D.b. Income Tax Appeal v. M/S Unique Builders And Developers Jpr

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 24 / 2013 C I T Central Jaipur ----Appellant Versus M/S Unique Builders And Developers Jpr ----Respondent D.B. Income Tax Appeal No. 28 / 2013 C I T Central Jaipur ----Appellant Versus M/S Unique Builders And Developers Jpr ----Respondent _____________________________________________________For Appellant(s) : Mr. Anil Mehta with Mr. Sameer SharmaFor Respondent(s) : Mr. Sanjay Jhanwar with Mr. Prakhul Khurana& Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 19/05/2017 In both these appeals common questions of law and facts areinvolved, hence, they are decided by this common judgment. 1.By way of these appeals, the department has assailed thejudgment and order of the Tribunal whereby the Tribunal has dismissed the appeals of the department and partly allowed theappeals of the assessee. 2.This Court while admitting the appeals framed the followingsubstantial questions of law:- “1. Whether the Tribunal was justified in holdingthat the Assessing Officer as well as CIT(A) haveerred in rejecting the books of accounts of theassessee under Section 145(3) of the Act andthereby reversing the findings given by AssessingOfficer as well as CIT(A), ignoring the undisputedfacts that the assessee has failed to maintainquantitative and qualitative stock registers andvouch the expenses incurred by it and ‘on money’received by it has not been disclosed? 2. Whether the Tribunal was justified in rejectingthe application of percentage completion methodadopted by the AO, when this rejection meansacceptance of loss returns of the assessee engagedin construction and sale of residential/commercialprojects in contravention of Accounting Standard-7and Accounting Standard-9 issued by ICAT?the application of percentage completion methodadopted by the AO, when this rejection meansacceptance of loss returns of the assessee engagedin construction and sale of residential/commercialprojects in contravention of Accounting Standard-7and Accounting Standard-9 issued by ICAT? 3. Whether the Tribunal was justified in ignoring thefact that the two brothers who are partners eitherthemselves or through their sons and their familiesand actively engaged jointly in the business of thesister concerns of the assessee firm and thusacceptance of ‘on money’ and specific seizeddocuments cannot be ignored for intervention? 4. Whether the Tribunal was justified in deleting theaddition of Rs. 29.95 crore confirmed by CIT(A)©,Jaipur ignoring that the assessee transferred all itsrights, control and interest in the first parcel of land(measuring 114.985 acres) in the garb of Securitydeposit through Development Assessment dated25.3.2008?” 3.Four questions were framed by the Court. However, question no. 1,2 & 3 are governed by the decision which has been takentoday in Tax Appeal No. 23/2013 (CIT Central Jaipur vs. M/sUnique Builders and Developers Jaipur) in case of presentrespondent assessee. 4.However, the issue No. 4 raised in these appeals was notraised in earlier appeals. Therefore, issue no. 4 only is required tobe answered. 5.Counsel for the appellant contended that in view of theDevelopment Agreement which is on record produced along withpaper book being Annexure-7 entered between the parties clearlyestablished that the parties are agreed to development of land andtransfer of the builder. 6.In that view of the matter, the land has been ransferred inthe name of the assessee. 7.In view of the above, the AO and CIT(A) has not committedany error. The issue is required to be answered in favour of thedepartment. However, in view of the observations which are madeby the Tribunal in para 30 & 31 which reads as under:- 4.However, the issue No. 4 raised in these appeals was notraised in earlier appeals. Therefore, issue no. 4 only is required tobe answered. 5.Counsel for the appellant contended that in view of theDevelopment Agreement which is on record produced along withpaper book being Annexure-7 entered between the parties clearlyestablished that the parties are agreed to development of land andtransfer of the builder. 6.In that view of the matter, the land has been ransferred inthe name of the assessee. 7.In view of the above, the AO and CIT(A) has not committedany error. The issue is required to be answered in favour of thedepartment. However, in view of the observations which are madeby the Tribunal in para 30 & 31 which reads as under:- “30.1 On the other hand, the ld. AR submitted thatassessee was constituted for the performance of thegroup housing project during the month of Dec.2006. The assessee purchased first parcel of landadmeasuring 11.85 acres during the month of Dec.2006.The assessee firm applied to JDA for change ofland i.e. conversion. After change of land use on 28thMay, 2007, single patta was issued to the assesseefirm by JDA on 59 14-06-2007. He submitted that thefirm acquired second parcel of land admeasuring17.889 acres during the month of Nov. 2007 to Jan.Feb/2008. The assessee conceivd a Mega HousingProject on the above residential plot of land andstarted marketing and selling the same. Theconstruction of residential units under projectcommenced in the month of Sept. 2007. Since thesize of the project was quite laree, the assesseedecided to avail of the marketing and selling servicesof Asipac and appointed it vide service agreementdated 24-08-2007. Since it was necessary to infusemore funding into the project, it was advised by theconsultant Asipac to obtain substantial loans/ fundsor outsource the development and marketing of theproject and go for private equity funding. Theassessee decided second option to outsource the development as well as marketing of the project.Therefore, the assessee on 8-02-2008 entered into06 agreements as part of arrangements of fundsthrough FDI / private equity funding as under:- (i) Shareholders Agreement (ii) Shares Subscription Agreement (iii) Brand Name & Licensing Agreement (iv) Development Agreement (registered on 25-03-2008) (v) Project Management Agreement (vi) Supplemental Agreement to Shares Subscription Agreement/ Shareholders Agreement 30.2. development as well as marketing of the project.Therefore, the assessee on 8-02-2008 entered into06 agreements as part of arrangements of fundsthrough FDI / private equity funding as under:- (i) Shareholders Agreement (ii) Shares Subscription Agreement (iii) Brand Name & Licensing Agreement (iv) Development Agreement (registered on 25-03-2008) (v) Project Management Agreement (vi) Supplemental Agreement to Shares Subscription Agreement/ Shareholders Agreement 30.2. The ld. AR submitted that on 25-03-2008, aTripartite Development Agreement was executed on 8-2-2008 between the assessee, UAHPL and RIL,Mauritius and was registered. He submitted that underthe said agreement dated 25-03-2008 assesseecontinued to be land owner, though development ofproject was taken over and required 60 to be carriedout by UAHPL. He submitted that the saiddevelopment agreement could not be considered assale deed because at the time of registration thestamp duty paid is 1% and on the other hand on thesale deed, stamp duty payable is @ 11% The ld. AR atthe time of hearing also filed the Schedule ofRajasthan Stamp Act, 1998 to substantiate his abovesubmission. He further submitted that saiddevelopment agreement was registered as agreementas per Article 5 (bbbb)and whereas the stamp dutypayable on conveyance deed on immovable propertyis as per Article 21(1). He further submitted that asper said development agreement the assessee was toreceive security deposit of Rs. 105.85 crores inrespect of entire land in order to secure and ensurepayent of consideration referable to the land fromUAHPL. He submitted that as per provision oftransaction documents there were in fact twoindependent contracts between the parties viz. Ist inrespect of first trench land and second in respect ofsecond trench land and the amount referable to eachtrench was mentioned separately in the transactiondocument and the sum referable to each trench wasagreed to be invested in UAHPL by RIL, Mauritius. Hesubmitted that in proportion, the amount of Rs. 22.54crores was released by RIL, Mauritius in favour ofUAHPL towards first trench which is termed as on thefirst closing on 2-4-2008. The assessee received anamount of Rs. 39,55,95,900/-as security deposit outof the total amount payable amounting to Rs. 105.85crores. The ld. AR submitted that as on 7-5-2008, theGovt. of Rajasthan u/s 4(1) of the Land AcquisitionAct, issued a Notification for acquisition of land and asa result, the project suffered set back. Therefore, theSupplemental Agreement was entered into on 11-6-2008 whereby Warburg Pincus Group restricted its investment to Rs. 22.54 crores only which wasalready paid and option was also given to go aheadwith the project in case notification is withdrawn andotheracquisitionconditionsaresatisfied.Consequently, the 61 payment of security deposit wasalso confined to initial amount paid at the time of firstclosing only and no contract took place between theparties in respect of second trenche land. The ld. ARsubmitted that on 29-09-208, the Govt.of Rajasthanissued a notification releasing the project land fromacquisition. However, Warburg Pincus Group did notexercise its option and the project got confined to firsttrenche land measuring 11.958 acres. He submittedthat security to be paid by the assessee of Rs. 105.85crores aginst the entire project got restricted to Rs.41.94 crores out of which assessee received only Rs.39.55 crores as security deposit. The ld. AR submittedthat the AO did not take into account thisSupplementalAgreementdated11-06-2008considering it as a bogus document as it was neitherregistered nor notorized and therefore, considered thesecurity deposit payable under developmentagreement dated 25-03-2008 of Rs. 105.85 crores asbusiness receipts. 30.3 The ld. AR submitted that the AO erroneouslyconsidered that the provision of Section 53A ofTransfer of Properties Act is applicable. He submittedthat such land is stock in trade and not capital assets.Therefore, the provision of Section 53A of Transfer ofProperties Act cannot be extended to stock in tradeas Section 2(47) of the I.T. Act is artificially extendedto the definition of capital assets only. He furtherreferred to the provision of Section 54 of the Transferof Property Act, 1882 and submitted that land beingan immovable property and ‘sale’ is governed byTransfer of Property Act. Section 54 of the said Actdefines sale as under:- “Sale” is a transfer of ownership in exchange for aprice paid or promised or part-paid and part-promised. He further submitted that it further defines how thesale is made and the same is as under:- ‘’Sale how made: Such transfer, in the case oftangible immovable property of the value of onehundred rupees and upwards, or in the case of areversion or other intangible thing, can be made onlyby a registered instrument.’’ ‘’ In the case of tangible immovable property of avalue less than one hundred rupees, such transfermay be made either by a registered instrument or bydelivery of the property.’’ The ld. AR submitted that in view of the above, sincedevelopment agreement dated 25- 03-2008 is not “Sale” is a transfer of ownership in exchange for aprice paid or promised or part-paid and part-promised. He further submitted that it further defines how thesale is made and the same is as under:- ‘’Sale how made: Such transfer, in the case oftangible immovable property of the value of onehundred rupees and upwards, or in the case of areversion or other intangible thing, can be made onlyby a registered instrument.’’ ‘’ In the case of tangible immovable property of avalue less than one hundred rupees, such transfermay be made either by a registered instrument or bydelivery of the property.’’ The ld. AR submitted that in view of the above, sincedevelopment agreement dated 25- 03-2008 is not registered as a conveyance deed between the assesseeand the developer for impugned land, there is no saleunder Transfer of Property Act. That it is adevelopmentagreementsimplicitorforthedevelopment of land and nothing more. Hence, thesaid amount received by the assessee as perdevelopment agreement is not a sale consideration.30.4 The ld. AR further referred to clause 5.1 of thesaid development agreement and submitted that itstipulates clearly that if the developer requires, theassessee shall transfer the project land alongwithtransfer approval and the project approval in favour ofthe developer at a price not exceeding Rs. 3.50 croresper acre. Therefore, this clause gives option to thedeveloper to buy the land if it so desires. He submittedthat if the land had been sold to the developer whilesigning the development agreement there would nothave been any need for such a clause for giving optionto the developer to buy the land. The ld. AR referred toclause 5.3 of the development agreement andsubmitted that transfer of project land could take placein favour of developer as contemplated vide clause 5and will occur through a deed of conveyance and thesame shall be executed on proper value of stamppaper and will be registered with the office of Sub-Registrar. He submitted that as per clause 5.4 of theagreement if the owner i.e. assessee refuses toexecute and / or cause registration of the deed ofconveyance or sale deed in favour of the developer inaccordance with clause 5 of the agreement , thedeveloper shall without prejudice to its other rightsand remedies shall have the right to seek specificperformance against the owner to cause sale deed tobe executed and to register in favour of the developer.He submitted that as per clause 12.3 of the developeragreement in the event of breach of the terms andconditions of the agreement by the assessee, at thesole discretion of the developer, the developer shall sellor shall cause to sell the project land to a third party atthe prevailing market price and for considerationacceptable to the developers and the interestedentities. The ld. AR further referred to clause 12.3 ofthe agreement and submitted that the assessee wouldbe bound to refund all proceeds to the developerspursuant to the sale of the project land including butnot limited to an amount equivalent to the securitydeposit. He submitted that in the event of breach ofcontract, the land has to be sold by the assessee andnot by the developer as the land is owned by theassessee only. The ld. AR further submitted that theAO misunderstood the development agreementbecause as per buyer’s agreement, the copies of whichwere also filed before the authorities below as well asplaced in the paper book filed before the us, it providesthat sale of flat has to be executed by the owner anddeveloper jointly. He submitted that until, unit is sold, the assessee i.e. owner of the land shall remain theowner of the land and developer shall remain theowner of the development of the land. He submittedthat the said development agreement is only todevelop land and not to buy land. He submitted thatsecurity deposit has wrongly been considered by theauthorities below as sale consideration but the same isto protect assessee's interest during the period and oncompletion of the project to realize sale proceedsadjust against the security deposit and balance to bepaid to the owner. He submitted that security depositreceived by the assessee from the developer was aliability and the same was shown in the books ofaccounts of the assessee and not consideration for saleof land. He submitted that clause 6.6 of theagreement read with clause 12.3 thereof require theassessee to refund/ repay the security deposit to thedeveloper by way of sale proceeds of land to be soldby the assessee with the developer permission. Hesubmitted that irrevocable and exclusive license andpermission to use project land was given by theassessee to the developer for use of project land fordevelopment purposes and had the assessee not givensuch permission to the developer, the very purpose ofdevelopment would have been defeated. He submittedthat reliance placed by the AO on clause 4.6 of theagreement is misplaced as it has to be read alongwithother clauses like clauses 5, 6,7, and 12 of thedevelopment agreement. He further submitted that theassessee need not to object to the sale considerationof the units because assessee's interest is duly securedby virtue of clauses 7.1.1, 7.1.2 and 7.2 of thedevelopment agreement which provides that assesseewill be provided the fixed amount of Rs. 105.85 croresout of receivable on sale of residential units. The ld. ARsubmitted that the AO himself was confused as he alsomade an attempt to apply provision of Section 28(va)of the Act which has no application as Section 28(va)applies only in cases where lumpsum consideration ispaid by a party to another to abstain from carrying outa business activity similar to the business carried on bythe first party. He submitted that it normally happenswhen a business is sold and the buyer in order tosecure the commercial cause asks the sellers not tocompete or carry on similar business within thevicinity. The ld. AR submitted that the cases cited bythe ld. DR are not applicable to the facts of the case asthe land has not been sold under the developmentagreement. Therefore, even the addition of Rs. 29.95crores confirmed by the ld. CIT(A) by deleting thebalance amount of Rs. 52.74 crores out of totaladdition of Rs. 82.69 crores made by the AO is notjustified. He submitted that not only the ground ofappeal taken by the Department be rejected, groundno.4 of appeal taken by the assessee may be allowedby deleting addition sustained by the ld. CIT(A) 31.1 We have carefully considered the submissions ofld. representatives of the parties, orders of theauthorities below and have also considered the casescited before us by the authorities below as well as ld.representatives of the parties. We have also gonethrough carefully the relevant clauses of thedevelopment agreement as well as SupplementalAgreement. We observe that under said developmentagreement dated 25-03-2008, the assessee haspermitted the developer not only to develop the landand complete the project, but also to sell the same towhich assessee would also be a party to the sale. Atthe time of execution of the said developmentagreement, the assessee was to receive a sum of Rs.105.85 crores but the assessee received Rs.39,55,95,900/- as security deposit. It is a fact that dueto initiation of acquisition proceedings by the StateGovt. of Rajasthan, in respect of land on which projectMy Haveli is to come up became subject to acquisitionunder Land Acquisition Act. Subsequently the Govt. ofRajastan released project land from acquisition on 29-09-2008 but in the meanwhile RIL, Mauritius restrictedits investment to Rs. 22.50 crores which was alreadypaid and thereafter no further investment came fromRosewood Investment ltd, Mauritius. Therefore, theproject got confined to first trench land admeasuring11.985 acres instead of entire project landadmeasuring 29.847 acres. We observe that the AO byconsidering the said development agreement asagreement to sale of land and also considered entireamount of security deposit to be received by theassessee of Rs. 105.85 crores as sale considerationignoring the fact that entire project execution did notmaterialize. The AO accordingly made addition of Rs.82,69,66,103/- as business profit from sale of projectland. On perusal of the document on record andconsidering the submissions of the ld. representativesof the parties, it is a fact that the AO has takencontrary stand in the case of the assessee before us.He has doubted the genuineness of SupplementalAgreement dated 11-06-2008 in the case of assesseeherein but in the hands of UAHPL he considered theSupplemental Agreement dated 11-06-2008 asgenuine and thereby treated the consideration for landpayable by UAHPL to the assessee at Rs.41,94,75,000/-. We observe that ld. CIT(A) afterconsidering the Supplemental Agreement dated 11-06-2008 has taken sale consideration in respect of firstparcel of land in para 14.3 of the impugned order andafter deducting the cost as per assessee record of Rs.11.99 crores has considered profit at Rs. 29.95 crores .Hence this Supplementary Agreement dated 11-06-2008 could not be ignored and is a genuine documenton the peculiar facts of the case. Therefore, theDepartment as well as assessee have filed appealagainst impugned order of ld. CIT(A). 31.2 On perusal of the relevant clauses of thedevelopment agreement, though the fixed amount assecurity is receivable / received by the assessee asowner of the land but we are of the considered viewthat under the agreement transfer of land has nottaken place nor security deposit received by theassessee could be considered as sale proceeds. Thesaid agreement according to us cannot be consideredas an agreement to sell in view of the specific provisionof Stamp Act. It is not in dispute that developmentagreement is registered and the stamp duty has beenpaid as a memorandum of agreement under Article 5(bbbb)and not stamped as deed of conveyance as perArticle 21(i) of the Rajasthan Stamp Act. On perusal ofrelevant clauses of the Development Agreement, weare of the considered view that this agreement isentered into only for the purpose of protecting therespective rights of the parties and to ensure smoothdevelopment of the project and thereafter to sell to theprospective buyers of the developed project. We agreewith the ld. AR that provision of Section 53A of theTransfer of Property Act cannot be made applicable tothe land under consideration as undisputedly the saidland is stock in trade of the assessee and not a capitalasset. . We observe that authorities below haveconsidered the said development agreement whichamount to transfer of land particularly in view of clause4.1 thereof as it gives an irrevocable and exclusivelicense and permission to use the project land to thedeveloper. But we are of the considered view that saidpermission has been given to the developer for thelimited purpose of development of the project and notwith the intention to transfer of land. The above factsare fortified in the light of clause 5 of the developmentagreement which gives an option to the developer topurchase the land if they want @ Rs. 3.50 crores peracre. It is also a fact that assessee received a securitydeposit of an amount of Rs. 39,55,95,900/- and notthe proportionate amount of Rs. 41,94,75,000/- whichwas not disputed by ld. DR at the time of hearing. Theassessee has not received any additional amount overand above the amount as mentioned in the orders ofthe authorities below. We agree that the securitydeposit received by assessee and shown as liability isin order and same cannot be considered as saleconsideration for transfer of land. 31.3 We also agree with the ld. AR that provision ofSection 28(va) of the Act are not applicable to the casebefore us as it applies only when lumpsumconsideration is paid by a party to another to abstainfrom carrying out the business activity similar to thebusiness carried on by the first party. We agree withthe ld. AR that this is not a case here. 31.4 Before, we part with this ground, we may statethat the case cited before us are not relevant and donot consider it necessary to discuss superficially in view of our our findings. 31.5 In view of the above,we are of the considered view that said securitydeposit received by the assessee cannot beconsidered as sale consideration for transfer of landin the assessment year under consideration. Hence,we not only confirm the order of the ld. CIT(A) indeleting the sum of Rs. 52.74 crores by disallowingground no. 3 of the appeal taken by the Departmentbut also delete the balance addition of Rs. 29.95crores sustained by ld. CIT(A) by allowing the GroundNo. 4 of the appeal taken by the assessee.Accordingly, the Ground No. 3 of the appeal of theDepartment is rejected and Ground No. 4 of theappeal of the assessee is allowed. 8.Counsel for the respondent contended that the contradictory stand is taken in earlier three issues and in view of theobservations made by the Tribunal, the issue is required to beanswered in favour of the assessee. 8.Counsel for the respondent contended that the contradictory stand is taken in earlier three issues and in view of theobservations made by the Tribunal, the issue is required to beanswered in favour of the assessee. 9.We are in complete agreement that under the DevelopmentAgreement rights will not be transferred and on specific questionwhich has been put to counsel for the department that thetransfer will not be made to signatory and owner of the developer,the view taken by the Tribunal is correct. The issue is also requiredto be answered in favour of the assessee against the department. 10.The appeals stand dismissed. A copy of the judgment be placed in each file. (INDERJEET SINGH),J. (K.S. JHAVERI),J. A.Sharma/27 & 30