DCIT Vs Ghanshyamdas J Sukhwani(HUF) (ITAT Pune)
ITAT Pune held that contribution of undivided title and rights in the land as share of capital in AOP is taxable under section 45(3) of the Income Tax Act.
Facts- The assessee is a proprietor of Vikram Constructions, engaged in the business of land development and Builder.
During the assessment proceedings, the AO observed that assessee was owner of the land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune. During the year, the assessee sold half of the said land to JKG Associates.
The assessee formed an AOP along with JKG Associates and Mantra Majestique Associates vide “Articles of Agreement”. As per Article-6(i), of the said “Articles of Agreement”, the assessee contributed his undivided title and rights in the impugned land which is at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune, as its capital contribution to the AOP. It is also mentioned in Article-6(i) that the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business. Thus, Rs.5 crores was credited to the capital account of the assessee.
The AO taxed Rs.5 crore as business income of the assessee. Aggrieved by the assessment order, assessee filed appeal before ld.CIT(A). The ld.CIT(A) vide his order dated 08.01.2018 allowed the appeal of the assessee.
Conclusion- Held that the transaction of impugned land introduced by the assessee as his share of capital in the AOP is taxable u/s.45(3) of the Act. The AO shall consider the value of Rs.5,00,00,000/- which is credited in the books of accounts , as value of land shall be deemed to be the full value of consideration as a result of transfer of land as provided in Section 45(3) of the Act.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal filed by the Revenue is directed against the order of ld.Commissioner of Income Tax(Appeals)-6, Pune dated 08.01 .2018 emanating from order under section 143(3) of the Income Tax Act, 1961 for the A.Y.2013-14 dated 29.03.2016. The Revenue has raised the following grounds of appeal:
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the transfer of stock in trade as capital contribution by the assessee is not taxable in the year under consideration.
2. On the facts and circumstances of the case and provision of law, the Ld. CIT(A) erred in holding that the stock in trade brought into common stock of partnership firm(AOP) by the assessee HUF by credit at an agreed value to the HUF capital does not amount to transfer of asset to the partnership firm(AOP), giving rise to taxable profit.
3. On the facts and circumstances of the case and in law, the CIT(A) failed to consider the decision of the Special Bench of the ITAT, Delhi in the case of DLF Universal Vs DCIT order dated 31/12/2009, where it has been held that provision of section 45(3) of the Act will also apply when stock in trade is introduced into a firm as capital contribution.
4. The appellant craves leave to add, modify or delete any or all of the aforesaid grounds of appeal”
Brief facts of the case :
2. The assessee filed return of income for A.Y.2013-14 on 28.09.2013 by declaring total income of Rs.3,13,66,950/-. The assessee is a proprietor of Vikram Constructions, engaged in the business of land development and Builder. The case was taken up for scrutiny. The Assessing Officer passed order under section 143(3) of the Act on 29.03.2016. During the assessment proceedings, the AO observed that assessee was owner of the land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune. During the year, the assessee sold half of the said land to JKG Associates. The assessee formed an AOP along with JKG Associates and Mantra Majestique Associates vide “Articles of Agreement” dated 02.11.20 12 which was duly registered with Joint Sub Registrar, Haveli, Pune. In the said “Articles of Agreement”, the assessee i.e. Vikram Constructions prop Ghanshyamdas J Sukhwani (HUF) is referred as party of the first part, JKG Associates is referred as the party of the second part and Mantra Majestique Associates is referred as party of the third part. The said AOP was called as Mantra Majestique Associates(AOP). As per Article-6(i), of the said “Articles of Agreement”, the assessee contributed his undivided title and rights in the impugned land which is at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune, as its capital contribution to the AOP. It is also mentioned in Article-6(i) that the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business. Article-6(ii) is reproduced here as under :
“ii. For making available the rights as per clause (i) above the Joint Venture the value of such contribution of the land shall be Rs. 5,00,00,000/- (Rupees five crore only) and the said amount shall be credited to the capital account of the First party.”
2.1 Thus, Rs.5 crores was credited to the capital account of the assessee.
2.2 Similarly, JKG Associates contributed its undivided title and rights in the impugned land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune as their capital contribution. For making available the rights, the value of such contribution of the land was taken at Rs.5 crores and credited to the capital account of the JKG Associates.
2.3 It is also mentioned at Article-32 that AOP shall file a separate Income Tax Return and other Tax Returns. It is further mentioned in Article-32 that the AOP shall be responsible for making payment of Income Tax. Accordingly the AOP has filed separate Income Tax Return.
3. The AO taxed Rs.5 crore as business income of the assessee. Aggrieved by the assessment order, assessee filed appeal before ld.CIT(A). The ld.CIT(A) vide his order dated 08.01.2018 allowed the appeal of the assessee. The relevant para 6.2 of the order of ld.CIT(A) is reproduced as under :
“In the present case, the appellant had not entered into any agreement to sell the property to the AOP. This is clear from the various recitals in the articles of agreement. There is no power of attorney provided to the AOP or to any member of the AOP to deal in the property. The stamp authorities have also not treated it as a transfer, as the stamp duty collected on the same is not on the market value of the property but on the refundable advances received by two of the members. The clause 8(v) of the articles of agreement, mentions that all the papers required. pertaining to sanction of the building plans and other clearances shall be obtained by the land owners namely the appellant and JKG Associates. As per the penalty clause 9(B) of the agreement, if the construction of the building of the said property is not commenced by the third party namely M/s Mantra Majestique Associates within six calendar months with the date of execution of .the agreement without any just and sufficient reason, the land owners would be entitled to cancel this agreement and return the deposit without any interest. This clause clearly indicates that there is no absolute transfer of the property by the appellant and the other party JKG Associates, as they have retained the right to cancel the agreement, for any non starting of the project and not for non-payment of the consideration of the land. Further, the clause 10 of the agreement also does not allow the third party to the agreement, M/s Mantra Majestique Associates to mortage the said property or pledge their rights with any financial institution. As per the agreement, the entire project development was to be carried out by the third party and there is no responsibility or liability on the part of the other two partners to the agreement. The clause-12 of the agreement provides that the method of sharing the profits and as per this, the first party and second party are each entitled to 35% of snare in profit and with no liability to share the losses. The clause also provides for minimum assured profit of 22.5% of the sale proceeds to each of the first party and the second party i.e. the land owners. As seen from the various clauses in the agreement, the land owners namely the first party and second party to the agreement have not assumed any liability towards the execution of the project but are entitled to certain fixed ………………… me gross sale proceeds for each is nothing but the consideration for the surrendering the rights in the land by them and not for assuming any business risks. This only leads to conclusion that the land price, has not been determined on the date of the agreement, though it is stated the cost of the land to be adopted is Rs. 10 crores while drawing up the P & L account at the end of the project. It is also seen that there is no capital contribution brought in by the third party. All the expenditures for the completion of the project were to be borne by the third party. This agreement is not truly in the nature of an association of persons though stated so, as the responsibilities and the risks are not borne in the proportionate ratio of the capital brought in by the members. It is more in the nature of joint venture agreement wherein the appellant and the second party introduced their land for development and the construction to be undertaken by the third party along with the risks associated with such construction business. In the light of the various clauses cited above, it is clear that there is no transfer of the property to any party on signing of this agreement. The consideration of the property itself is unascertainable at the time of the agreement, as the appellant is entitled to 22.5% of the sale consideration of the flats to be-constructed.. The consideration as and when received on transfer to the final purchasers has to be assessed in the year of such transfer on proportionate basis of transfer of land. In view of the reason cited above, the addition made by the AO on the ground of the entry, in the books of the AOP cannot be taxed in the current year, as there is no transfer of any stock in trade in the current year. Therefore, the addition made is deleted.”
Submission of ld. Departmental Representative (ld.DR) :
4. The ld.DR submitted a paper book. The ld.DR submitted that as per the Balance Sheet of the assessee, the land is shown as current asset and not as closing stock. In the Balance Sheet for A.Y. 2012- 13 and 2013-14 the closing stock is shown separately and land is show separately. The ld.DR submitted that therefore the ld.CIT(A) erred in stating that assessee has treated land as stock-in-trade. Had the assessee treated the land as stock-in-trade, then it would have also appeared in the profit and loss account of the assessee as closing stock and opening stock, but on perusal of the profit and loss account, it is observed that land is not appearing as closing stock, opening stock in the profit and loss account. This explains that assessee had not treated land as stock-in-trade. The ld.DR relied on the decision of Special Bench of ITAT in the case of “DLF Universal Ltd. Vs. DCIT [2010] 36 SOT 1 (Delhi)”. The ld.DR explained that the Special Bench of ITAT has categorically held that “We therefore hold that the surplus arising from making over assessee ’s personal asset, i.e. said plot of land in question, to the firm as his contribution to its capital account is a profit or gain accrued to the assessee and is chargeable to tax.”
4.1 The ld.DR distinguished the case laws on facts relied by the assessee.
Submission of ld.Authorised Representative of the Assessee :
5. The ld.AR strongly relied on the order of ld.CIT(A). The ld.AR specifically stated that it was a joint development agreement for development of the land. Assessee had not sold the land to the AO. Assessee was entitled to receive profit at 15% of gross sales. The ld.AR further stated that the land was not transferred and it was merely given for development, hence, there was no transfer as envisaged in section 2(47) of the Act.
Findings & Discussions :
6. We have heard both the parties and perused the records. On perusal of the profit and loss account for A.Y. 2012-13 and 2013-14, it is observed that following was closing stock :
