Ita/75/2009 Of The Commissioner Of Income Tax v. Shri Dinesh D Ranka

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 11 DAY OF JUNE, 2015. PRESENT THE HON’BLE MR. JUSTICE MOHAN M. SHANTANAGOUDAR. AND| THE HON’BLE MR. JUSTICE ARAVIND KUMAR I.T.A. No./75/200 BEIWEEN: 1)The Commissioner of Income-Tax.Centra| CircleC.R. Bullding|Queens RoadBangalore 2.The Assistant Commissioner of Income-Tax ~ Central Circle-2(3)C.R. Building|Queens RoadBangalore .. Appellants| (By Sri K.V. Aravind, Standing Counsel for appellants) R ? AND * Sri Dinesh D. Ranka 8[+4]Floor, Ranka Chambers.No.31, Cunnigham Road)Bangalore-560052 ..Respondent (By Sri S. Parthasarathi, Adv.,). This appeal filed under Section 260-A of the Income.Tax Act, 1961 is arising out of the order dated 10.10.2008passed in ITA No.1163/Bng/2007, for the assessment year|1999-2000. This appeal is filed praying to formulate tne|substantial questions of law stated in the appeal and to.aliow the appeal and set aside the order passed by the.Income Tax Appellate Tribunal, Bangalore and confirm the.order of the Appellate Commissioner confirming the order.passed by the Assistant Commissioner of Income Tax,|Central Circle-2(3), Bangalore. — This appeal having been heard and reserved forJudgment, coming on for pronouncement of Judgment this.day,MOHAN M. SHANTANAGOUDAR .J.,delivered theTOHOWwING. JUDGMENT This appeal is filed by the Revenue against the orderpassed by the Income Tax Appellate Tribunal, Bangalore|Bench in ITA No.1163/ Bang/O7 (Assessment year 1999- 3 2000). The appellant has sought confirmation of the|orders passed by the Commissioner of Income Tax.(Appeals)-VI <‘Appellate Commissioner’ for short} as well|as the Assistant Commissioner of Income Tax, Central|Circle - 2(3), Bangalore. | 2. This appeal came to be admitted to consider the.following substantial question of law: | Whether the Tribunal was correct in holding that the amount received of Rs.3.47,75,000/- by.the assessee from L & T, the developer of theadjoining land in respect of the transfer of7575.37 square meters of FAR In assessee’s.residential plot measuring 1.6 acres is nottransferable as the same is not a capital assetand consequently no capital gains can be levied? 3 Brief facts of the case are as under: The respondent - assessee is carrying on the business. in real estate. Admittedly, he owned 35 acres 6 guntas of| land at Kothanur Village. The entire land was converted|from agriculture to housing purposes in the year 1992. The.Bangalore Development Authority approved the plan for|residential group housing scheme over the said land. —Subsequently, the plan was renewed on 19.2.1998. The|plan covered entire area of 35 acres 6 guntas and the same.was signed by the respondent as the owner. The total Floor,Area Ratio (‘FAR’ for short) area sanctioned for the project.consisting of 35 acres and 6 guntas is 2,61,912.30 squaremeters. Out of the same, FAR relating to 1 acre 6 guntas|would be 8589.53 square meters. Out of the total extent of35 acres 6 guntas of land, an area of 34 acres was the.subject matter of Joint Development Agreement dated19.10.1995 entered into between the respondent and the|Larsen & Tourbo Limited (L & T’ for short). The remainingextent of 1 acre 6 guntas of land was not covered under the.Joint Development Agreement entered into between theparties. Admittedly, the said area of 1 acre 6 guntas of| land was Kept by the respondent for his personal use 1.ée.,for construction of his residential house. ~— land was Kept by the respondent for his personal use 1.ée.,for construction of his residential house. ~— In respect of the assessment year 1999-2000, theassessee filed return of income on 14.2.2000 declaring.total income of Rs.4,90,000/-. Tne assessment under|Section 143(3) of the Income Tax Act (‘the Act’ for short)|came to be concluded determining the total income at.Rs.5,20,000/-. A searcn came to be conducted in the.premises of Assessee under Section 132 of the Act on)47.2004. Certain documents were seized. It was found.from the seized records that the Income earned from the.Joint Development Agreement entered into by the assesseewith the L & T was shown year after year under the head“income from business”. Though the assessee had retained |an area of 1 acre 6 guntas for his personal purposes and.though the total FAR which was available for the assesseein respect of an area of 1 acre 6 guntas retained by him| was 8589.53 square meters, the assessee gave up /57/5.37Square meters in favour of L & T (which is the developer ofremaining adjoining property measuring 34 acres) andconsequently, the assessee retained FAR relating to1,014.16 square meters only. This was detected from tne|seized document vide A/DDR-1/5 at pages 46 and 64 under.the head ‘1.6 Account’. The seized document also!disclosed that an amount of Rs.3.15 crores was paid byL & T to the respondent for utilizing the FAR relating to|7575.37 square meters. Pursuant to search, notice under.Section 153-A of the Act came to be issued by the Revenueto the assessee and in response to said notice, the.assessee filed return of income declaring the loss of.Rs.1,28,668/-. — 4. The Assistant Commissioner of Income Tax,Central Circie 2(3), Bangalore framed the assessment order.on 31.1.2006 under Section 143(3) r/w Section 153A of the 7 Act. The Assessing Officer held, on facts that the FAR of7575.37 square meters out of total extent of FAR of.8589.53 square meters relating to 1.6 acres of landretained by the assessee is taken over by the L & T for|utilizing the same in its adjoining project (which was\coming up in 34 acres of land, which is the subject matterof Joint Development Agreement between L & T and theassessee) for a advance consideration of Rs.3.15 crores and.Same would amount to transfer which is liable to capital|gain tax. Consequently the long term capital gains were.worked out to Rs.2,48,45,970/-. It is also concluded by theAssessing Officer that tne assessee has not declared the.long term capital gains either in the original return or in the|return filed consequent to notice issued under Section 153A)of the Act and assessee had concealed the particulars ofincome and consciously tried to evade tax and therefore|penalty proceedings under Section 271(1)(c) was initiated. 8 5. The assessment order passed by the AssessingAuthority against the assessee was questioned by the.assessee before the Commissioner of Income Tax§(Appeals) <‘Appellate Commissioner’ for short} in Appeal|No. ITA 315/ACIT.Cen.Cir.2(3 )/CIT(A)-VI/2005-06/BLR videAnnexure-B.TheAppellate|Commissioneron+&.appreciation of the entire material on record concluded thatthe relinquishment of FAR of 7575.37 square meters by theassessee in favour of the L & T comes within the definition of transfer as found in Section 2(4/7) of the Act andtherefore the Appellate Commissioner held that the capital.gains have arisen to the assessee. Consequently, the.AppellateCommissionerupheldtheadditionofRs.2,48,45,9/70/- under the head of ‘capital gains’. | 6. The orders passed by the Assessing Officer as wellas the Appellate Commissioner were carried further in.appeal by the assessee before the Income Tax Appellate. 9 6. The orders passed by the Assessing Officer as wellas the Appellate Commissioner were carried further in.appeal by the assessee before the Income Tax Appellate. 9 Tribunal, Bangalore Bench in ITA No.1163/Bang/0/7. The|Tribunal allowed the appeal filed by the assessee and setaside the orders passed by the Assessing Officer as well asthe Appellate Commissioner by its order dated 10.10.2008.on the ground that area of 1 acre 6 guntas retained by theassessee is not a capital asset and it was not transferred bythe assessee in favour of Developer and there was no.transfer of immovable property as defined under Section2(47) of the Act. | Hence, the Revenue has filed this appeal questioning>the order passed by the Income Tax Appellate Tribunal,|Bangalore Bench and consequently prayed for confirmation|of the orders passed by the Assessing Officer and the.Appellate Commissioner. 7. AS aforementioned, the assessee was the exclusiveowner of 1 acre 6 guntas of land which adjoins 34 acres ofland. The said area of 1 acre 6 guntas of land was held by| the assessee for his personal use. The adjoining propertyof 34 acres was the subject matter of the JointDevelopment Agreement dated 19.10.1995 between the)assessee and the L& T (Developer). It is also relevant to.note that the assessee, who had paucity of funds,|approached one Mr. Udnav H Buxani who provided financial|assistance to the assessee and in the agreement dated.20.9.1993, it was decided that the profits will have to beShared between the assessee and Udhav H Buxani equally. —As aforementioned, the assessee entered into jointdevelopment agreement with L & T for developing 34 acres.of land. The project was called South City. The assesseehas received Rs.5.00 crores as interest free deposit. Out of|which, Rs.2.50 crores was non-refundable. As per the joint.development agreement, the assessee was to receive 25%.of the built up area. It was also agreed that since the.building was being constructed by the developer (L & T),|the saleable space alongwith the amenities and undivided. rights and interest in the land could be shared between the|assessee and the developer in the ratio of 25% and /5%.respectively. Out of such 25% of the profit earned by the)assessee, Udhav H. Buxani would be entitled to 50% of|the said profit i.e., 12 Y % of the total built up area/profit.It was further agreed that as and when the proceeds witn.regard to the sale of built up area were collected,|proportionate amount would be credited to the assessee’s|account. Subsequently on 25.3.1996, on Udhav H..Buxani staking his claim, a four party agreement was|entered into i.e., between the assessee, Udhav H. Buxani,|M/s.Townand|CountryDevelopersPrivateLimitedrepresented by Udhav H. Buxani andL&T. By way of the|four party agreement, the security deposit to the assesseeand Sri Udhav H. Buxanl was decided to be Rs.2.50 crores|each, out of which Rs.1.25 crores was refundable. It is|also not in dispute that the assessee had authorized L& T°(developer) to market all the built up area of South City| project and he did not intend to retain any portion thereof |for himself. 8. The income arising from 34 acres which was thesubject matter of the joint development agreement has.been shown under the head “income from business” iInassessment year after assessment year. However the|income earned out of the rest of 1 acre 6 guntas of land|had not been shown at all by the assessee in any of the)assessment years. According to the assessee, there is no-need to show such income as it was a non-taxable capital|asset. Admittedly, 1 acre 6 guntas of land was kept by theassessee for his personal use. During the course of search.as mentioned supra, the documents were seized, which.depicted that the assessee had also received income from.L & T by entering into a joint development agreement in|respect of 1 acre 6 guntas of land also by surrendering FAR.The relevant portions of the seized documents containing|aforementioned particulars are reproduced in the order passed by the Appellate Commissioner as well as in the|order of the Assessing Officer. 9. We have carefully perused the relevant portions as.depicted in the orders passed by the Appellate Tribunal,|Appellate Commissioner and the Assessing Officer. On|plain reading of the contents of such documents, it is clear|that the details are found relating to consolidatedstatements of amount to be paid to the assessee towards.the joint development agreement. The seized documents.clearly snow that the assessee nas entered into joint.development agreement with the L & T in respect of his.personally owned asset of 1 acre 6 guntas of land also. The)said fact becomes crystal clear from the letter dated.23.12.1999 addressed to the appellant by the L & T, which.reads thus: “LTCG/BLORE/PDBU/HSC/1 797 September 23, 1999 14| Mr. Dinesh Ranka|Ranka Group|Ranka Chnambers31, Cunningnam RoadBangalore-560052Phone: 2260426/2262351 Dear Mr. Ranka, Sub: FAR area accrued on account of 1 acre 6 guntasInDSouth CityJproject Bangalore Dearing SurveyNos.90/1, 91, 92, 93, 94, 95 & 96/1 part {ItISnoticed|fromtneJointDevelopmentAgreement dated 19[1%]October 1995 that only 34.acres have to be developed. However, the available.approved FAR area is for 35 acres 6 guntas. FARaccrued on account of 34 acres only, in South City.project, is to be shared amongst M/s. Larsen &Toubro Limited, M/s. Dinesh Ranka & Associates andM/s.Buxanl,|as|perratiosdefined.In|thesupplemental agreement dated 22[*4]July 1999. TneFAR area accrued on the balance area of 1 acre 6guntas will be shared between M/s. Larsen & ToubroLimited and M/s. Dinesh Ranka & Associates, as perratios defined in the Joint Development Agreementdated 19[1%]October 1995. 15. Thanking you,Yours faithfully,For Larsen’s & Tourbro LimitedSd/-.(H.S.Chandrashekar) General Manager Property Development Business Unit.”| (Empnasis Supplied)| 10. From the aforementioned letter, it is clear thattnere was joint development agreement dated 19.10.1995governing development of 1 acre 6 guntas of land alsoowned by the assessee and the accounts of the above havebeen made in pages 46 and 64 of the seizure memo}No.A/DDR-1/5 respectively by the L & T and the assessee.separately under the head “1.6 Accounts”. The said letterand other documents seized also prove that there wastransfer of right (FAR) in favour of L&T in respect of 1acre 6 guntas of land for the development. What has)been transferred in favour of the L & T by the assesseeIs |FAR to an extent of 7575.37 square meters in respect of 16| the land measuring 1 acre 6 guntas held by the assessee,though same was not the subject matter of the jointdevelopment agreement entered into on 19.10.1995. | 11. As aforementioned, by way of an amended planapproved during the previous year relevant to theassessment year 1999-00, the assessee was eligible for an.FAR of 8589.53 square meters. The records make it clear|tnat the assessee as per the plan decided to retain FAR only|to an exent of 1014.16 square meters for his residence and.Surrendered the balance of 75/75.37 square meters infavour of developer (L & T) for construction of flats.Therefore there is a transfer within the meaning of Section.2(47) of the Act since the assessee has surrendered FAR of.7575.37 square meters. The word, transfer as defined.under Section 2(47) of the Act in relation to a capital asset|includes the sale, exchange or relinquisnment of the asset)or the extinguisnment of any rights therein. In tne matteron hand, the assessee has relinquished his rights over the. 1/| FAR to aneextent of 75/75.37 square meters andconsequently his right in FAR relating to his plot of 1 acre 6guntas of land to the said extent gets extinguished. Thus itis a clear case of transfer within the definition as found iInSection 2(4/7) of the Act. The seized material also.discloses that L & T has paid Rs.3.15 crores towards sucn.Surrender of FAR and the same would amount to sale.proceeds. 1/| FAR to aneextent of 75/75.37 square meters andconsequently his right in FAR relating to his plot of 1 acre 6guntas of land to the said extent gets extinguished. Thus itis a clear case of transfer within the definition as found iInSection 2(4/7) of the Act. The seized material also.discloses that L & T has paid Rs.3.15 crores towards sucn.Surrender of FAR and the same would amount to sale.proceeds. 12. The transfer is complete on the day when theplan was sanctioned and the building of the apartment|complex started since there is no way of the assessee.either getting back the FAR or using the same. Even if |such a situation arises, it would be another transfer on that|day with L & T as the transferor. The argument of the.assessee that the said amount of Rs.3.15 crores is to be.adjusted out of the proceeds of the built up area relatable.to FAR of 1 acre 6 guntas which according to them could be.constructed in the end, cannot be accepted. Such| adjustment though presumed in favour of the assessee,|does not change the taxability of capital gains since theSame is taxable in the year of transfer during theassessment year 1999-2000. 13. Section 2(47) begins the definition of transfer with|the words “in relation to a capital asset”. Under Section.2(47) of the Act, the term “transfer” in relation to a‘Capital asset’Nas peen defined to include the sale,|exchange or relingquishment of the asset. A capital asset’|means property of any kind held by an assessee whether or not connected witn nis business or profession but does not)include what is defined under sub-clause(i) and (ii) of)Section 2(14) namely the definition clause of capital asset.A right to construct additional stories on account of increasein available floor space index (FSI) is a capital asset and an)assignment of the same is a capital receipt. However,|where no consideration is paid and such right is notembedded in land, it would not be liable to tax as capital gains. In the instant case as already noticed by us.hereinabove the assessee was eligible for a FAR of 8589.53|Sq. Mtrs. However as per the approved plan the assessee.retained FAR only to an extent of 1014.16 Sq. Mtrs. for his|residence and surrendered the balance of 7575.37 Sq. Mtrs.|in favour of Developer (L & T) for construction of flats by|receiving consideration of 3.15 Crores. Thus, thetransaction in question would squarely fall within the.definition of transfer’ as defined under section 2(47) of the |Act inasmuch as the words employed in sub-clause(1) is.“Ssale’, “exchange”, or ‘relinguishment™ and under subclause(2) the words employed is “extinguishment of any.rights therein”. The said definition is an inclusive definition. |The expression must be read widely and not narrowly. It.denotes extension and cannot be treated as restricted. A.transaction whereunder the right to exclusive possession.and enjoyment stood transferred, even subject to right ofreversion in favour of the transferor would be covered by 20| this section. In that view of the matter, we are of the|considered view that the transaction in question namely.transfer of capital asset j.e., an extent of 7575.35 Sq. Mtrs..of the total extent of FAR which related to 1.6 acres of land.retained by the assessee to the developer (L and T) would|stand fully covered by the definition clause of section 2(4/7)of the Act. 14. The search as aforementioned came to beconducted on 4.2.7004 wherein number of vital documents|were found against the assessee and L & T. Even.thereafter a letter dated 7.6.2005 as mentioned supra cameto be written to the assessee (wherein they have enclosed a.letter dated 23.9.1999) confirming the terms on which the|amount in respect of the FAR surrendered to be paid. It is.clearly mentioned in the said letter that the available.approved FAR area is for 35 acres 6 guntas though the joint|development agreement dated 19.10.1995 was only in. 14. The search as aforementioned came to beconducted on 4.2.7004 wherein number of vital documents|were found against the assessee and L & T. Even.thereafter a letter dated 7.6.2005 as mentioned supra cameto be written to the assessee (wherein they have enclosed a.letter dated 23.9.1999) confirming the terms on which the|amount in respect of the FAR surrendered to be paid. It is.clearly mentioned in the said letter that the available.approved FAR area is for 35 acres 6 guntas though the joint|development agreement dated 19.10.1995 was only in. respect of 34 acres of land. It is also mentioned in the said|letter that the FAR area accrued on the balance area of 13acre 6 guntas will be shared between the L & T andassessee as per the ratio defined in the joint development.agreement dated 19.10.1995, which clearly means that theassessee is entitled to 25% of the profit earned by utilizing|7575.37 square meters of FAR relatable to 1 acre 6 guntas.of land. However, curiously another letter came to be.issued by the L & T on 4.7.2005 mentioning that the|amount of Rs.3.15 crores paid to the assessee is in the.nature of advance. Such letter is clearly an after thought|inasmuch as, the search was made in the year 2004 and|this self-serving letter written by the L & T to protect|the assessee from tax liability Dy any stretch of imagination cannot be said to be reliable. Thus, the explanation of theL&T deserves to be rejected as the same is after thought. |15. Having regard to the totality of facts andcircumstances of the case, we concur with the opinion. 2) expressedby|theASS@SSINQ|Officer.and|Appellate|Commissioner that the assessee has surrendered FAR to an.extent of 7575.37 square meters in respect of 1 acre 6.guntas exclusively held by him in favour of the L & T and.has earned Rs.3.15 crores as advance in that regard. We,Nave already Clarified supra that surrendering of the saidFAR by the assessee in favour of the L & T amounts to|transfer within the definition of Section 2(47) of the Act. Allthese aspects are considered in detail by the AppellateCommissioner as well as the Assessing Officer. The|Income Tax Appellate Tribunal is not justified in concluding that there is no transfer of FAR relating to 1 acre 6 guntasduring the relevant year. The Appellate Tribunal is also not.justified in holding that no income has accrued during theyear as no construction has taken place relating to such.FAR. The reasons assigned by the Income Tax Appellate|Tribunal while setting aside the orders passed by the. Assessing Officer and the Appellate Commissioner cannot. be accepted in view of the reasons mentioned supra. | Accordingly, the appeal is allowed_ The substantial. question of law is answered accordingly in favour of theRevenue. The order passed by the Income Tax Appellate|Tribunal,|Bangalore|Bench|“AS,BangaloreInTTA.No.1163/Bang/07 (Assessment year 1999-2000) stands Set|aside. Consequently, the orders passed by the AppellateCommissioner and the Assessing Officer stand restored. Sd/-. JUDGE Sd/-. JUDGE | Gss/-