Unitech Hospitality Services Limited Through: Mr. Gagan Kumar, Advocate v. Assistant Commissioner Of Income Tax

$~29 *IN THE HIGH COURT OF DELHI AT NEW DELHI%Judgement delivered on:03.02.2017 +ITA No.710/2016 & CM No. 38487/2016 UNITECH HOSPITALITY SERVICES LIMITEDThrough:Mr. Gagan Kumar, Advocate. ..... Appellant VersusASSISTANT COMMISSIONER OF INCOME TAX ..... RespondentThrough:Mr.Ruchir Bhatia, Senior StandingCounselwithMr.PuneetRai,Advocate. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI NAJMI WAZIRI, J. (OPEN COURT):- CM No. 38487/2016 (for exemption) Allowed, subject to all just exceptions.The application stands disposed off.ITA No.710/2016 1.The appellant has impugned the order of the Income Tax AppellateTribunal (hereinafter referred to as the ‘ITAT’) dated 07.03.2016, whichconfirmedtheorderoftheAssessmentOfficer(AO)and oftheCommissioner of Income Tax (Appeals) [CIT(A)] disallowing deduction of`6,73,76,070/- towards license fee, external development charges andconversion charges.The following question of law was framed forconsideration in this appeal on 10.01.2017:- “Did the ITAT commit an error in confirming thedisallowance of Rs. 6,73,76,070/- claimed by the assesseeas one relating to license fee, external developmentcharges and conversion charges, in the circumstances ofthe case?” 2.The facts of the case are that M/s. Unitech Business Parks Pvt. Ltd.(hereinafter referred to as the "UBPL") purchased 3.39 acres of land on31.08.2004 from M/s. Unitech Ltd., M/s. Pioneer Profin Ltd. and M/s. SardaPlywood Industries Ltd., the “original allottees”.On 30.03.2006, UBPLentered into an Agreement to Sell (ATS) with M/s. Unitech Developers &Hotels Pvt. Ltd. (hereinafter referred to as the "UDHPL") for sale of the saidland and it was agreed that all the approvals for construction shall beobtained by the purchaser. However, since the purchaser was unable to paythe monies, it sought cancellation of the ATS. 3.By a Memorandum of Understanding (hereinafter referred to as the“MoU”) executed between UBPL and UDHPL and the Unitech HospitalityServices Limited - the appellant on 01.04.2007, the ATS dated 30.03.2006was treated as cancelled and the said land was agreed to be sold to theappellant.It was also agreed that all expenses incurred on developmentshall be borne by the appellant. 4.Meanwhile, on 05.10.2006 and 06.12.2006, although the originalallottees had all rights and interests in favour of UBPL by way of the SaleDeed, nevertheless, paid an amount of `13,67,23,723/- to the Department ofTown and Country Planning, Government of Haryana (hereinafter referredto as the "DTCP, Haryana") towards license fees, external developmentcharges and conversion charges of the aforesaid land. 5.The DTCP, Haryana gave necessary approval for the development ofthe said land vide letter dated 18.04.2007. UBPL executed a Sale Deed infavour of the appellant on 25.03.2008 for a consideration of `7.16 crores. Aweek later i.e. on 31.03.2008, the appellant capitalized `22,23,51,205/- inits books of accounts towards cost of land, stamp duty charges and licensefees, external development charges and conversion charges. Upon sale ofone of the two blocks constructed on the said land, on 06.03.2009 theappellant apportioned a sum of `6,73,76,070/- towards a portion of licensefees, conversion charges and external development charges as proportionatecost of the land beneath Block-A.However, the AO disallowed thisapportionment cost. Both, in the appeal before the CIT(A) and ITAT, thesaid disallowance was upheld.The Tribunal examined the MoU dated01.04.2007 executed between UBPL, UDHPL and the appellant and did notfind any such monies or consideration payable by the assessee to either theSeller UBPL or to the original allottee. It reasoned inter alia:- “6.............According to this agreement it is stated thatunited business park ltd is the owner of the licensed landwhich was purchased by it from Unitech Ltd on 31-August-2004. On 30.3.2006 Unitech business park ltdfurther entered into the agreement to sale this property toUnitech Developers and Hotels Pvt. Ltd for Rs. 675 lacsonly. As unitech developers and hotels Pvt ltd could notpay the price agreed to unitech business park ltd, UnitechDevelopers and hotel Pvt ltd and the assessee jointlyapproachedtheUnitechbusinessparksltdforcancellation of agreement to sale dated 30[th]March 2006and assessee agreed to purchase that property onpayment of mutually agreed consideration. On reading ofthe said MOU we could not find any consideration to bepaid by the assessee to the owner of the land agreed based on this MOU. Therefore for the exact considerationand cost of land the only relevant documents required tobe seen is the sale deed executed between the assesseeand Unitech business parks ltd. This sale deed dated25.03.2008 which is filed in the PB 89-91. According tothat sale deed the total consideration for 3.398 acre ofland was Rs.716 lacs and stamp duty paid of Rs.4296,000/-. On reading of the sale deed we could not findany reference of the amount of license fees etc to be paidto the owner or to the other party. The terms andconditions of the sale deed are as under:- “1. That in lieu of payment of aggregateconsideration of-Rs. 7,16,00,000/(Rupees Seven Crore Sixteen Lac Only),the VENDOR doth hereby sell, transfer, convey andassign all its rights, title and interest in the landadmeasuring3.398acressituatedinBlock-BatGreenwoods City, Gurgaon, Haryana, unto the VENDEEtogether with all its rights, liberties, privileges, liens,easements, advantages, passages, pathways, permissiongrants whatsoever attached or annexed to the said land. 2. That the VENDEE has paid the aforesaid totalconsideration of Rs.7,16,00,000/ -(Rupees Seven CroreSixteenLacOnly)videchequeNo.856317dated25.03.2008 drawn on Canara Bank, Nehru Place, NewDelhi to the VENDOR, the receipt whereof the VENDORhereby admits and acknowledges. 3. That hereafter the VENDOR Company is not left withany right, lien or claim of any nature whatsoever in thesaid land/ plot of land shall henceforth be owned anddeveloped by the VENDEE requirements, per its ownrequirements. 4.That the VENDOR simultaneously with the execution ofthis Deed of Sale has handed over thevacant physicalpossession of the said land/plot to the VENDEE. 5.That all taxes, levies,- assessments, demands orcharges, which are levied in respect of the said plot ofLand upto the date of execution of this Deed of Sale arepaid by the VENDOR. However, the said assessment,charges, rates etc., which may be levied in future shall beborne and paid by the VENDEE. 6. That all expenses, incurred on registration of this SaleDeed including Stamp Duty and other charges have beenborne and paid by the Vendee." 4.That the VENDOR simultaneously with the execution ofthis Deed of Sale has handed over thevacant physicalpossession of the said land/plot to the VENDEE. 5.That all taxes, levies,- assessments, demands orcharges, which are levied in respect of the said plot ofLand upto the date of execution of this Deed of Sale arepaid by the VENDOR. However, the said assessment,charges, rates etc., which may be levied in future shall beborne and paid by the VENDEE. 6. That all expenses, incurred on registration of this SaleDeed including Stamp Duty and other charges have beenborne and paid by the Vendee." 7. According to paragraph No.5 of that sale deed of taxlevies assessment demand or charges which are levied inrespect of the said plot of land paid up to the date of Saledeed are to be paid by the vendor and after that by theassessee. Contrary to the statement made by the assesseeaccording to the sale deed in Para No.1 of the sale deedtotal interest in the land were transferred by Unitechbusiness Parks Ltd to the assessee for Rs. 7.16 only. Wefailed to understand that if such cost is to be borne by theassessee why it does not find a mention in the sale deedor MOU executed by the parties. Further AO and CIT (A)both have perused these documents and based on thathave disallowed these costs to the assessee. Therefore inour opinion merely because the assessee has recorded thecost of external development charges and license fees inthe books of account by crediting it to some other partiesaccount and showing it as work in progress i.e. openingstock, it cannot be granted as deduction from the salesprice of the land when (1) the cost has been incurred bythe other party, (2) the sales deed proves otherwise, (3)MOU relied up on by the assessee does not support theargument of the assessee. LD AR has argued vehementlythat the assessee has already accounted this expenditureas it is work in progress and it has been taken as closingstock therefore it has to be granted as deduction in thenext year as it becomes opening stock in that year. Forthis proposition he relied on the decision of the SupremeCourt in the case of VK. Builders and contractors Pvt. Ltd. Vs. CIT reported in 318 ITR 204. At the firstinstancestheargumentlooksattractivebutonexamination of the facts before the Supreme Court andthe facts of the case of the assessee, this argumentdeserves to be dismissed. Fact before the Supreme Courtin case cited before us is quite different. The Hon'bleSupreme Court has held that according to the principle ofaccountancy that the figure of the closing stock of theearlier years does form the opening stock of the next yearand it cannot be questioned in the subsequent year. Offcourse, there cannot be any question on acceptance ofthis accounting principle. However, Hon'ble SupremeCourt was not concerned the issue like in the case of theassesseewherethecostdebiteditselfcannotbeconsidered as the cost of the land unsupported byevidences in the form of conveyance deed and MOUexecuted by the buyer and seller. Therefore reliance byAR on the decision of Honorable Supreme Court ismisplaced as it does not apply to the facts of the case ofassessee. On probing amount of the work in progress theAO has come to know that these expenses have not allbeen incurred by the assessee and on perusal of the saledeed AO has stated that sale consideration is inclusive ofall rights. Therefore in this case AO is disputing theclosing stock of the earlier years also. In view of theabove facts and circumstances of the case we are of theview that learned Commissioner of Income-tax (Appeals)hasrightlyconfirmedthatdisallowanceofRs.6,73,76,070/- towards the cost of land, we confirm theorder of learned Commissioner of Income-tax (Appeals)and dismiss the ground No.1 of the appeal of theassessee.” 6.For the convenience of this Court, the learned counsel for the assesseehad relied upon the following sequence of events and structure of financialtransactions between the parties:- 6.For the convenience of this Court, the learned counsel for the assesseehad relied upon the following sequence of events and structure of financialtransactions between the parties:- 7.TheCourtwould note that by the ConveyanceDeed dated31.08.2004, the original allottees had, for a consideration of `6.75 Crores,agreed to convey, sell, transfer and assign all their rights and interest in theaforesaid plot of land to the Vendee i.e. UBPL alongwith all its rights,liberties etc. in the said plot of land. It further recorded that the Vendors areleft with no right, lien or claim of any nature whatsoever in the said land.Clauses (5) and (6) of the said Agreement record that all the externaldevelopment charges up to the date of the said Conveyance Deed had beenpaid by the Vendee to the original allottees and nothing further remained tobe paid in that regard. The taxes, levies, assessments, demands or charges etc. had been paid by the Vendors and all further charges etc. in that regardwould be payable by the Vendee, the purchaser.Therefore, as far as theVendor the original allottee was concerned it had divested itself of allinterests in the sold land.The Court is of the view that if the originalallottee chose to make any payments in subsequent years towards license feeand development charges and conversion charges, it may be out ofbenevolenceorwhateverotherconsiderations,buttheamountof`13,67,23,723/- paid by it could not be fastened either upon the Vendee,UBPL or upon the subsequent Vendee the appellant for reimbursement.The agreement between UBPL and UDHPL dated 30.03.2006 does notstipulate any such liability or reimbursement to the original allottee. In anycase, such monies before reimbursement or transfer to the original allotteewould be subject to tax in the hands of the assessee. 8.The ATS dated 30.03.2006 between the UBPL and UDHPL recordsthe transfer of the said plot of land admeasuring 3.39 acres for aconsideration of `6.75 crores of which an amount of `10,00,000/- wasacknowledged to have been received by the Vendor and the balance of`6,65,00,000/- was to be paid by 30.04.2006. The ATS further recorded:- “(6)All costs, charges and expenses payable on or inrespect of this agreement and on all other instrumentsand deeds to be executed, if any, pursuant to thisagreement, including stamp duty and the registrationcharges of the Sale Deed, shall be borne and paid solelyby the Vendee. (7)That all rates, taxed, levies, etc. in respect of thesaid Plot of Land upto the date of registration ofConveyance Deed shall be paid by the Company andthereafter such rates, taxes and charges shall be paid bythe Vendee.” 9.The MoU dated 01.04.2007, recorded that UBPL had purchased theland by Registered Conveyance Deed dated 31.08.2004; the land was meantfor development of a commercial complex. The ATS between UBPL andUDHPL for a sale consideration of `6.75 crores was required to beconcluded by a Sale Deed by 30.04.2006.This time was extended to31.03.2007, but even then the purchaser UDHPL was unable to perform itspart of contract.Hence, through the MoU the appellant was requested totake over the liabilities and funds under the ATS and to remit UDHPL’sexpenses incurred by it towards the commercial complex on the said land.The assessee agreed to the above terms. The MoU recorded inter alia asunder:- “1. That all the expenditure incurred and spent on theconstruction and development of Commercial Complexon the Said Land shall be transferred and accounted forin the books of accounts of 'UHSL'. 2.Thatthetransferofexpenses,asmentionedhereinabove shall include expenses, such as, License fee,Architect'sfee,EDC,IDC,conversioncharges,constructioncostincludingmaterialsconsumed/unconsumed at site of the Project or any otherindirect expenditure incurred in connection with theconstruction and development of the Said CommercialComplex. “1. That all the expenditure incurred and spent on theconstruction and development of Commercial Complexon the Said Land shall be transferred and accounted forin the books of accounts of 'UHSL'. 2.Thatthetransferofexpenses,asmentionedhereinabove shall include expenses, such as, License fee,Architect'sfee,EDC,IDC,conversioncharges,constructioncostincludingmaterialsconsumed/unconsumed at site of the Project or any otherindirect expenditure incurred in connection with theconstruction and development of the Said CommercialComplex. 3. That as a consequence of the Understanding as agreedherein, the ATS dated 30.03.2006 and the SupplementaryAgreement dated 25.04.2006 shall stand cancelled andthe Conveyance Deed of the Said Land shall be executedby 'UBPL' in favour of 'UHSL' within a period of oneyear from the date hereof. 4. That it is expressly agreed in between the Parties that they shall remain bound by this Understanding and shalltake all consequential steps in accordance with theprovisions of this MOU. 5. That in the event of any controversy or ambiguitypertaining to or arising out of this MOU, the same shallbe referred to the Chairman of the Holding Company i.e.Unitech Limited and the decision of the Chairman of theHolding Company shall be binding on all the Parties.” 10.Aforesaid clauses (1) and (2) clearly state that the transfer of expensesshall include all expenses such as, license fee, external development charges,conversion charges.Instead the expenses made towards conversion anddevelopment of the commercial complex were to be transferred to the booksof accounts of UHSL the appellantSignificantly, it does not stipulatereimbursement of any monies by the appellant to the original allottee.Therefore, the appellant was under no obligation to make any payments tothe original allottee. Hence, its payment of `13.67 crores to the latter on29.09.2007 is of its free volition and under no legal obligation under any ofthe documents relied upon by the appellant. The said amount could not beclaimed as against the costs etc. for development of the said land. The SaleDeed was executed between the UBPL and the appellant on 25.03.2008,however, in the absence of any obligation under any agreement between theappellant, the UBPL and UDHPL to pay monies of any sort to the originalallottee, the appellant could not claim the sum of Rs.6.75 crores towardsdeduction from income. The AO had further disallowed and disputed theaddition of such costs on the ground that no such expenses had at all beenincurred by the assessee and the perusal of the Sale Deed showed that thesale consideration was inclusive of all rights. Hence, the costs of transfer of rights alongwith all developments/constructions thereon were included inthe sale consideration. 11.The ITAT also distinguished the reliance of the appellant on V.K.Builders and Contractors Pvt. Ltd. Vs. CIT reported in [2009] 318 ITR 204(SC) on the ground that the facts of the present case and the documents suchas Conveyance Deed etc. did not support the debiting of the aforesaid cost. 12.Similarly, in the same vein, the appellant has also relied upon thedecision of the Allahabad High Court in Ram Luxman Sugar Mills Vs.Commissioner of Income-tax, [1967] 63 ITR 51 (Allahabad) and of theAndhra Pradesh High Court in Commissioner of Income Tax Vs. MopedsIndia Limited [1988] 31 ITR 347 (AP) to contend that the assessee has aright to value his stock at market price or cost price, whichever is lower, ifhe desires to do so. The said precedent, however, is inapplicable to the factsat the present case because the valuation of the closing stock whatever itmay be would by itself not create a liability to pay any amounts to theoriginal allottee, since no such liability was transferred to the appellant. 13.In view of the above, the Court is of the view that there is no error inthe impugned order. Accordingly, the question of law framed is answered inthe negative and against the appellant. 14.The appeal is dismissed in the above terms. NAJMI WAZIRI, J. FEBRUARY 03, 2017/sb 13.In view of the above, the Court is of the view that there is no error inthe impugned order. Accordingly, the question of law framed is answered inthe negative and against the appellant. 14.The appeal is dismissed in the above terms. NAJMI WAZIRI, J. FEBRUARY 03, 2017/sb S. RAVINDRA BHAT, J.