Case Law Details
The taxpayer instead of developing the land, transferred the development rights in respect of part of the land to a separate construction company.As per the agreement, the taxpayer jointly with the trust was required to convey the land to the proposed buyers. Instead of developing land, the taxpayer parted with the development rights in respect of part of the land forever. The possession of the land had also been given during the year along with development rights. This was an independent activity having no connection with the development of the remaining part of the land.
The taxpayer was following mercantile system of accounting as per which income accrues when it becomes due for payment. In the instant case, the entire amount became due to the taxpayer in the relevant year on signing of development agreement and on handing over of the possession of the land. Under the mercantile system of accounting the accrual of income does not depend upon receipt of income. Therefore, the income had accrued during the year since the transfer was complete during the year. The postponement of payment does not stop accrual of income. Therefore, even if part of the payments were received in subsequent years, the entire income had accrued during the year. However, the Tribunal allowed the deduction in respect of cost of acquisition of development right.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No. : 402/M/2008 – Assessment Year : 2004-05
ITA No. : 2643/M/2010 – Assessment Year : 2004-05
ITA No. : 3046/M/2010 – Assessment Year : 2005-06
ITA No. : 2644/M/2010 – Assessment Year : 2006-07
ITA No. : 2645/M/2010 – Assessment Year : 2007-08
Hillside Construction Company. Pvt. Ltd.
Vs
Dy. Commissioner of Income tax
Date of Pronouncement : 30.5.2012
ORDER
PER RAJENDRA SINGH, AM:
These appeals by the assessee are directed against different orders of CIT(A) dated 8.10.2010, 27.1.2010, 25.1.2010, 25.1.2010 and 25.1.2010 for the assessment years 2004-05, 2004-05, 2005-06, 2006-07 and 2007-08 respectively. As the issue raised in all the appeals is identical, these appeals are being disposed off by a single consolidated order for the sake of convenience. The common dispute raised in all these appeals is regarding accounting and accrual of income from sale of land as per development agreement with the developers.
2. We first take up the appeal of the assessee for the assessment year 2004-05 in ITA No.402/Mum/2002. This appeal is in relation to assessment made by AO under section 143(3) of the Income tax Act. The dispute raised is regarding accrual of income from sale of land as per development agreement. The assessee was engaged in the business of development and construction of land in the village Yerwada, in Pune Dist. The assessee was following mercantile system of accounting and was following policy of declaring income from the development project from year to year on the basis of 25% of the WIP of the project. A trust named as Mukund Bhavan Trust had acquired interest in 326 acres of land in village Yerwada. The trust was facing difficulty in release of land from Government of Maharashtra. The trust entered into an MOU with the promoters of the assessee company as per which the promoters were required to make efforts for release of the land from the Government and assessee was to be given development rights in the land to a certain extent for agreed consideration. Because of the efforts made by the promoters of the assessee company, land admeasuring 108 acres and 26 gunthas was released in which the assessee was given development rights to the extent of 32% on payment of consideration © Rs.50 per sq.ft. in addition to the earnest money deposit of Rs.1.00 crores.
2.1 During the year under consideration, the assessee jointly with the trust granted development rights to Mahanagar Construction in respect of part of the land for a consideration, of Rs.7,87,50,000/- vide agreement dated 29.1.2004 in which the share of the assessee © 32% came to Rs.2.52 crores. Out of the said share, the assessee received a sum of Rs.92.00 lacs during the assessment year 2004-05 and balance was received in instalments in subsequent years. The assessee offered income from transfer of development rights © 25% of the receipt taking the transfer as integral part of the development project. The assessee argued that the transfer of development right was part of one single individual project and income had to be declared by the assessee on the same basis as in case of development project. The AO however did not accept the contentions raised. It was observed by him that the assessee was following mercantile system as per which the income from transfer of development rights had accrued during the year irrespective of the fact that part of the payment had been received subsequently. The AO therefore held that the entire income of Rs.2.52 crores had to be assessed in the assessment year 2004-05. The assessee jointly with the trust had paid a sum of Rs.20.00 lacs to four persons for removing encroachments in relation to the land. The AO, therefore allowed 32% of the said payment i.e. Rs.6,40,000/- as deduction from the income of the transfer of development rights. The assessee also allowed other expenses incurred in connection with the transfer. Thus total deduction allowed by the AO was Rs.24,11,909/- and balance amount of Rs.2,27,88,091/- was added to the total income. The assessee had made alternate claim before AO that in case the entire income was assessed, the proportionate cost of land should be allowed as deduction which was rejected by the AO on the ground that the assessee had transferred only interest in land and not the land.
3. The assessee disputed the decision of AO and reiterated the submissions made before AO that the assessee had obtained development rights of the land from Mukund Bhavan Trust and had assigned part of the rights against which consideration receivable was Rs.2.52 crores. It was also submitted that assignment of development rights was integral part of the project and therefore the income from the assignment should be computed on the same basis as in the case of the entire project. Accordingly it was argued that income offered by the assessee, © 25%, the basis adopted by the assessee for offering income from the project had to be accepted. Alternatively it was also submitted that the assessee should be allowed proportionate cost of land for acquiring joint right, title and interest in the land. CIT(A) however did not accept the contentions of the assessee that assignment of development rights was integral part of the single individual project. The transfer of part of development right was independent of the land being developed by the assessee. He also noted from the agreement that the assessee jointly with the trust was required to convey land to the proposed buyers of the developed property and in fact possession of the land had been given to Mahanagar Construction. The agreement also provided that the developer was entitled to demarcate or amalgamate the said land with other property if so desired. The assessee jointly with the trust had handed over possession of the land along with development rights against which part consideration had been received and therefore, the transfer was complete in the relevant year under section 53A, of Transfer of Property Act. Thus the entire revenue receivable by the assessee was to be recognized in the year of transfer. CIT(A) further observed that there was no reason for the assessee to defer revenue recognition till the entire development of the property. He, therefore upheld the stand of the AO that the entire amount receivable as per development agreement had to be assessed in this year. CIT(A) also rejected the alternate claim of the assessee to allow proportionate cost of land while computing income. Aggrieved by the said decision, assessee is in appeal before the Tribunal.
4. Before us the ld. AR reiterated the submissions made before lower authorities that the transfer of development right was integral part of the entire development project which was indivisible, and therefore, income had to be recognized on the same basis as done by the assessee. Alternatively it was submitted that in case entire income was recognized in this year, the project cost of acquisition of joint right, interest in the land and prorata expenditure incurred on the acquisition should be allowed. The ld. AR placed reliance on the judgment of Hon’ble High Court of Bombay in the case of K.H. Mody (8 ITR 179) for the proposition that in case of single venture the profit arises only when the venture, comes to an end. The ld. DR on the other hand supported the order of CIT(A) and placed reliance on the findings given in the orders of authorities below.
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding assessment of income receivable by the assessee from the transfer of development rights. The assessee along with Mukund Bhawan Trust had acquired development rights in land admeasuring 108 acres and 26 gunthas in which share of the assessee was 32%. During the relevant year, assessee jointly with the trust granted development rights in respect of part of land to Mahanagar Construction for a total consideration of Rs.7,87,58,000/- in which share of the assessee © 32% was Rs.2.52 crores out of which the assessee received during the year a sum of Rs.92.00 lacs and balance amount was received in instalments in subsequent years. The issue is whether the entire amount of Rs.2.52 crores has to be assessed in the relevant assessment year i.e. assessment year 2004-05 in which the development rights were granted or income should be assessed © 25% as done by the assessee in case of the development project.
5.1 The case of the assessee is that granting of development rights was an integral part of development project which was one indivisible project and therefore, the income had to be assessed © 25% as part of the development project. We, are however unable to accept the claim made by the assessee. The assessee had development rights in respect of certain piece of land. The assessee instead of developing the land, transferred the development rights in respect of part of the land to a separate construction company. As per the agreement, the assessee jointly with the trust was required to convey the land to the proposed buyers and possession of the land had also been given during the year along with development rights. Thus instead of developing land, the assessee parted with the development rights in respect of part of the land forever. This was an independent activity having no connection with the development of the remaining part of the land. The assessee was following mercantile system of accounting as per which income accrues when it becomes due for payment. In this case, the entire amount became due to the assessee in the relevant year on signing of development agreement and on handing over of the possession of the land. The transfer was complete during the year and income, therefore, had accrued during the year as in mercantile system of accounting, accrual of income does not depend upon receipt of income. The postponement of payment does not stop accrual of income. Therefore, even if part of the payments were received in subsequent years, the entire income had accrued during the year.
5.2 The assessee has placed reliance on the judgment of Hon’ble High Court of Bombay in case of K.R. Mody in (8 ITR 179). The said case in our view is distinguishable. In that case assessee had earmarked certain piece of land which was divided in 1000 plots out of which 208 plots were sold during the year and the issue was regarding taxability of income from sale of these plots. The amended question in that case admitted by the Hon’ble High Court reproduced at page 185 was “whether there was any evidence to support the finding of the Astt. Commissioner that the profit if any made on sale and purchase of land or any part thereof was profit earned by the assessee in the business of purchasing developing and selling land,” which has been answered by the Court in the affirmative. Thus only the limited question of fact slated above had been answered by the Hon’ble High Court who did not go into any other aspect. The case therefore, cannot be considered as precedent for the issue raised in this appeal regarding assessability of income. Moreover, we have already held that the outright transfer of part of development right was a different activity which did not depend on the development of the remaining land. The judgment therefore is distinguishable and not applicable. We, therefore, for the reasons given earlier hold that the entire income has to be assessed in the relevant year and accordingly confirm the order of CIT(A). However, we agree with alternate claim of the assessee that in case the entire income was assessed, the cost of acquisition of development right has to be allowed as deduction. We, therefore, set aside the order of CIT(A) on this point and allow alternate claim of the assessee.
Appeals in ITA Nos.3046/M/10, ITA2644/M/10 and ITA No.2645/M/10 for assessment years 2004-05 to 07-08 :-
6. In these appeals also the dispute raised is identical to the dispute in appeal No.402/M/2008 with the only difference that assessment in these years had been made under section 143(3) r.w.s. 153A subsequent to the search conducted in case of the assessee on 22.3.2007. In these years also the assessee had received certain consideration in respect of part transfer of the development rights. In assessment year 2004-05, the assessee as per development agreement dated 27.1.2004 with M/s. Mahanagar Construction was entitled to received Rs.2.52 crores. The income as per this agreement had already been considered in the original assessment which was subject matter of appeal in ITA No.402/M/2008. However, after search, the assessment had been reopened and fresh assessment had been made under the provisions of sec.153A in which the AO again assessed the entire income from the transfer of development rights.
6.1 In assessment year 2005-06, the assessee had further transferred development rights as per two agreements entered into with M/s. Mahanagar Construction and M/s. Mahanagar Developers in respect of some other portion of the land as per which sums of Rs.81,28,000/- and Rs.2,99,52,000/- respectively were receivable by the assessee out of which sums of Rs.42,18,588/- and Rs.1,56,63,692/- had been received during the year and balance amount were receivable in subsequent years. In assessment year 2005-06, the assessee had granted further development rights vide agreement dated 26.5.2005 as per which Rs.1,85,64,000/- was receivable out of which a sum of Rs.1,36,53,720/- had been incurred during the year. Similarly in assessment year, 2007-08 the assessee as per agreement dated 29.12.2006 with Indo Saigon Agency was entitled to receive a sum of Rs.20.00 crores for assignment of right, interest of the assessee to obtain constructed premises on the area retained by the assessee under agreement dated 28.10.2004 with K. Raheja Corpo (P.) Ltd. The AO as per stand taken in the assessment under section 143(3) for assessment year 2004-05 held that the entire sum receivable as per agreement was assessable as income of the relevant year against the claim of the assessee to assess income © 25%, the method followed by the assessee in case of the main project treating the entire project as one individual project. In appeal, CIT(A) has upheld the view taken by the AO to assess the entire amount receivable in the relevant years. However, he has allowed the claim of the assessee that prorata cost of land incurred by the assessee in relation to right/interest in the land transferred by the assessee has to be allowed as deduction. Aggrieved, by the decision of CIT(A), the assessee is in appeal in these years also claiming that the income had to be assessed only @ 25% as per basis adopted by the assessee to recognize income from the project treating the same as single individual project.
7. Before us, the ld. AR for the assessee reiterated the submissions made before lower authorities that income has to be assessed @ 25% treating the transfer of development rights as part of one individual project. The ld. DR on the other hand supported the orders of authorities below.
8. We have perused the records and considered the rival contentions carefully. The dispute is regarding taxability of income from transfer of development rights during the year. There is no dispute that the assessee had transferred development rights and also handed over possession of the corresponding land. The issue is identical to the issue raised in ITA No.402/Mum/2008 and therefore, following our decision in para-5 we hold that the entire income had to be assessed in the relevant years in which the development rights were transferred and accordingly we confirm the orders of CIT(A) on this point. As regards deduction on account of expenditure incurred on acquisition of development rights CIT(A) has already allowed the same and therefore, there is no dispute raised on this point.
9. In the result appeal of the assessee in ITA No.402/M/2008 is partly allowed whereas appeals in ITA Nos.2643/M/10, 3046/M/2010, 2644/M/2010 and 2645/M/2010 are dismissed.
Order pronounced in the open court on 30.5.2012.
The judgement is as per law and accrual system of accounting as per law. But what the Lawer or the CA of the firm failed to guide the client is payment of taxes in the year of accrual and he need cash/money for that. In our Indian system there is no support to the injured party where taxes once levied become a liability and should be paid, but when the actual payment is defaulted by the party entirely including the principal of sale or transaction. There is no remedy to it. Why not the court also look into the aspect of it?