposes of section 45, the gain shall be the deemed income of the year of transfer of the capital asset. It shall not be out of context, at this juncture, to mention an observation of the hon'ble Authority for Advance Rulings in the caseof Jasbir Singh Sarkaria, In re [2007] 294 ITR 196 (AAR), that the expression used in section 45 is "arising", which cannot be equated with the expression "received" or even with the expression "accrued" as being used in the statute. The point which deserves notice is that the amount or the consideration settled may not be fully received or may not technically accrue but if it arises from the agreement in question, then the deeming provisions shall come into operation. Another point is also equally noticeable that by the presence of the deeming provision, the income on account of accrual of the capital gain should be charged to tax in the same previous year in which the transfer was effected or deemed to have taken place. Due to the presence of this statutory fiction, the actual year in which the entire sale consideration is received, is beside the point but what needs to be judged is the point of time at which the transfer took place either by handing over of the possession or by allowing the entry into the premises or by making the constructive presence of the vendee nevertheless duly supported by a legal document.
8.3 But the issue does not get settled only by the interpretation of section 45 and section 2(47)(v) because the definition of "transfer" does not merely prescribes allowing of possession but also that it must be retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act. Therefore, it is further requisite to deal with the relevant section contained in the Transfer of Property Act. The Transfer of Property Act contains section 53A under the heading "Part performance" and, for deciding the case in hand, it is necessary to quote the impugned section verbatim as follows :
"Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascer tained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the trans feror or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract : Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."
8.4 The doctrine of "part performance" is undoubtedly based upon the doctrine of equity. If one party has performed his part of duty then equity demands that the other party shall also perform his part of the obligation. If one party stood by his words then it is expected from the other party to also stand by his promise. Naturally an inequitable conduct of any person has no sanction in the eye of law.
8.5 In the light of the ingredients of this section, which has been argued from both the sides, now we proceed to examine the factual matrix of the case in hand, hereinbelow :
(a) Starting words of section 53A are "where any person contracts" which means just the existence of a contract. The assessee is the "person" who has entered into a contract with the developer vide agreement dated 10th September, 2006.
(b) This section says "to transfer", which means the said contract is in respect of a transfer and not for any other purpose. The term "transfer" is to be read along with the section 45 and section 2(47)(v) of the Income-tax Act. It is pertinent to clarify that one must not forget to identify the issue of capital gain with the term "transfer" as defined in section 54 of the Transfer of Property Act. At the cost of elaboration, we may like to add that in the past there was a long line of pronouncements; while deciding Income-tax cases, that unless and until a sale deed is executed and that too it is regis tered, transfer cannot be said to have been effected. The consequence of the said catena of decisions was that no capital gain tax was directed to be levied so long as the "transfer" has not taken place as per the generally accepted connotation of the term under the Transfer of Property Act. The resultant position was that the levy of capital gains tax thus resulted in major amendments in the Income-tax statute. The main objective of those amendments was to enact that for the purposes of capital gains, the trans action involving transfer of the nature referred are not required to be regis tered under the Registration Act. Such arrangement does not include transfer of certain rights vesting to a purchaser ; however such "transfer" does confer certain privileges of constructive ownership with connected bundle of rights. Indeed it is a departure from the commonly understood meaning of the definition "transfer" while interpreting this term for tax purpose. On the facts of this case, the developer has got bundle of rights and thereupon entered into the property. Thereafter, we have to see what has happened and what steps the transferee has taken to discharge the obligation on his part. If transferee has taken any steps to construct the flats, undisputedly then, under the provision of the Income-tax Act a "transfer" has definitely taken place.
(c) The existence of the "consideration" is the essence of the contract. In this case the amount of consideration has to be paid to the assessee in the form of cash as well as in kind, i.e., the flats to be constructed by the developers to be handed over to the owners.
(d) Next is the important phrase, i.e., "terms necessary to constitute the transfer can be ascertained with reasonable certainty". According to us, in this case, the terms and conditions of the contract were unambiguous and clearly spoke about the rights and duties with certainty of both the signing parties. We are concerned mainly with two certainties ; one is passing of substantial consideration and the second is passing over of posses sion. As far as the payment of consideration is concerned, we have already noticed that it is in the form of both cash as well as kind and payment made to the assessee has been brought on record by the lower authorities and the same was examined and considered by the Commissioner of Income-tax (Appeals). There was a payment of Rs. 7,02,54,000/- vide Joint Venture Agreement dated 10.06.2006 as interest free deposits on signing the agreement.
(e) The other factor which governs the happening of transfer is the handing over of possession. This section says "and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession continues in possession in part performance of the contract and has done some act in furtherance of the contract". Retention of possession is one kind of the facet of part performance of the contract. The agreement in question can be said to be a distinct transaction that has given rise to the event of allowing the contractor to enter into the property. What is contemplated by section 2(47)(v) is a transaction which has direct and immediate bearing on allowing the possession to be taken in part performance. It is at that point of time that the deemed transfer takes place. According to us the possession as contemplated in clause (v) need not necessarily be sole and exclusive possession, so long as the transferee is enabled to exercise general control over the property and to make use of it for the intended purpose. The mere fact that the assessee owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of the agreement, did not restrict the rights of the developer or did not intro duce any incompatibility. In a situation like this when there is a concurrent possession of both the parties, even then clause (v) has its full role to play. There is no warrant to postpone the operation of clause (v) to that point of time when the concurrent possession would become exclusive possession of the developer. Any other interpretation, i.e., possession means exclusive possession, shall defeat the purpose of amendment. The possibility of stag gering of payment linked with possession is ruled out by this amendment so that the taxability of gain may not be shifted to an uncertain distant date. We have no hesitation in saying that even if some part of consideration remains to be paid, the transaction shall not affect the liability of the capital gains tax so as to postpone the same indefinitely. What is meant in clause (v) is the "transfer" which involves allowing the possession so as to allow developer to undertake development work on the site. It is a general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. To our understanding of the language of the Act, it is enough if the transferee has, by virtue of the impugned transaction, a right to enter upon and exercise the act of possession effectively, then such an act amounts to legal possession over the property.
(f) The last noticeable ingredient is, "the transferee has performed or is willing to perform his part of the contract". To ascertain the existence of willingness on the part of the transferee one must not put stop at one event but the willingness is to be judged by the series of actions of the transferee. The transferees survey the land and to attract purchaser put up hoardings plus sales office and carry out site development work. Landscaping, sales promotion, execution of construction and completion of project are all inci dental to demonstrate the willingness of the transferee. On one hand, the joint development agreement grants bundle of possessor rights to the developer simultaneously and on the other hand transferee's gesture of payment of consideration coupled with development work can be said to be a positive step towards the willingness to fulfil the commitment. Facts of this case thus suggest that the developer had never intended to walk-out of the project.
(g) From the development agreement, it is more than clear that it was an agreement for construction of residential/commercial flats on the property owned by the assessee. In lieu of the right given to the developer thereunder, the assessee was to receive 27 per cent. of the constructed area of all the floors. Further, even the vacant and peaceful possession of the property had been delivered to the assessee vide clause No.18 to 18.4 of this JV Agreement. Under the circumstances, there was indeed an exchange of property which amounted to a transfer within the meaning of section 2(47)(v) of the Act and the gain resulting from such transfer was indeed taxable in the year in which the development agreement giving vacant and peaceful possession of the property to the developer was entered into by the assessee, as held by the hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 ITR 491 (Bom) and in the several decisions of the jurisdictional Income-tax Appellate Tribunal, Hyderabad, including that in the case of Dr. Maya Shenoy, Secunderabad in 124 TTJ 692. Since the development agreement in the assessee's case has been executed on 10th September, 2006 and the vacant and peaceful possession also was given in on the same date itself, such gains were indeed to be taxed in the financial year 2006-07, relevant to the assessment year 2007-08.
(h) As regards the contention of the assessee's representative that the said decisions are not applicable to the assessee's case, it is clear that no reasons for such view could be ever furnished by him. Similarly, there is no merit in the contention that the development agreement could not have come into force unless and until the JV agreement has been cancelled. As discussed in the assessment order, the assessee had indeed been paid Rs. 7,02,54,000/- on signing the JV agreement. Under the circumstances, it cannot be disputed that there was a promise to pay which has not been shown as having remained unfulfilled. It is an established judicial proposition that the consideration may be futuristic also, as held by the Supreme Court in the caseJugalkishore Saraf v. Raw Cotton Co. Ltd. reported in AIR 1955 SC 376. Accordingly, there is no merit in such contention of the representative of the assessee. As regards the argument that the agreement under reference had been executed only for the purpose of getting permissions from various Departments for construction, the very terms of the agreement belie any such claim as the development agreement gives absolute rights to the builders, including possession, duly specified the consideration to be received by the assessee on such exchange. As regards the case law cited by the authorised representative, evidently those stand on a set of different facts and hence cannot be considered in the facts of the present case.
8.6 To sum up the owners have entered into an agreement for development of the property and certain rights were assigned to the developer who in turn had made the substantial payment and consequently entered into the property and thereafter the transferee has taken steps in relation to construction of the building, then it is to be considered as transfer under section 2(47)(v) of the Income-tax Act. The fact that the legal ownership continued with the owners to be transferred to the developer at a future distant date really does not affect the applicability of section 2(47)(v) as per the reasons assigned hereinabove. The transferee was undisputedly willing to perform its part of the contract, in this circumstance we have to hold that there is transfer under section 2(47)(v) of the Act in A.Y 2007-08. Thus, the possession and control of the property is already vested with the transferee and the impugned development agreement has not been duly cancelled and it is still in operation, it has to be decided that there is a transfer under section 2(47)(v) of the Act in F.Y.2006-07 relevant to ay 2007-08.
9. We have to see the real intention of the parties. As per the well known cannon of construction of document, the intention generally prevails over the word used and that such a construction placed on the word in a deed as is most agreeable to the intention of the parties. There are grounds appearing from the face of the instrument affording proof of the real intention of the parties, then that intention would prevail against the obvious and ordinary meaning of the words used. Entering into the property and handing over of the possession was instantaneous thus entire conspectus of the case has attracted the provision of section 45 of the Act on fulfilment of conditions laid down in section 53A of the Transfer of Property Act. In our opinion, the real intention of the parties herein is to be seen.
9.1 Accordingly, we decide the above issue relating to transfer of property under section 2(47)(v) of the Income-tax Act in favour of the Department. We also hold that clause (47) of section 2 was amended by the Finance Act, 1987 with effect from April 1, 1988 by inserting new sub-clauses (v) and (vi) thereunder. These two new sub-clauses provide that "transfer" includes (i) any transaction which allows possession to be retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act ; and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Therefore, under these two sub-clauses, the capital gain would be taxable in the year in which such transactions are entered into even if the transfer of the immovable property is not effective or complete under the general law. The assessee entered into an agreement with the builder/developer for development of the impugned land and construction of flats thereon. Further, the assessee acted on the impugned agreement by accepting from the builder/developer payments in the financial year 2006-07. In view of the facts and circumstances discussed above, all the conditions of subclause (v) of section 2(47) are satisfied in this case and therefore, it has to be inferred that a "transfer" did take place within the meaning of section 2(47)(v). The argument that the deeds in respect of the sale of flats were not registered/executed is not a relevant consideration so far as provisions of sub-clause (v) of section 2(47) are concerned. The completion of "transfer" of an immovable property as per the general law is not a requirement for the applicability of the provisions of sub-clause (v) of section 2(47). Thus, this ground is dismissed.
10. Now the question before us is with regard to quantification of capital gains. The AO considered the amount received by the assessee Rs. 7,02,54,000/- as towards 4.5% of the constructed area and thereby determined the sales consideration at Rs. 42,15,24,000/-. In our opinion, this methodology followed by the AO is not correct. As per clause 12.4 of the JV agreement, the assessee shall be sold back to the developer 4.5% areas of project with proportionate undivided share of land at Rs. 1,000/- per sq. feet and the consideration amount for the said 4.5% of the area of the assessee shall be paid by the Developer by way of adjustment out of the interest free deposit paid to the assessee by developer at Rs. 7,02,54,000/- as per clause No.10.1 of JVA. Thus, it does not mean that the cost of 4.5% of the area of the project was valued at Rs. 7,02,54,000/-. On this issue, the CIT(Appeals) observed that the value of share of consideration of 27% of saleable or super-built area including parking places of the project allotted to the assessee on transfer of undivided share of 73% of land surrendered in favour of developer to be valued on the basis of guideline value of said undivided share of land allotted to the developer. In our considered opinion, this is also not appropriate method to determine the consideration receivable by the assessee on account of JVA dated 10.09.2006. In our considered opinion, cost of construction of built-up area of 27% of saleable or super-built area including parking places of the project allotted to the assessee to be ascertained by the Assessing Officer after examining the relevant record of cost of construction incurred or to be incurred by the developer. Accordingly, this said cost of construction would constitute as sale consideration received by the assessee in kind and that should be brought to tax in the assessment year 2007-08. If necessary, he could take assistance of DVO or any experts so as to arrive the cost of construction of 27% of constructed area, which would be transferred to the assessee. Thus, the issue is remitted to the Assessing Officer for the limited purpose of determining the sale consideration and to compute the capital gains accordingly after giving opportunity of hearing to the asseseee. The issue relating to the computation of capital gains in both the appeals is remitted to the Assessing Officer for fresh consideration.
11. The next ground for our consideration is with regard to the issue of disallowance of _ 93,730/- u/s.14A r.w.Rule 8D of the IT Rules.
11.1 This ground is not pressed by the ld. AR before us. Accordingly, this ground is dismissed as not pressed.
12. The next ground is with regard to the issue of disallowance of _ 7,95,000/- being the payment made to M/s. TNCA u/s.37(1) of the Act, the AO observed that the assessee has offered explanation only regarding the TNCA sponsorship. The other expenses viz. Sumeru Soft Trophy-5 appears to be of the nature of donation, which is not allowable expenditure. As regards the sponsorship for TNCA, the AO observed that the assessee has sponsored one of the special boxes in M.A. Chidamabaram Stadium during 2007-08 for _ 60 lakhs. As per the conditions, the sponsorship is for a period of six years. The air-conditioned special box is for usage by not more than 15 persons during test and one day international matched. The sponsor will be allowed to have his name board on top of the box facing the ground, the size and design should be got approved by the TNCA. Sponsoring a special box or sponsoring other sports tournament would not in any way further the cause of the assessee’s business and it is not an expenditure required for the carrying on of its business of software development. Therefore, according to the AO, the contention of the assessee that the expenditure was requisite for the purpose of advertisement is not acceptable. It would not be out of place to mention that the Managing Director of the assessee company Shri K.V.Aiyappan is also the Vice President of the Tamilnadu Cricket Association (TNCA). Therefore, according to the AO, the expenditure has been incurred only for extraneous reasons, rather than for the purpose of the business of the assessee company. Against this, the assessee went in appeal before the CIT(Appeals).
12.1 The CIT(Appeals) observed that the assessee has only five clients, viz., M/s. Infosys, M/s. Standard Chartered Bank, M/s. Scope International, The Cancer Institute, M/s. Sundaram BNP Paribas and an overseas client, M/s. Signature Senior Living, USA. Sponsoring any sports event or a special box even if viewed on TV channels or media does not advertise its name as its product is not for mass consumption but for very selective clients. Therefore, according to the CIT(Appeals), the action of the AO in disallowing expenditure towards TNCA sponsorship is justified.
13. We have heard both the parties and perused the materials on record. The above expenditure incurred by the assessee cannot be considered as incurred wholly and exclusively incurred for the purpose of assessee’s business. This expenditure is nothing but charity or donation, which cannot be allowed as a deduction while computing the income of the assessee. We do not find any infirmity in the order of the CIT(Appeals) and the same is confirmed. The ground raised by the assessee is dismissed.
14. In the result, both the appeals by the assessee and the Revenue is partly allowed for statistical purposes.