Thursday, September 26, 2013


 By Subash Agarwal, Advocate

A.        High Court

1.         CIT vs. Kuruvilla Abraham 356 ITR 519 (Mad.)

Paintings excluded from personal effects – amendment was not made with any retrospective effect
In order to attract the capital gains tax it should first fall within the definition of capital asset as defined in section 2(14) of the Act. Paintings were excluded from the purview of personal effects and, consequently, included as one of the capital assets u/s. 2(14) only pursuant to the amendment made under the Finance Act, 2007, w.e.f. April 1, 2008. The amendment was not made with any retrospective effect. The Memorandum Explaining the Provisions of the Finance Bill, 2007, made it clear that the amendment was intended to take effect from April 1, 2008, and apply in relation the A.Y. 2008-09 and for subsequent years.

2.         Maruti Suzaki India Ltd. vs. Dy.CIT 356 ITR 209 (Del.)

Reassessment on the basis of change of opinion
Where a claim or deduction has been examined by the A.O., it would amount to formation of an opinion despite the fact that no addition had been made or reason therefore had been given in the original assessment order. Thus, when after an examination in the first round, the matter is sought to be re-opened by the issuance of notice u/s. 148 of the Act, it would clearly be a case of change of opinion and the re-assessment proceedings would be invalid.

3.         CIT vs. Samara India P. Ltd. 356 ITR 12 (Del.)

Bad Debt

In the instant case, the Hon’ble Delhi High Court dismissed the revenue’s appeal by holding that amount written off as bad debt was deductible. The Hon’ble High Court relied upon the judgement of  Supreme Court in the case of T.R.F. Ltd. vs. CIT 323 ITR 397, where it has been held that after the amendment of section 36(1)(vii) of the I.T. Act, 1961 was effect from 01.04.1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt has become irrecoverable. It is enough if the bad debts are written off as irrecoverable in the accounts of the assessee.

4.         CIT vs. Peoples General Hospital Ltd. 356 ITR 65 (MP)

Share Application Money – Identity of the share applicant to be proved

In the instant case, the A.O. made addition on the ground that a non-resident Indian company had made share subscription to the capital of the assessee. The A.O. doubted the creditworthiness of the share applicant – company and directed addition of the amount of share subscription provided by the company to the assessee.

If the assessee had received subscription to the public or rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 of the Act, in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented the company’s own income from undisclosed sources. It was nobody’s case that the non-resident Indian company was a bogus or non-existent company or that the amount subscribed by the company by way of share subscription was in fact the money of the assessee. The assessee had established the identity of the investor who had provided the share subscription and that the transaction was genuine. Though in this case, the assessee’s contention was that the creditworthiness of the creditor was also established, but according to the Hon’ble High Court, in the light of the judgement of Lovely Exports P LTd. 319 ITR (St.) 5 (SC), held that – “we have to see only in respect of the establishment of the identity of the investor.”  
5.         CIT vs. Shivali Construction Pvt. Ltd. 355 ITR 218 (Del.)

Remission or cessation of liability

In the instant case, the A.O. treated the unclaimed unsecured loan as income of the assessee on the grounds that the assessee had not been carrying out any business activity for the last many years and since the loans were long outstanding and there did not appear to be any obligation on the assessee to repay these loans, it clearly implied that there was cessation of liability to pay those loans.
The Hon’ble Delhi High Court dismissed the appeal of the revenue holding that the very first condition for invoking sec. 41(1) is that an allowance or deduction ought to have been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee. In the instant case, no allowance or deduction had been made in the assessment of the assessee in any earlier year. Consequently, there was no question of invoking sec. 41(1).

6.         CIT VS. Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj.)

Bogus Purchase

The assessee engaged in the business of trading in finished fabrics. The A.O. held that purchases were unexplained and disallowed the same by treating as bogus purchases. The Tribunal was of the opinion that though the purchases might have made from bogus parties, the purchase themselves were not bogus. The Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such purchase amount would be subjected to tax. The Hon’ble High Court supported the view of the Tribunal. 
See also: CIT vs. Simit P. Sheth 356 ITR 451 (Guj.)

7.         CIT vs. Raman Boards Ltd. 355 ITR 305 (Karn.)

Payment made to subsidiary company – no question of applicability of Sec. 40A(2)(b)
Held, in order to attract the provisions of sec. 40A(2), the assessee has to incur an expenditure by making payment to the person referred to in clause (b). In the instant case, the assessee was a company. The person, to whom it had to make the payment in order to attract the provision, was any director of the company or any relative or director. Admittedly, the payment was made to the subsidiary company and not to any director or any relative of the director. Therefore the requirement to section 40A(2) was not fulfilled.

8.         Jagat Jayantilal Parikh vs. Dy. CIT 355 ITR 400 (Guj.)

Reassessment on the basis of audit objection not valid

Original assessment was completed on scrutiny. In the post-assessment period, the audit party raised objections and the A.O. had in internal communication, strongly objected to them. No material emerged to indicate any independent application of mind by the A.O. The facts on the contrary clearly established the absence of subjective satisfaction of the A.O. Thus, such notice for reopening on the basis of audit objection was not valid.

9.         Dy. CIT vs. Smt. Sneha Joshi 355 ITR 102 (Bom.)

Reassessment – Reason should be proper

In the instant case, the reasons which had been disclosed by the A.O. to the assessee for reopening the assessment for the relevant assessment years did not indicate that there was any failure on the part of the assessee to disclose fully and truly all materials facts necessary for the assessment. If the basis for reopening an assessment beyond four years was founded on the material produced by the assessee, the clear inference was that there was no suppression of facts materials to the assessment by the assessee. The attention of the A.O. was drawn to this aspect when the assessee submitted its objections to the reopening of the assessment but he disregarded them. Such objections in respect of validity of reopening of the assessment are not an idle formality. Treating the exercise as a meaningless formality would be a serious breach of the law. The A.O. while disposing of the objections, observed that notice u/s.148/ITNS-34 did not contain any provisions to disclose that the assessee has failed to disclose fully and truly all material facts necessary for assessment. Again, the A.O., while dealing with the submission that the reasons did not even state that there was a failure of the assessee to disclose fully and truly all material facts, contended that in the reasons recorded for the reopening the assessment through typographical error the conclusion remained to be incorporated.
It was held that the fact that the form prescribed by the CBDT did not require that the reasons should state that there was a failure of the assessee to disclose fully and truly all material facts was no answer to the jurisdictional requirement contained in sec. 147. The provisions of the statute enacted by Parliament bind all authorities, including the A.O. A form, which is at the highest an administrative instruction, cannot override a statutory provision. Again, the A.O. sought to explain away her failure to record a satisfaction of the requirement of the proviso to sec. 147 stating that this was a typographical error. The omission to state a jurisdictional fact could not be regarded as a typographical error. Therefore, the A.O. had in purporting to reopen the assessment acted in clear breach of the mandate of the law and of the jurisdictional condition prescribed by the proviso to section 147.

10.       CIT vs. Manjula J. Shah 355 ITR 474 (Bom.)

Cost of Acquisition

The assessee derived income from business, house property, capital gains and other sources. The assessee’s daughter, the previous owner, originally acquired the capital asset (flat) on January 29, 1993, and the assessee acquired the flat under a gift deed dated January 2, 2003, without incurring any cost. The assessee sold the capital asset on June 30, 2003, for Rs.1.10 crores. According to the A.O., the cost inflation index for 2002-03 would be applicable in determining the indexed cost of acquisition for the assessment year 2004-2005. The CIT(A) held the long term capital gains had to be determined by computing the indexed cost of acquisition with reference to the cost inflation index for 1993-94 instead of the cost inflation index for the A.Y. 2002-03 as held by the A.O. The same view was supported by the Tribunal. Dismissing the revenue’s appeal, the Hon’ble high court held that –

(i)                 When the Legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will the capital gains under sec.48 have to be computed applying the deemed fiction. Therefore, the fiction contained in Explanation 1(i)(b) to sec.2(42A) has to be applied in determining the indexed cost of acquisition u/s. 48.
(ii)               By applying the deeming provision contained in Explanation 1(i)(b) to sec. 2(42A) the assessee was deemed to have held the asset from January 29, 1993 to June 30, 2003, by including the period for which the asset was held by the previous owner and accordingly, held liable for long term capital gains tax. While computing the capital gains, the indexed cost of acquisition had to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset.

11.       CIT vs. Dey’s Medical Stores Manufacturing P. Ltd. 355 ITR 126 (All.)

Business Expenditure – Allowability of sales promotion expenses

The assessee was engaged in manufacturing of drugs and medicines. It debited an expenditure of Rs.23,60,574/- towards sales promotion expenses. This amount was paid to another company. The assessee contended that the expenses were deductible because although the assessee did not maintain any office for the purpose of advertisement and sales promotion, such an office was maintained by the Calcutta Company, whose expenses were reimbursed by the assessee. The A.O. did not accept the contention and made disallowance. However, the CIT(A) and Tribunal accepted the contention of the assessee. The Hon’ble High Court held that –
The payment of 8% of the sales realization, to the Calcutta company, to reimburse it for expenditure incurred by it on behalf of the assessee in maintaining the sales promotion office and other infrastructure for advertising its product was allowable expenditure u/s. 37(3B)(iv).

12.       Rural Electrification Corporation Ltd. vs. CIT 355 ITR 345 (Del.)

Applicability of sec. 150

The assessee advanced loans to a co-operative society which created a special corpus fund. The society earned interest on the special fund but did not disclose it in its returns of income on the ground that the money actually belonged to the assessee and that any income earned thereon was on behalf of the assessee. The Tribunal agreed with the submissions of the society and held that the interest was not taxable in the hands of the society but ought to be taxed in the hands of the assessee. On that basis, the Ld. A.O. issued notice u/s. 148 to the assessee seeking to reopen its assessment. On writ petition contending that the notice u/s. 148 was issued beyond the period of six years stipulated in sec. 149 and the bar of limitation prescribed in sec. 149 would be applicable unless the revenue was able to establish that the case fell within sec. 150 r.w. Explanation 3 to sec. 153.

Held, when the Tribunal held in favour of the society concluding that the interest was not taxable in its hands and that the interest ought to have been taxed in the hands of the assessee, an opportunity of hearing ought to have been given to the assessee. No opportunity of hearing was given to the assessee prior to the passing of the order of the Tribunal. As such, one essential ingredient of Explanation 3 was missing and therefore, the deeming clause would not get triggered. Thus, sec.150 would not apply and, therefore, the bar of limitation prescribed by sec. 149 was not lifted. In such a situation, the normal provisions of limitation prescribed u/s. 149 would apply. Therefore, the notice issued u/s. 148 having all been issued beyond the period of six years were time barred.
B.        Tribunals

1.         Shrinivas R Desai vs. ACIT [2013] 35 170 (Ahmedabad - Trib.)

Eligibility for getting deduction u/s. 54
(i)                 The use of words 'purchased or constructed' in section 54 does not mean that the property can either be purchased or constructed and not a combination of both the actions.
(ii)               A property may have been purchased as a readymade unit but that does not restrict the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work.
(iii)             Accordingly, as long as the assessee has incurred the bona fide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment under section 54.
(iv)             The cost of purchase under section 54 does include any capital expenditure incurred by the assessee on such property to make it liveable.
(v)               As long as the costs are of such a nature as would be includible in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit – as per his taste and requirements, the costs so incurred will form integral part of the qualifying amount of investment in the house property.

2.         ACIT vs. Farida Shoes (P.) Ltd. 143 ITD 400 (Chennai)
Payments made to non-residents on account of service rendered outside India - provisions of section 195 are not applicable


The assessee made payment to overseas agent as commission for procurement of export orders and claimed it as business expenditure. The A.O. disallowed the claim on ground that assessee had not deducted tax at source on payment made to non-residents. On first appeal, the assessee contended that the commission was paid for procurement of export orders which were completely rendered outside India by overseas agent, and therefore, such payment was not liable to tax in India. The Commissioner (Appeals) thus, deleted the addition. On appeal by revenue, before the Tribunal, the Hon’ble Tribunal held that –

(i)                 The only issue for consideration is as to whether the assessee is under obligation to deduct the TDS under section 195 or not. The Commissioner (Appeals), by considering the entire facts and circumstances of the case passed a detailed order by observing that section 195 have no application to assessee's case. In the case of Prakash Impex v. Asstt. CIT [IT Appeal No. 8 (Mds.) of 2012, dated 30-3-2012], the coordinate Bench of Tribunal, Chennai had considered the very same issue and observed that the commission paid to non-resident agent for the services rendered outside India and such payments are not chargeable to tax in India and therefore, the provisions of section 195 are not applicable in view of the decision of the Supreme Court in the case of G.E. India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456.
(ii)               In the case of Armayesh Global v. Asstt. CIT [2012]  51 SOT 564, the Mumbai Bench of Tribunal has observed that the commission payment was made to the overseas agent for procuring export orders. The agents have not been provided by managerial/technical services. The relationship between the assessee and the non-resident (agent) was only for rendering non-technical services. Moreover, there was no permanent establishment of the said non-resident in India. Therefore, the commission paid to the non-resident agent did not accrue or arise in India and, thus, there was no need for deducting TDS under section 195.
(iii)             In the present case, the assessee paid certain amounts to overseas agents for procurement of export orders. The agents have not provided any managerial/technical services. The payments received by the non-resident Indian are not taxable in India. Taking into consideration of entire facts and circumstances and by following decision in Armayesh Global's case (supra), it is opined that the issue involved in this appeal is covered in favour of the assessee and section 195 have no application to assessee's case. Accordingly, the appeal of the revenue is dismissed.

3.         Pravat vs. CIT 142 ITD 654 (Kol.)
Registration under section 12AA
The assessee, a society said to be working for public good in rural area, moved an application under section 12AA but instead of any adjudication on the said application, a communication was issued by the Income-tax Officer (Technical) in the office of the Commissioner informing the assessee that the assessee was declined registration under section 12AA and initial exemption under section 80G.

Issue Involved
Whether the communication sent by Income-tax Officer could be treated as disposal of assessee's application for registration under section 12AA?


(i)                 An application made to a statutory authority, for his exercise of powers vested in him by the statute, can only be disposed of by him and not by any other person to whom he may like to delegate such an authority. A statutory power vested in an authority cannot be delegated by the authority to any other authority, unless there is a specific enabling provision to that effect in the statute itself. It is, therefore, beyond much controversy and debate that it was for the Commissioner to dispose of the application for registration, and the order thereon could not have been passed by any other authority to which such powers may have been delegated. The communication by the Income-tax Officer (Technical), therefore, does not have any authority of law. The assessee has not received any order rejecting the application under section 12A till date. It is, thus, also not in dispute that there is no other service of any other communication addressed to the assessee by the Commissioner. In these circumstances, the application under section 12AA cannot be treated to have been disposed of by the Commissioner.
(ii)                No reasons whatsoever have been given in the ITO's letter but he mentions that the application was considered 'sympathetically' and rejected. This kind of authoritarian approach and unwillingness to give legal reasons does not anyway befit conduct of any public authority in a democratic set up like ours, wherein rule of law is of paramount importance. It is not the sympathy, but the legal rights of the assessee, which should be subject-matter of consideration, and there is not even a whisper of those relevant considerations. The Income-tax Officer had, thus, even in sending this communication, which has no value in law sofaras disposal of application under section 12AA is concerned, shown complete lack of conduct befitting someone holding a public office to implement the provisions of a legal statute, i.e., Income-tax Act, 1961.
(iii)             Further, it is not open to the Commissioner to keep an application for registration under section 12A pending indefinitely, and when the application is not disposed of within a period of six months from the date of filing the application, the approval is deemed to have been granted. Clearly, in the instant case, the period of six months from the date of application has passed and no order has been passed by the Commissioner. Therefore, for this short reason alone, the registration under section 12A should be deemed to have been granted.

4.         ACIT vs. Arun Thomas 143 ITD 237 (Coch)
Interest on capital borrowed for purpose of business would be guided by provisions of section 36(1)(iii) and not by section 37(1)


The assessee engaged in money lending business, received deposit outside books of account and paid interest thereon and claimed deduction. The A.O. found that the deposit shall be accepted only as per the provisions of RBI Act at the rate fixed by RBI for non-banking financial institution and private money lenders are prohibited from accepting deposits from public and, thus, the assessee had accepted the deposit in violation of the provisions of RBI Act and paid interest in violation of Explanation to section 37(1). He disallowed the claim of the assessee. However, the Commissioner (Appeals) allowed the said claim.

(i)                 A bare reading of section 37(1) clearly shows that any expenditure which is not in the nature described under sections 30 to 36 and not being capital expenditure or personal expenditure laid out wholly and exclusively for the purpose of business has to be allowed in computing the total income. Therefore, it is obvious that the expenditure which falls under sections 30 to 36 and capital expenditure and personal expenditure are excluded from section 37 of the Act. For removal of doubts, Explanation 1 to section 37(1) introduced by the Finance (No. 2) Act of 1998 with the retrospective effect from 1-4-1962 clarifies that any expenditure incurred for any purpose, which is an offence or which is prohibited by law shall not be treated as incurred for business and no deduction shall be allowed in respect of such expenditure. While clarifying Explanation to section 37(1) the CBDT clarified in circular No. 772.

(ii)               From the above Explanation, the Legislature intended to disallow the payment like protection money, extortion, hafta, bribe, etc. when it was claimed as business expenditure. The contention of the taxpayer is that the payment of interest by the taxpayer comes within the ambit of sections 30 to 36. No doubt, section 37(1) is not applicable in respect of expenditure which falls within sections 30 to 36 of the Act. In this case, the taxpayer admittedly borrowed funds for enhancing the working capital for the purpose of money lending business. Interest on capital borrowed for the purpose of business falls within the provisions of section 36(1)(iii), any interest paid thereon has to be allowed as deduction under section 36(1)(iii). In view of the above, provisions of section 37(1) may not be applicable in respect of interest on the capital borrowed for business purpose. Apart from this, the taxpayer claims that the funds were borrowed in the personal capacity and not in the name of business concern. The payment of interest on the borrowed capital falls within section 36(1)(iii) and hence the provisions of section 37(1) may not be applicable. Therefore, it may be immaterial whether the money was borrowed in personal capacity or not. 

5.         Dy. CIT vs. Jammu & Kashmir Bank Ltd. 142 ITD 553 (Amritsar)
Where interest free funds available with assessee were more than investment made in tax free securities, no disallowance under section 14A could be made

The A.O. having found that the assessee-bank had made investment in tax free securities, invoked provisions of section 14A and made disallowance on account of proportionate interest and management expenses attributable to earning exempt income. The CIT(A) considering fact that the assessee had enough funds of its own and a portion of same would have easily been invested in exempted income, deleted disallowance made under section 14A.
On second appeal, the Hon’ble Tribunal held that –
(i)                 The assessee has submitted details before the A.O. that the assessee is having interest free funds for making investment in tax-free securities and infrastructural advances. The A.O. in fact has not accepted these details and the explanation of the assessee in right spirit and has rejected the same that the assessee was required to give entry-wise details to prove that the assessee is having interest free funds and the same were invested in the exempt securities. This approach of the A.O. cannot be accepted especially for the reasons that the assessee has submitted that the assessee is having interest free funds of Rs. 2265.25 crores at the beginning of the year and Rs. 2,736.65 crores at the end of the year, which indicates an increase of interest free funds to the extent of Rs. 471.40 crores. Besides this, a clear explanation was given before the A.O. that the profits of the year after declaring dividend and dividend tax amounting to Rs. 237.52 crores were also pumped in such accounts. Thus, interest free funds to the extent of Rs. 708.92 crores were available to assessee-bank for making investment which far exceeded investment in tax free securities can be said to be established only when it is shown that interest free funds are not available with the assessee-bank whereas reverse is true in this case, the borrowed funds are not available for investment in tax free securities and infrastructural advances. The A.O. has not brought on record that interest free funds are not available with the assessee-bank. The assessee is having borrowed funds to the extent of Rs. 11,058.54 crores whereas investment and advances are to the tune of Rs. 11,926.42 crores. The A.O. has not controverted the fact that the assessee-company is not having enough funds to make investment in tax free securities.
(ii)               As a matter of fact, section 14A requires to determine the amount of expenditure incurred in relation to such exempt income which does not form part of total income under the Act. Therefore, the onus lies on the A.O. to establish that in fact there was some expenditure actually incurred by the assessee. The A.O. in the present case has not brought on record any such expenditure which has actually been incurred by the assessee on account of interest expenditure or even the management or administrative expenditure for earning the exempt income. The Commissioner (Appeals) has rightly held that statute has not left such decision on the wishes and ideas of the A.O. to determine what expenditure has been incurred without establishing and identifying the same.
(iii)             Since there is nothing on record brought out by the A.O. that the assessee has actually incurred any cost or expenditure in relation to the exempt income, no disallowance on account of interest, management or administrative case can be made by the A.O.. Therefore, the addition being the proportionate disallowance on account of interest expenses was to be deleted.

6.         ACIT vs. Meenakshi Khanna 34 297 (Delhi - Trib.)
Applicability of provisions of section 56(2)(vi) in case of receipt of alimony

During the previous year relevant to the assessment year 2008-09, the assessee received lump sum payments from her ex-husband 'P', a national of Germany. She did not admit any tax liability on the said amount. She stated that (i) there was an agreement between her and 'P' for custody, separation and divorce on 1-12-1989 and divorce finally took place on 20-4-1990, (ii) pursuant to this agreement 'P' had agreed to pay the said amount in instalments over a period of time which he did not honour, (iii) thereupon she threatened for execution of divorce agreement, (iv) 'P', therefore, parted with the said amount as full and final settlement in lieu of past monthly non-payments and in lieu of future payments, (v) said amount was received in August 2007 as alimony from 'P' as per divorce agreement, (vi) amount received contained consideration for extinguishing her right of living with her husband, and (vii) in any case the said amount was a capital receipt. The A.O. held that the assessee was not covered under the definition of relative as provided in exceptions to section 56(2)(vi). He, therefore, treated the amount received by the assessee as income from other sources taxable under the provisions of section 56(2)(vi) and added the same to the income of the assessee. On appeal, the Commissioner (Appeals) held that the provisions of section 56(2)(vi) would not be applicable to the instant case. He, therefore, deleted the impugned addition made by the A.O. On second appeal, the Hon’ble Tribunal held that –
(i)                 The divorce agreement was entered in the year 1990 and monthly payments were promised to be paid to the assessee by the husband, who did not pay the same. Therefore, the assessee threatened to take legal action against husband, who, therefore, paid a lump sum amount for settlement of all her claims against the husband.
(ii)               The Commissioner (Appeals) has held that amount was paid by way of alimony only because they were husband and wife and the assessee was spouse of the person who has paid the amount and, therefore, payment received from spouse did fall within the definition of relative. The Commissioner (Appeals) has also held that the amount was received against consideration of relinquishing her personal right of claiming monthly payments as provided under the divorce agreement. The Bombay High Court in the case of Princes Maheshwari Devi of Pratapgarh v. CIT [1984] 147 ITR 258 had held monthly payments of alimony as taxable and lump sum amount of alimony as tax free being capital receipt.
(iii)             In the instant case, though the assessee was to receive monthly alimony which was to be taxable in the each year from conclusion of divorce agreement, but the monthly payments were not received and, therefore, were not offered to tax. The receipt by the assessee represents accumulated monthly instalments of alimony, which has been received by the assessee as a consideration for relinquishing all her past and future claims. Therefore, there was sufficient consideration in getting this amount. Therefore, section 56(2)(vi) is not applicable. Moreover if the revenue's arguments are to be accepted of it being monthly payments liable for tax as per decision of the Bombay High Court in the case of Princes Maheshwari Devi of Pratapgarh (supra), then also the amount represented by past monthly payments cannot be taxed in the year under consideration. Therefore, the amount in question was a capital receipt not liable to tax. In view of the above facts and circumstances, the appeal filed by the revenue was liable to be dismissed.

7.         S. Ranjith Reddy vs. Dy. CIT 35 415 (Hyderabad - Trib.)

A.        Only execution of development agreement of land, without commencement of construction, cannot be held as transfer so as to attract capital gains tax
The assessee had received land measuring 6 acres and 4.8 guntas from his late father. He, along with his family members and some third parties, entered into a joint development agreement (joint venture) on 28-2-2006 with 'L' Constructions, which itself held land in the same area. By virtue of the agreement, assessee was to receive plots along with constructed houses. The A.O. held that there was transfer of land on the basis of the development agreement and, therefore, computed capital gain in the hands of assessee. On appeal, the Commissioner (Appeals) confirmed the order of the A.O.

(i)                 The first condition for transfer under section 2(47) is as to whether there was a sale, exchange or relinquishment of the asset. The assessee entered into a joint development agreement with 'L' Constructions in the previous year relevant to the assessment year under appeal, for promoting a joint venture with 'L' to construct houses.
(ii)               The joint venture project, as far as the impugned previous year is concerned, was only in its nascent stage. As per the agreement, 'L' was to construct the building at its own cost. All the above features make out a case of a JV for developing and reconstructing houses by adjusting rights in the immovable properties by providing the vacant land and in return getting a share in the undivided right over the land as well as in the built-up area.
(iii)             As far as the previous year relevant to the impugned assessment year is concerned, nothing happened other than the execution of the agreements. The transfer of an immovable property always contemplates transfer of an existing property, i.e., a property in praesenti. The question in the present case is whether there was a property existing to be transferred by the assessee-company. As far as the land of 6 acres and 4.8 guntas is concerned, there was only an agreement. The proposed project was still to be born as the offshoot of the assessee. The assessee and 'L' were not forming any new company. The assessee was not transferring any right or any property to 'L'. The assessee-company assigned its landed property in favour of 'L' by the joint venture agreed into between the assessee and 'L'. There cannot be a sale to oneself. Nothing was exchanged in the previous year relevant to the assessment year under appeal. No right was relinquished by the assessee in the impugned previous year. It only proposed to redefine the rights. There is no extinguishment of any rights therein.
(iv)             The consideration for the contribution made by the assessee-company is not by way of sale consideration. As the assessee is providing its land for development, the assessee is getting rights in the developed property. The extinguishment of its right over the land is compensated by its right in the built-up area. Even if it is considered as a proposed exchange, nothing has been culminated in the impugned previous year. All those things are to happen in the future. The joint venture has not started the construction in the impugned previous year. The housing project was a proposed project. As already stated, a transfer is contemplated only in the case of an existing property. In the present case the property was only in the nature of mutual rights. The project and development are yet to happen. Strictly, speaking, the projects and plans may happen or may not happen. That is why the parties call the arrangement as agreements. The assessee has not transferred any property as such, either in favour of 'L' or in favour of the JV. In these circumstances, there cannot be a case that the assessee had sold or extinguished or relinquished any of its assets/rights. The rights of the assessee-company and 'L' are with reference to the property to be built in future. Therefore, there cannot be a case of extinguishment of any right in the property held by the assessee.
(v)               All these matters bring home an important point that the expectations and contemplations incorporated in the agreements are the business propositions made by the concerned parties, which have been deduced into enforceable agreements. Even though the agreements are enforceable, they themselves do not take the character of immovable properties.
(vi)             The execution of the development agreement does not bring into existence any tangible asset that could be transferred between the parties. The agreements speak about the intentions of the parties. Their future action plans are based on the agreements. Once the project is completed and all the stipulations are satisfied, the parties may come to declare the final satisfaction of the agreements. Only at that point of time, the question really arises as to whether there was any transfer within the meaning of section 2(47). That too again, the question will be further enlarged to know that if at all there is a transfer, whether it is between the assessee and 'L'.
(vii)           Next it is necessary to consider whether this arrangement can be treated as a transfer within the meaning of section 53A of the Transfer of Property Act. In the present case, 'L' is not a transferee; it has not taken possession of the property. No money consideration it has been discharged. In fact there cannot be a question of handing over possession of the property to anybody. The assessee itself contemplated a joint venture for the development of housing project. The joint venture is not a new legal entity. It is an extension of the assessee itself. In such circumstances, there cannot be a case of transfer at all and it is only to enable its contractual obligations in planning, implementing and executing the project as construed in the Joint development agreement. It is for 'L' to undertake the construction activities and do each and everything to transform the concept into reality.
(viii)         It is important to bear in mind that section 2(47)(v) refers to possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act. When the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of Section 53A which is a sine qua non for invoking section 2(47)(v).
(ix)             A plain reading of the section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be of the nature referred to in section 53A of the Transfer of Property Act, it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract.
(x)               It is clear that willingness to perform for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under section 2(47)(v).
(xi)             As per the development agreement, landowner gets his share of plots on construction, and consideration is quantified in terms of money. Also the handling over of possession in the development agreement is missing. Both the developer and the assessee were having the landed property. They pooled together the landed property along with some other parties who were owners of some other landed property and all parties together gave licence to the builder to enter the premises and construct houses. No sale was effected on the date of agreement. No consideration has passed between the parties on signing the agreement. Further from the date of signing of development agreement dated 28-2-2006 to 31-3-2006, no progress has taken place in the said landed property which is subject-matter of the development agreement. Further, there was no consideration in the form of money that passed between the parties. There was no construction, whatsoever, that took place during the period. Even otherwise, there was a General Power of Attorney given by the assessee to the developer. In such a situation, it is only the actual performance of transferee's obligation which can give rise to the situation envisaged in section 53A of the TP Act. On these facts, it is not possible to hold that the developer performed its obligation during the period in which the capital is sought to be taxed by the Revenue authorities. Thus, the condition laid down under section 53A of TP Act was not satisfied during the period. Once it is concluded that the developer did not perform the stipulation as required by the development agreement during the period under consideration and within the meaning assigned to the expression in section 53A of TP Act it cannot be said that there was a transfer under section 2(47)(v) so as to levy capital gain tax.
B.        Even while reopening a case where only intimation under section 143(1) was issued, it is essential that A.O. should have tangible material before him justifying his reason to believe that income had escaped assessment

The assessee's return of income for assessment year 2006-07 was processed under section 143(1). Later, the A.O. reopened assessment on ground that assessee had entered into a development agreement, whereby assessee handed over his land to builder in lieu of developed plots. The A.O. held that value of developed plots received were taxable in the year of executions of the development agreement as there was a transfer under section 2(47)(v). On appeal, the assessee contended that reopening of assessment was not permissible as there was no tangible material, the Commissioner (Appeals) rejected assessee's contentions.
On assessee's appeal, the Hon’ble Tribunal held that –
(i)                 One needs to give a schematic interpretation to the words 'reason to believe' failing which, section 147 would give arbitrary power to A.O. to reopen assessments on the basis of mere change of opinion, which cannot be per se reason to reopen. The A.O. has no power to review; he has the power to reassess. But reassessment has to be taxed on fulfilment of certain pre conditions and if the concept of 'change of opinion' is removed, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an inbuilt test to check abuse of power by the A.O. Hence, the A.O. has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.
(ii)               Undoubtedly an order of the assessment which has been passed in subsequent assessment year may furnish a foundation to reopen an assessment for an earlier assessment year. However, there must be some new facts which come to light in the course of assessment for the subsequent assessment year which emerge in the order of the assessment. Otherwise, a mere change of opinion on the part of the A.O. in the course of assessment for a subsequent assessment year would not by itself legitimize reopening of assessment for an earlier year.
(iii)             The contention of the Department is that there was no assessment under section 143(3) for the assessment year 2006-07 and only return was processed under section 143(1) and the A.O. was within the jurisdiction of reopening the assessment and there was no change of opinion. For the Department to say that there was no change of opinion, it should be incumbent upon the Department to demonstrate that during the course of assessment proceedings for Assessment year 2007-08 some new information had been brought on record, which was not available when the return of income was processed for Assessment year 2006-07 or before the expiry of time limit to complete the assessment for Assessment year 2006-07 in regular course. That indeed is not the case of the Revenue. All the material which was relevant to determine the income were available with the A.O. when the regular assessment was to be completed for Assessment year 2006-07. Consequently, mere formation of another view in the course of assessment proceedings for Assessment year 2007-08 would not justify the revenue for reopening the assessment for Assessment year 2006-07 though the reopening of assessment has taken place within the period of 4 years. In the present case, there is no tangible material, no new information and no fresh material which came before the Revenue in the course of assessment for Assessment year 2007-08 to justify reopening of assessment for A.Y. 2006-07.
(iv)             The contention of the Department was that where no view had been taken as to the correctness of the return in the first instance, the A.O. could not be said to exercise a power of review when he reopened the assessment which had been earlier passed under section 143(1). This argument is similar to the argument that if no opinion can be said to have been formed by the A.O. when the return was merely processed under section 143(1), by issuing notice under section 148, he cannot be said to have changed his opinion. But it needs to be remembered that section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that the reassessment notice issued under section 148 in a case where the original assessment was made under section 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. There is no exclusion in section 147 to the effect that where the return was earlier processed under section 143(1) it is not necessary for the A.O. to hold or entertain a belief that income chargeable to tax had escaped assessment for the reasons recorded by him. Therefore, the condition that the A.O. must have reason to believe and the further condition that those reasons must have a live link with the formation of the belief is applicable equally to cases where the return was processed under section 143(1) as also to cases where the return was examined and an assessment was made by a speaking order under section 143(3).
(v)               All that has been excluded is that the assessee, in whose case the return was first processed under section 143(1), cannot challenge the notice of reopening on the ground that it is prompted by a mere change of opinion. Only to this limited extent there is a disability on the part of the assessee to challenge the notice of reopening in a case, where his return was earlier processed under section 143(1).
(vi)             Thus, while resorting to section 147 even in a case where only an intimation had been issued under section 143(1)(a), it is essential that the A.O. should have before him tangible material justifying his reason to believe that income had escaped assessment.
(vii)           The assessee contended that there was no such tangible material before the A.O. from which he could entertain the belief that there was transfer under section 2(47)(v) resulting in escapement of income chargeable to tax. Though it is not possible to challenge the action of the A.O. on the ground of a change of opinion because in the present case the return was earlier processed under section 143(1), his action can be challenged, on the ground that there was no tangible material before the A.O. to enable him to entertain a prima facie belief that income chargeable to tax has escaped assessment. The Department has not produced any tangible material on the basis of which the reasons were recorded to demonstrate that there was a live link or nexus between them and the requisite belief. Being so, the reopening cannot be held as valid.
(viii)         The facts suggest that the information that was considered by the A.O. to reopen the assessment was already on record and if the A.O. failed to consider the same for framing the assessment by issuing notice under section 143(2), he was precluded from considering the same material for reopening of the assessment under section 147, read with section 148. Accordingly, the assessment is quashed.

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