Profit & gains arising from transfer of interest in Hydro Projects taxable under income from business

Arch Hydro Power Projects Pvt. Ltd Vs DCIT (ITAT Pune)

ITAT Pune held that profits and gains arising from transfer of interest in Hydro Projects is income from business and not income under the head ‘short term capital gains’.

Facts- The assessee is engaged in the business of developing Hydro Power projects on BOT basis, for Govt. of Maharashtra. During the course of assessment proceedings, it was submitted by the assessee that as the approval for transfer of project was not received from State Government the profit from transaction was not recognized in the books of account for the year. The AO was not satisfied with the explanation of the assessee.

The A.O found that during the year under consideration, the assessee has received an amount of Rs. 4,37,00,000/- out of total sale consideration Rs. 4,87,00,000/- for transfer of said project which was 90% of total consideration. As per the AO, M/s. R.M. Mohite Textiles Pvt Ltd has incurred substantial amount of expenditure at the site. Thereafter the A.O came to the conclusion that the assessee has transferred the possession to the transferee who has commenced the work relating to the said project.

The AO emphasised that major risk and reward associated with the project has been transferred during the year itself and the transferee has taken possession of the property and done some act in furtherance of the contract. Therefore, according to the A.O there is transfer of property as per section 2(47) of the Income Tax Act and the gains from the transaction are liable to be assessed u/s. 45 of the Act. As the assessee has held the capital asset for less than 36 months immediately preceding the date of its transfer, the gain was brought to tax as short term capital gains. Aggrieved the assessee went in appeal before the ld. CIT(A).

Conclusion- CIT(A) held that what is transferred in the present case is creation of a hydro project i.e, interest in the Hydro Project and not land or property. Therefore, in my considered opinion the- profits and gains arising from such transfer of interest in the subject project is liable to be assessed under the head ‘income from business’ as the appellant is in the business of execution and development’ of such projects and the interest in the project was transferred/assigned to RMMTL in the course of business of the appellant.

We find that the CIT(A) has held that the gains are taxable under the head ‘income from business’ and not under the head ‘short term capital gains’. The reasoning assigned by the CIT(A) is cogent and we find no infirmity with the findings and the decisions rendered by the CIT(A).

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal preferred by the assessee emanates from order of the ld. Commissioner of Income Tax (Appeals)-1, Pune dated 30-01-2015 for A.Y. 2010-11 as per the following grounds of appeal.

1. The ld. CIT(A) Pune, erred in law and on facts in holding that the income arising from transfer of ‘AMABA! HEP Project‟ is taxable in A.Y. 2010-11 as per the provisions of MOU executed on 30-10-2009. Ld. CIT(A)-1, Pune and ld. A.O ought to have appreciated the fact that income from transfer of ‘AMABA! HEP Project‟ arises in A.Y. 2012-13 considering the test of transfer of significant risk and rewards.

2. The appellant craves leave to add/modify/delete/amend all or any of the grounds of appeal.”

2. At the time of hearing, none appeared for the assessee. From the order sheet, it is evident that ample opportunities were given to the assessee and the case has been adjourned for number of times. That as regards present date of hearing, a notice was served through RPAD which had returned unserved. Said notice of hearing was served through D.R‟s office. With this background, we take on record the submissions of the ld. D.R, relevant orders of the subordinate authorities and adjudicate the case on merits.

3. The relevant facts of this case are that the assessee is engaged in the business of developing Hydro Power projects on BOT basis, for Govt. of Maharashtra. It filed return of income on 15-10-2010 declaring total income of Rs. 9,16,485/-. The case was selected for scrutiny and the total income of the assessee was determined at Rs. 2,19,32,170/- after making addition of Rs. 2,10,15,680/- to the total income returned on account of short term capital gains. A survey action u/s 133A of the Income-tax Act 1961 (hereinafter referred to as “the Act”) was conducted in the business premises of the assessee on 27-01-2010. On examination of books of account found during the survey, it was noticed that the assessee was awarded a contract of Hydro Project by the Govt. of Maharashtra on BOT basis, namely Ambai Hydro Project, Kolhapur in F.Y. 2007-08. The assessee started work on this project and incurred an expenditure of Rs. 3,15,75,730/- including advance paid to Boeing Forest Company for supply of Turbine. Subsequently, said project was sold to M/s. R.M. Mohite Textiles Pvt. Ltd. for a consideration of Rs. 4,87,00,00/-. The Director of the company was confronted with the above findings on 27-01-2010 whose statement was recorded. In his statement, the Director of company stated as under:

“I am Director in Arch Power Projects Pvt. Ltd. and the said company has taken a project on BOT basis at Amboi Hydro Project, Kolhapur in the year 2007. Against this project the company had spent about Rs. 3,15,75,730/- including advance to Boeing Forest a company for supply Turbine. However, due to financial problems, we sold the said project to R.M. Mohite Textiles Pvt. Kolhapur for a sum of Rs. 4,87,00,000/-. The difference represents profits which I am offering to tax on the hands of the company. A tentative profit and loss account drawn in this regard is being provided to you. The company has not paid Advance tax on this profit, which will be paid in March 2010, provided approval from State Government is received in this regard.”

4. During the course of assessment proceedings, it was submitted by the assessee that as the approval for transfer of project was not received from State Govt. on or before 31-03-2010, the profit from transaction was not recognised in the books of account for the year. The A.O was not satisfied with the explanation of the assessee. The A.O summarized sequence and chronology of events relating to the said project as mentioned in his assessment order which is on record. The A.O has observed that the assessee has entered into agreement vide MOU on 30-10-2009 for transfer of Ambai HEP as per clause ^„A-14” of the contract. The A.O further noted that M/s. R.M. Mohite Textiles Pvt. Ltd. (hereinafter referred to as RMMTL) has made payment of 90% of the consideration which was accepted by the assessee-company. Subsequently, said RMMTL has taken over possession of the property and started the work. Thereafter, the A.O issued a summons to the Director of RMMTL and on verification, the A.O observed that the facts mentioned above are found to be correct. The A.O found that during the year under consideration, the assessee has received an amount of Rs. 4,37,00,000/- out of total sale consideration Rs. 4,87,00,000/- for transfer of said project which was 90% of total consideration. As per the A.O said RMMTL has incurred substantial amount of expenditure at the site. Thereafter the A.O came to the conclusion that the assessee has transferred the possession to the transferee who has commenced the work relating to the said project. In view of these developments, the A.O concluded that the assessee has handed over the possession of the project to RMMTL and the transferee has started its work at the site and paid 90% of total consideration. The A.O emphasised that major risk and reward associated with the project has been transferred during the year itself and the transferee has taken possession of the property and done some act in furtherance of the contract. Therefore, according to the A.O there is transfer of property as per section 2(47) of the Act and the gains from the transaction are liable to be assessed u/s 45 of the Act. As the assessee has held the capital asset for less than 36 months immediately preceding the date of its transfer, the gain was brought to tax as short term capital gains. Aggrieved the assessee went in appeal before the ld. CIT(A).

5. On appeal, the ld. CIT(A), after considering the detailed submissions made on behalf of the assessee, observed and held as follows:

“4.3 The contentions raised by the Ld. Counsel for the appellant are carefully examined in the light of the facts of the case and the material placed on record. The appellant company is into the business of development of Hydro projects awarded by the Government of Maharashtra and as per the Director’s report; the company has been allotted work of construction of three Hydro Power projects by Govt. of Maharashtra. One of the projects named as “Amboi Hydro Project” was awarded on BOT basis and the appellant has initiated steps for starting the said project development during FY 2007-08. As per the balance sheet of the appellant company as on 31.03.2010, appellant made advance payment of Rs, 67/50,000/- for purchase of Hydro machine from Boving Fouress Pvt. Ltd. which is shown under the head ‘loans and advances’ and also incurred development expenditure of Rs. 2,09,34,320/- on this project which is shown as ‘work in progress’ under head ‘Inventories‟’. The company offloaded Ambal Hydro Project to RMMTL as per the MoU dated 30.10.2009 for a consideration of Rs, 4.87 Cr. and out of which, the appellant received an amount of Rs. 4.37 Cr. during the year and the same was shown as ‘advance from ‘customer’ in the balance sheet. The case of the, appellant is that role of appellant in the execution of project got marginalized (though not totally extinguished) only after approval from WRD, Govt, of Maharashtra on 03/06/2011 and therefore the gains, if any, from the transfer of the project cannot be brought to tax in the veer under consideration. The other contention of the appellant is that provisions of sec. 2(47} and sec. 53A, as relied upon by the Assessing Officer, deal with the situation of transfer of an immovable property, whereas present case relates to intended transfer of interest in the Hydro Project arid such proposed transfer transaction cannot be subjected to provisions of TPA and capital gains u/s 45. On the other hand, the stand of the .Assessing Officer is that the all significant risks and rewards in the subject project have already been transferred to the transferee as per MoU and the transferee has also commenced the work on the project and therefore the said gains on transfer of the project is liable to be assessed under the head ‘short term capital gains’ for the year under consideration. Therefore, the first point for determination in the present case is timing of recognition of income from transfer of subject Hydro project to RMMTL viz. whether it is in the year of signing of MOU on 30.10.2009 or in the year of approval from the WRD, State Govt. on 03/06/2011. In the first place it is to be mentioned that during the survey operation u/s 133A in appellant group of cases, a sum of Rs. 1,61,00,000/- was declared as additional income on account of offloading of subject project by the appellant. The relevant question and answer from the statement dated 27/01/2010 of Shri klshor Mahadeo Howale, one of the directors of the appellant company is extracted below:

Q.6 Please state about the project under Arch Hydro Power Project Pvt. Ltd.?

Ans: I am director in Arch Hydro Power Projects Pvt. Ltd. and the said company has taken a project on .BQT basis at Ambai Hydro Project, Kolhapur in year 2007. Against this project the company had spent about Rs. 3,15,75,730/- including advance [0 Boeing Forest a company for supply of Turbine. However, due to financial problems we sold the said project to R. M. Mohite Textile Pvt. Ltd. Kolhapur for a sum of Rs. 4,87,00,000/-. The difference presents profits which I am offering to tax in the hands of the company. A tentative profit and loss account drawn in this regard is being provided to you. The company has not paid advance tax on this profit which will be paid in March, 2010, provided approval from State Government is received in this regard.”

4.3.1 In continuation of the statement the appellant also filed copy of the P & L a/c for the period 01-04-2009 to 31-12-2009 during the survey, wherein the net profit from the sale of the project is shown at Rs. 1,03,74,270/- from the transaction. It is also submitted that the said consideration of Rs. 4.87 crores was utilized for investment in shares of Arch Infra Project Nirman Pvt Ltd and payment of dividend. In this background, it is now examined when the Income from subject transfer has accrued to the appellant and for deciding the timing of recognition of income from sale of said flats, it is necessary to refer to the Accounting Standard (AS}-9. As stipulated in theAS-9J a key criterion For determining when to recognize revenue is transfer of significant risks and rewards of ownership to the buyer. Another important criterion for recognition of income from such transactions is that there is no significant uncertainty regarding ultimate collection of the amount of consideration. The facts of the’ present case are now tested vis-a-vis these criteria laid down in Accounting Standard (AS)-9.

a) Transfer of all significant risk and rewards to the buyers.

4.3.2 By virtue of MoU entered into by the appellant, certain rights are assigned to the transferee on payment of 90% of the consideration and the transferee company RMMTL has taken over the project and commenced spade work at the site of the project. The Director of RMMTL also filed the details before the Assessing Officer and these details and the books of account of RMMTL indicate that RMMTL has incurred substantial amount of expenditure at the subject project site and the year wise expenditure incurred by RMMTL as noted in the assessment order is given as under:-

4.3.3 Thus, the transferee has taken over the subject project by virtue of MoU (clause 7of the MoU) and has also done some act in furtherance of the understanding in the MoU. The Memorandum of understanding (MoU) for transfer of project entered on 30-10-20209 was also in the knowledge of the State Government even before the format approval is accorded for the transfer by the State Government. Therefore, it is difficult to accept the contention of the Ld. counsels that ‘significant risk and rewards’ are not transferred in spite of signing MoU which is legally enforceable contract and receipt of 90% of consideration from RMMTL and taking over the project by RMMTL. Thus, in the instant case, the MoU results in or coincides with the transfer of significant risks and rewards of ownership to the buyer and therefore the revenue from the transfer of subject project has to be recognized in the year of signing the MoU i.e. year under consideration.

Expectancy of Ultjmate realization:

4.3.4 As per the Accounting Standard-9, the other criterion is that the revenue should be recognized when it becomes measurable and the surrounding circumstances give rise to reasonable expectancy of ultimate realization. In the instant case, the consideration for transfer of the project was fixed and specified in the MoU and the revenue from transfer of the project was measurable and in fact, as already mentioned 90% safe consideration was received by the appellant on signing MoU. Therefore, the other criterion that no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the project is also satisfied in the case of the appellant.

4.3.5 Thus, for all practical purposes, the criteria as specified in AS-9 for the recognition of revenue in respect of transfer of subject project in this year are satisfied in the case of the appellant and the subsequent approval of Govt. of Maharashtra in the next year is only a formality to be complied with by the appellant as per the clauses of the tender document and that by itself does not postpone the accrual of income from transfer of subject project.. The dominion over execution of the project was. passed on to the transferee on Signing MoU and payment of 90% of the consideration as per MoU and therefore amount received by appellant could not be held to be mere advance and the profit from transfer of subject projects liable to be assessed in this year.

4.3.6 The next point to be decided whether the profits arising from the transfer of the subject project are liable to be assessed as business profit or under the head capital gains’ as considered by the Assessing Officer. As already mentioned, the appellant has been engaged in the business of execution of irrigation projects for Govt. of Maharashtra and the Director’s report for this year also confirms this position. Even the expenditure incurred on the subject project as on 31.03.2010 is shown under the head ‘inventories’ In the books of account of the appellant company. This is not a case where the appellant transferred the land by virtue of MoU entered with RMMTL. What is transferred or assigned to RMMTL as per MoU is the rights for the execution the subject project as per the tender document. In any case, project land is a government property and the same cannot be transferred. Even at the time of survey, the profits arising from the transfer are offered as business income by drawing a separate P & L a/c for the period from 01-04-2009 to 31-12-2009 in respect of this project. Provisions of sec. 2(47) and see. 53A of T P Act, referred by the Assessing Officer, deal with a situation of transfer of an immovable property or interests in the immovable property and the present case relates to transfer of interest in the Hydro Project and such a transfer cannot be subjected to provisions of TPA and see, 45of the I. T. Act. Further, the decision in the case of CIT vs. Podar Cement P. Ltd. (226 ITR 625)(SC){ referred by the Assessing Officer, cannot be applied to the facts of the present case as what is transferred in the present case is creation of .a hydro project i.e, interest in the Hydro Project and not land or property per seas in the case of the Podar Cement’s case. Therefore, in my considered opinion the- profits and gains arising from such transfer of interest in the subject project is liable to be assessed under the head ‘income from business’ as the appellant is in the business of execution and development’ of such projects and the interest in the project was transferred/assigned to RMMTL in the course of business of the appellant. Accordingly, the Assessing Officer is directed to assess the gains of Rs. 2,10,15,680/- as income from business instead of short term capital gains. Grounds of appeal No.1 and 4 are rejected and Grounds of appeal No, 2 and 3 are treated as allowed for statistical purpose as it is held that the gains are taxable under the head ‘income from business’ and not under the head ‘short term capital gains’.”

6. The ld. D.R relied on the order of the ld. CIT(A).

7. Having heard the ld. D.R we find that the ld. CIT(A) has held that the gains are taxable under the head ‘income from business’ and not under the head ‘short term capital gains‟. The reasoning assigned by the ld. CIT (A) is cogent and we find no infirmity with the findings and the decisions rendered by the ld. CIT (A). We accordingly uphold his order.

8. In the result, appeal of the assessee is dismissed.

Order pronounced in the open Court on this 22^nd day of November, 2022