S. 45(3) not permit A.O. to substitute full value of consideration other than the amount recorded in the books of account of joint venture

ITO Vs. Chiraayu Estate & Dev. (P) Ltd. (ITAT Mumbai)

The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

A plain reading of the said provision would reveal that the profits or gains arising from the transfer of a capital asset to another entity by way of capital contribution or otherwise shall be chargeable to tax. The profit or gain would arise only when the transfer has been made at a price which is more than the cost price and the difference between the cost price and amount at which transfer has taken place can be charged under section 45(3). In the instant case the purchase price of land as recorded in the transferors book and recorded in the books of the joint venture are the same. As per provisions of section 45(3) price of land recorded in the books of joint venture is required to be considered as receipt of full value of consideration received or accrued as a result of transfer of capital assets. Once the price recorded in the joint ventures books is treated as full value of consideration, the provisions do not permit substitution of any value so as to make addition under section 45(3). In fact the approach of the A.O. is also not correct in the sense that under section 45(3) once the full value of consideration is taken as the amount recorded in the books of the joint venture, the capital gain can be worked out by reducing the cost of purchase as per the books of assessee. In case the A.O. substitutes the cost of purchase, by whatever means, then that cost price has to be adjusted in the capital gains. This may result in a loss of equal amount as the books of joint venture show the book value as consideration and substituted cost price (value determined by AO in the order) as a deduction. This working would result in a loss but not a gain. This simple arithmetic calculation was missed by the A.O. and he made the addition under section 45(3) which does not permit him to substitute the full value of consideration other than the amount recorded in the books of account of the joint venture. As the Assessing Officers action is not according to the provisions of section 45(3), there is no justification for upholding the contentions of Revenue. We uphold the order of the CIT(A) and reject the ground of appeal.

ITO v. Chiraayu Estate & Dev. (P) Ltd.

In the ITAT, Mumbai C Bench

ITA No. 263 (Mum) of 2010

24 August, 2011 A.Y. 2006- 07

This appeal by the Revenue is against the order of the CIT(A) IV, Mumbai dated 27.10.2009.

2. Revenue is aggrieved on the following grounds :-

“1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.1,61,95,917 made under section. 69B without appreciating the fact that the transactions reflected in the assessees books were sham.

2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs.1,26,64,239 by holding that no capital gain arose to the assessee without appreciating the fact that the provisions of section 45(3) were applicable in respect of the transfer of land by the assessee to the joint venture company and that the value of the land transferred was recorded at a figure lower than the market value in the books of the joint venture.”

3. Briefly stated, assessee company is engaged in the business of real estate, which has filed its return of income declaring loss of Rs. 575. It has purchased land for development of residential and commercial properties at various places which includes Katni, Hardwar, Anantapur, Chandigarh, Bengusarai, etc. Part of these properties purchased in earlier years and during the year under consideration were transferred to a joint venture company formed with M/s. Sahara (India) Commercial Corporation Ltd. (SICCL) along other group concerns. In the books of account assessee shown that these properties are transferred to the joint venture at the same cost price. The A.O. noticed that the lands were purchased on the loan taken from SICCL along with a few entities and transferred to the joint venture with other entities at the cost price. The lands were transferred to the joint venture was treated as capital contribution by the amount of land cost. The capital account of assessee has been credited in the joint venture. The A.O. noticed that the entire exercise undertaken by the assessee in purchase of land and transfer to the joint venture is a sham and bogus transaction undertaken for the purpose of tax evasion and gave a finding that the incomes arise in the hands of the SICCL. However, he also noticed that the land has been purchased at various places and the variation in the rate of land was very significant. He noticed that the variation was from Rs. 9,00,000 to Rs. 9,50,000 for Katni, Rs. 6.43 lakhs to 143.86 lakhs for Anantpur and likewise. On looking on the huge variation in the rate the A.O. came to the conclusion that the transaction pattern is not real and after issuing a show cause notice to the assessee to explain the variations and asking for report of the DVO towards the cost of land for purchase price he determined the undisclosed amount at Rs. 60,56,27,667 as addition under section 69B. Similar amount was also added as addition under section 45(3) as the property stood transferred to the joint venture company. Thus the A.O. made two additions and raised the demand.

4. Assessee pointed out that the A.O. took the purchase price of the entire land not only by the assessee but also by the other group concerns into consideration and arrived at the amounts wrongly and furnished details of the value at which it is purchased and the maximum applicable rate and difference, if any, on the same price adopted by the A.O. The A.O. noticing the mistake modified the order and determined the undisclosed investment under section 69B at Rs. 1,61,95,917 as against Rs. 60,57,27,667. As two of the lands at Bengusari and Vellore were not transferred to the joint venture the addition under section 45(3) was restricted to Rs. 1,26,64,239 as against the amount of Rs. 60,57,27,667 originally added by the A.O. Assessee preferred appeal before the CIT(A) on the original amounts of addition and subsequently restricted to the revised additions. The CIT(A) vide his above referred order examined the issue and deleted the additions made under section 69B as well as 45(3).

5. The CIT(A) in his order has held that the land has been purchased under registered agreements and since the agreements were registered there is no need for valuation report. He also further held that there is nothing on record to suggest that there is unexplained investment and as investment has been booked properly in the books, provisions of section 69B are not attracted. He also relied on various case laws relied by the assessee in coming to the conclusion that the addition made by the A.O. cannot be sustained. Apart from that he also held that the value recorded in the books of the joint venture is the same as that of recorded by the assessee in the books of account and, therefore, addition under section 45(3) cannot be made. For these reasons, vide his detailed order, he deleted the additions, hence, Revenue is aggrieved.

6. Drawing our attention to the orders of the A.O. and the CIT(A) the learned D.R. submitted that the CIT(A) erred in deleting the addition made under section 69B as assessee could not explain the variations in prices properly. He has filed a written submission in this regard explaining the facts and relying on the orders of the A.O.

7. The learned counsel referred to the facts and submitted that the A.O. undertaken the exercise to examine the purchase of properties and entering into the joint venture and he discussed the issue that assessees transactions are sham and bogus vide his discussion upto para 21. Then he referred to the working in page 33 of the order and how the A.O. arrived at the difference at Rs. 60,57,27,667, which was subsequently restricted to Rs. 1,61,95,917. It was the submission of the learned counsel that the assessee purchased the properties not only in earlier years but also in this year and it was categorically explained to the A.O. that the rates of purchases of land differ from person to person depending upon various circumstances, namely (i) time of purchases, (ii) location of particular land, (iii) size of land, (iv) nature and quality of land and (v) extent of need of seller and purchaser. It was also explained that if a major venture is taken up in a particular place immediately the land rates of adjoining and adjacent land increases and the assessee was made to purchase the land at market price then available. It was submitted that the rates vary over a period of time and whatever price it has paid to various sellers of the properties, the same was recorded and the deeds were also registered, therefore, the allegation that assessee must have paid uniform price for lands purchased over a period of time has no substance. It was also submitted that the A.O. does not have any evidence that assessee made undisclosed investments in land at various locations. He then referred to the detailed order of the CIT(A) including various case laws governing the conditions under section 69B. He drew our attention to the principles established by the ITAT in the case of Dilshad Trading Co. (P.) Ltd. v. ITO [1994] 49 ITD 348 (Bom.), CIT v. Lalit Bhasin [2007] 290 ITR 245/[2005] 147 Taxman 619 (Delhi) and CIT v. K.K. Enterprises [2009] 178 Taxman 187 (Raj.). With reference to the addition under section 45(3) it was his submission that provisions of section 45(3) are not applicable as the said provision deems the full value of consideration, the amount recorded in the books and the A.O. accepts that the amount recorded in the books of the joint venture is the same as that of cost of the assessee in its books. Therefore, there is no scope for any presumption under section 45(3) for making an addition of the difference amount as sought out by the A.O.

8. We have considered the issue. As seen from the order of the A.O. his main focus in the assessment under section 143(3) dated 31-12-2008 is to hold that the transactions of the assessee company in purchase of land, taking loans from SICCL and transferring the land to the joint venture for effective development was a sham transaction. He also held that these transactions are fictitious in nature and as a tool for tax evasion and assessee company is a mere name lender to all the transactions routed through SICCL. That issue was not before us for consideration even though the A.O. elaborately discussed from paras 12 to 21, those observations are irrelevant to the additions made under sections 69B and 45(3). The Revenue is aggrieved on the deletion of the two additions under sections 69B and 45(3).

9. Coming to the addition under section 69B we notice that the A.O. has not made out any case for making the addition under section 69B. The provisions of section 69B are as under:

“69B. Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.”

10. As per the section the following ingredients must pre-exist before invoking the provisions of section 69B:-

(i) It is found that the assessee has made investment or the assessee is found to be the owner of any bullion, jewellery or other valuable article, and

(ii) It is found that the amount expended on making such investment or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in that behalf in the books of account maintained by the assessee, and

(iii) Either the assessee offers no explanation about such excess amount, or the explanation offered by him is not satisfactory.

The above circumstances are cumulative. If all the circumstances exist, the excess amount may be deemed to be income of the assessee for the financial year in which such investment was made. It may be noted that the legal fiction enacted in section 69B comes into effect only where all the above circumstances do exist. The onus is on the Revenue to prove the existence of all the circumstances. There is no room or scope for making any presumption about the existence of any requisite circumstances. The facts in the present case are that assessee purchased land at different places at different intervals at different prices. These purchases were registered and the value shown in the purchase agreement is in conformity with valuation of stamp duty authorities. Assessee explained that there are variations in purchases due to several factors like timings, location, demand and the fact that the project is coming up near the area the land owners increase the price automatically depending on the locational advantage. There is nothing on record to indicate that the A.O. has found any evidence to say that most of the purchases recorded were less than the amounts actually invested. What the A.O. did was to tally the purchase prices of land purchased earlier to the value of the land purchased later or the maximum amount of investment per acre in a particular place. He has not taken into consideration the explanation of the assessee about the variations in purchase prices. It is on record that all the parties in the group have jointly and severally made the investment in particular piece of land, which was ultimately transferred to the joint venture as capital contribution. Looking into the facts of the case in its entirety we agree with the findings of the CIT(A) that the A.O. has not found any material, whatsoever, so as to invoke the provisions of section 69B. The findings of the CIT(A) on this issue are as under: –

“2.16 Looking to the facts of the case in its entirety, I find that the A.O. has not found any material, whatsoever, so as to invoke the provisions of section 69B of the I.T. Act. The appellant has purchased land alongwith other entities at different intervals during the year at various prices. These prices are determined on various factors. The forces of market conditions and the phenomena of demand & supply would be a determinative factor in fixing the price of the land at the same place during different time. A land which is purchased, say at Rs.1,00,000 per acre, 3 to 4 months ago at a place, may cost more after 3 to 4 months later. Due to rapid development of infrastructure and coming of big projects even in tier 2 & 3 cities of the country, the land prices are going steadily up. The land prices cannot be stagnant. This phenomena in the appreciation of land prices fully justifies the purchase of land by the appellant at higher price at the same place during the year than the land purchased earlier. I, therefore, find that there is no justification on the part of the A.O. in holding that the maximum land price paid at a given time might have also been paid for the land purchased earlier during the year.”

11. We agree with the above findings as there is nothing on record to indicate that assessee has invested more than what was recorded in the books of account. In fact the Assessing Officers approach in making the addition originally at Rs. 60,57,27,667 is also not correct and rectified by the order under section 154 subsequently. There seems to be casual and pedantic approach in examining the issue and making the addition by the A.O.

12. The learned counsel relied on the judicial principles established in the case of Dilshad Trading Co. (P.) Ltd. (supra), Lalit Bhasin (supra) and the decision of the Honorable Rajasthan High Court in the case of K.K. Enterprises (supra). All the above judgments are in support of the assessee, where it was held that for invoking the provisions of section 69B there should be justifiable evidences for making the addition. In the absence of any material on the basis of which addition under section 69B can be made that addition can only be considered as primarily on imaginative basis and conjunctures rather than on the basis of any record or evidence. There is no basis for considering that assessee has made any unexplained investment so as to invoke provisions of section 69B. A.O. cannot presume the difference between the purchase price on the basis of the entries in the books of account as unaccounted investments in this case. As rightly pointed out by the CIT(A) even a reference to valuation does not bring into existence the scope for making the addition as provisions of section 50C were also on statute and there is no difference between the value as registered and the value as made by the assessee in the books of account. In view of this, there is no merit in Revenues ground in contesting the order of the CIT(A), who deleted the addition not only on the basis of the facts but also on principles of law. We accordingly confirm the order of the CIT(A) and reject the ground.

13. With reference to second ground, i.e. addition made under section 45(3), provisions of section 45(3) are as under: –

(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”

14. A plain reading of the said provision would reveal that the profits or gains arising from the transfer of a capital asset to another entity by way of capital contribution or otherwise shall be chargeable to tax. The profit or gain would arise only when the transfer has been made at a price which is more than the cost price and the difference between the cost price and amount at which transfer has taken place can be charged under section 45(3). In the instant case the purchase price of land as recorded in the transferors book and recorded in the books of the joint venture are the same. As per provisions of section 45(3) price of land recorded in the books of joint venture is required to be considered as receipt of full value of consideration received or accrued as a result of transfer of capital assets. Once the price recorded in the joint ventures books is treated as full value of consideration, the provisions do not permit substitution of any value so as to make addition under section 45(3). In fact the approach of the A.O. is also not correct in the sense that under section 45(3) once the full value of consideration is taken as the amount recorded in the books of the joint venture, the capital gain can be worked out by reducing the cost of purchase as per the books of assessee. In case the A.O. substitutes the cost of purchase, by whatever means, then that cost price has to be adjusted in the capital gains. This may result in a loss of equal amount as the books of joint venture show the book value as consideration and substituted cost price (value determined by AO in the order) as a deduction. This working would result in a loss but not a gain. This simple arithmetic calculation was missed by the A.O. and he made the addition under section 45(3) which does not permit him to substitute the full value of consideration other than the amount recorded in the books of account of the joint venture. As the Assessing Officers action is not according to the provisions of section 45(3), there is no justification for upholding the contentions of Revenue. We uphold the order of the CIT(A) and reject the ground of appeal.

15. In the result, appeal of the Revenue is dismissed.