2023 (5) TMI 1442 - AT - Income Tax

Revision u/s 263 - Capital gain computation - As per CIT AO s acceptance of the income offered by the assessee under the head Capital Gains arising from the development agreement for sale of land and sharing of revenue from constructed flats was erroneous and prejudicial to the interests of the Revenue HELD THAT - As per covenants of the Development Agreement it is unambiguously clear that the risk and the cost of development of the housing project is that of the developer and of not the assessee. Although the assessee is compensated by way of profit sharing model but the financial interest of the assessee is fairly secured by way of advance deposit of Rs.10 crores which of course would be adjusted gradually on the sale of complete residential units (Re. Clause 16 Distribution Mechanism). The assessee is not liable for any damages on account of delay or losses in the project. The entire risk and liability to bear the damages is that of the developer. Possession and the ownership of the land shall continue to be with the assessee/owner till the time possession of the completed residential units is handed over to the respective buyers of the flats. The relationship between the developer and the assessee is strictly on principal to principal basis. Thus from the above covenants in the development agreement it can be safely deduced that it is not a case of joint development agreement as argued by ld. DR. Contention of the Revenue is that the AO has failed to conduct enquiries before completing the assessment - A perusal of documents on record reveal that the assessment order was selected for limited scrutiny to examine the genuineness of the capital gains the AO has conducted primary enquires. The agreement on the basis of which the assessee has offered income from land is the same which was subject matter of scrutiny in AYs 2013-14 and 2014-15. For AY 2013-14 after enquiries the AO accepted the income from land as capital gains. In subsequent assessment year the AO again accepted the income that germinated from same development agreement as capital gains. No material is brought on record to show that the assessment for AY 2013-14 and 2014-15 were distributed. Therefore it can be presumed that they have attained finality. The impugned assessment year is a third assessment year. Since the agreement consequent to which the income was offered to tax as capital gains was the same there could have been no deviation in the nature of income. We are live to the fact that the principle of res judicata do not apply in income tax proceedings nevertheless where there is no change in the facts and circumstances from the preceding assessment year the Rule of Consistency cannot be ignored (Re. Distributors Baroda (P) Ltd. vs. Union of India 1985 (7) TMI 1 - SUPREME COURT and Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT Whether there is no discussion in the assessment order with respect to genuineness of the capital gains for which the case of assessee was selected for limited scrutiny ? - Undisputedly in the assessment order there is no discussion with respect to the capital gains on sale of land. However from the documents on record it is evident that the AO has issued notice u/s 142(1) of the Act for making enquiry. The assessee has responded to the notice giving the details of the transactions. The AO thereafter has not made any further investigation in issue and was ostensibly satisfied with the reply. Merely for the reason that the AO has not discussed about the issue in the assessment order would not make the assessment order erroneous. In the case of CIT vs. Gabriel India Limited. 1993 (4) TMI 55 - BOMBAY HIGH COURT wherein under similar set of facts where the AO made no detailed discussion in the assessment order on an issue but had made enquiries regarding the nature of expenditure and had accepted the explanation furnished by the assessee passed the assessment order without even referring to the issue the CIT invoked revisional jurisdiction u/s 263 of the Act on the ground observing that the order of AO did not contain discussion on allowability of the claim in the assessment order. In the instant case the PCIT has directed to reframe assessment after re-examining the same Development Agreement from the perspective of PCIT. Merely for the reason that the AO has not deliberated in the assessment order on the issues for which the case of assessee was selected for limited scrutiny and the view taken by the AO is one of the possible view with which PCIT does not agree cannot be a reason for revision. The jurisdiction u/s 263 of the Act can be invoked by the CIT/PCIT where any order passed under the Act by the AO is erroneous and is prejudicial to the interest of revenue. The sine qua non for exercising revisional jurisdiction u/s 263 of the Act is the order of AO should be erroneous and prejudicial to the interest of revenue. Both the conditions have to be satisfied simultaneously. In the instant case the Revenue has failed to show that the assessment order is erroneous. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisional jurisdiction under section 263 of the Income Tax Act, 1961 ("the Act") to revise the assessment order passed by the Assessing Officer (AO) for the assessment year (AY) 2015-16.

(b) Whether the AO's acceptance of the income offered by the assessee under the head "Capital Gains" arising from the development agreement dated 21.09.2010 for sale of land and sharing of revenue from constructed flats was erroneous and prejudicial to the interests of the Revenue.

(c) Whether the income arising from the development agreement should be treated as "Capital Gains" or as "Business Income" of the assessee.

(d) Whether the AO conducted adequate enquiries and verifications before passing the assessment order under scrutiny for the impugned AY.

(e) The applicability of the principle of consistency in taxation of income arising from the same development agreement across multiple AYs and the relevance of prior assessment orders for AYs 2013-14 and 2014-15.

(f) The legal effect of the terms of the development agreement, particularly the nature of relationship between the assessee and the developer, allocation of risk, and ownership of the land during development, on the characterization of income.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Jurisdiction and correctness of invoking section 263 revisional powers

Relevant legal framework and precedents: Section 263 of the Act empowers the Commissioner or Principal Commissioner to revise any order passed by the AO if it is found to be erroneous and prejudicial to the interests of the Revenue. Both conditions must be satisfied simultaneously. The revisional jurisdiction is not to be exercised merely because the Commissioner disagrees with the AO's view. The Supreme Court and High Courts have held that the AO's order must be shown to be "erroneous" and "prejudicial" for revision to be valid. Further, the Commissioner cannot direct re-examination unless the original order is shown to be erroneous. (CIT vs. Gabriel India Limited, 203 ITR 108 (Bombay) cited)

Court's interpretation and reasoning: The Tribunal noted that the AO had issued notice under section 142(1) for limited scrutiny to verify genuineness and correctness of capital gains declared by the assessee. The AO received detailed replies, conducted enquiries, and accepted the income as capital gains. The PCIT's contention that the AO failed to make necessary enquiries was not supported by material evidence. The AO's order, though cryptic and lacking detailed discussion on the scrutiny issue, was not held to be erroneous merely for that reason. The Tribunal relied on the precedent that absence of elaborate discussion in the assessment order does not render it erroneous if enquiries were made and the AO was satisfied with the explanations.

Key evidence and findings: The AO's notice under section 142(1), the assessee's detailed reply dated 01.11.2017, and the acceptance of income as capital gains in the assessment order dated 27.12.2017 were considered. The Tribunal found no material indicating that the AO's acceptance was without enquiry or that the order was erroneous or prejudicial.

Application of law to facts: The Tribunal held that the PCIT's order under section 263 was not sustainable as the AO's order was not shown to be erroneous or prejudicial. The revisional jurisdiction was improperly invoked.

Treatment of competing arguments: The Revenue argued that the AO's order was cryptic and lacked application of mind, justifying revision. The Tribunal rejected this, emphasizing that the AO had made enquiries and was satisfied, and that disagreement alone does not justify revision.

Conclusion: The revisional jurisdiction under section 263 was wrongly invoked; the AO's order was neither erroneous nor prejudicial.

(b) Characterization of income: Capital Gains versus Business Income

Relevant legal framework and precedents: The nature of income from sale or development of land depends on facts such as ownership, intention, risk, and mode of transaction. Capital asset held as such and sold ordinarily results in capital gains. Conversion of capital asset into stock-in-trade or joint development with risk-sharing may attract business income treatment. The principle of consistency in tax treatment across assessment years is recognized but not absolute.

Court's interpretation and reasoning: The Tribunal examined the development agreement dated 21.09.2010 in detail. The agreement established that the assessee was the sole owner of the land, granting development rights to the developer (Godrej Properties Limited). The developer was solely responsible for all development activities, costs, risks, and liabilities. The assessee received 50% share of gross sales revenue from flats constructed on the land as consideration.

The Tribunal highlighted key clauses:

• Clause 3: Developer paid an interest-free refundable security deposit of Rs. 10 crores to the owner to secure performance.
• Clause 11: Developer undertook to obtain permissions and bear all costs and risks of development.
• Clause 14: Developer responsible for all development works at its own cost and risk; owner to provide assistance only.
• Clause 23: Developer liable for damages on delay; owner not liable for losses.
• Clause 25: Ownership and possession of land remain with the owner until flats are handed over to buyers.
• Clause 28: Relationship strictly principal-to-principal; no partnership or joint venture.

From these, the Tribunal concluded that the assessee did not share development risks or convert the land into stock-in-trade. The revenue sharing was a mode of consideration for sale of land rights, not profit sharing in a joint development business. The owner's interest was secured by the security deposit. The agreement explicitly negated any partnership or joint venture.

Key evidence and findings: The development agreement was the primary document. Prior assessment orders for AYs 2013-14 and 2014-15, where the income was accepted as capital gains, were also relevant. The Tribunal noted no change in facts or circumstances in the impugned AY.

Application of law to facts: The income was correctly characterized as capital gains arising from sale of land held as capital asset. The Revenue's contention of business income based on joint development and risk sharing was rejected as contrary to the agreement's terms.

Treatment of competing arguments: The Revenue argued that the revenue sharing model indicated risk sharing and joint development, converting the land into business asset. The Tribunal rejected this on the basis of explicit contractual terms and the absence of risk or liability on the assessee. The assessee's reliance on the principle of consistency and prior accepted assessments was upheld.

Conclusion: Income arising from the development agreement was capital gains, not business income.

(c) Adequacy of AO's enquiries and principle of consistency in tax treatment

Relevant legal framework and precedents: The AO is required to make adequate enquiries and verifications before completing assessment. The principle of consistency mandates that tax treatment of similar transactions should not be arbitrarily altered without change in facts. However, each assessment year is independent, and res judicata does not strictly apply in income tax proceedings. (Re. Distributors Baroda (P) Ltd. vs. Union of India, 155 ITR 120 (SC); Radhasoami Satsang vs. CIT, 193 ITR 321 (SC))

Court's interpretation and reasoning: The Tribunal found that the AO had issued notices and received detailed replies. The AO accepted the income as capital gains in the impugned AY, consistent with acceptance in AYs 2013-14 and 2014-15. The Revenue did not produce material to show that the earlier assessments were disturbed or erroneous.

The Tribunal acknowledged that the AO's assessment order was cryptic and lacked detailed discussion on scrutiny issues but held that absence of detailed discussion does not imply lack of enquiry or erroneous order. The AO's satisfaction with the assessee's explanation was sufficient.

Key evidence and findings: Notices under section 142(1), replies from the assessee, and prior assessment orders were examined. No evidence of fresh facts or material warranting change in treatment was found.

Application of law to facts: The AO's enquiries were adequate for the limited scrutiny. The principle of consistency was applicable as there was no change in facts or circumstances. The Revenue's contention that each AY is independent was accepted in principle but not to justify arbitrary change without new material.

Treatment of competing arguments: The Revenue relied on case law emphasizing independence of each AY and criticized reliance on prior assessments. The Tribunal balanced this by recognizing independence but upholding consistency in absence of changed facts.

Conclusion: The AO conducted adequate enquiries, and the principle of consistency supported acceptance of income as capital gains.

3. SIGNIFICANT HOLDINGS

"The sine qua non for exercising revisional jurisdiction u/s 263 of the Act is, the order of AO should be erroneous and prejudicial to the interest of revenue. Both the conditions have to be satisfied simultaneously. In the instant case, the Revenue has failed to show that the assessment order is erroneous. Both the conditions for exercising revisional jurisdiction u/s 263 of the Act are not satisfied in the instant case."

"Merely for the reason that the AO has not deliberated in the assessment order on the issues for which the case of assessee was selected for limited scrutiny and the view taken by the AO is one of the possible view with which PCIT does not agree, cannot be a reason for revision."

"From perusal of above covenants of the Development Agreement, it is unambiguously clear that the risk and the cost of development of the housing project is that of the developer and not the assessee. Although, the assessee is compensated by way of profit sharing model but the financial interest of the assessee is fairly secured by way of advance deposit of Rs.10 crores... The relationship between the developer and the assessee is strictly on principal to principal basis."

"The assessee has never converted the land held as capital asset into stock in trade. The income from sale of land pursuant to the development agreement is rightly offered and accepted as capital gains."

"Where there is no change in the facts and circumstances from the preceding assessment year, the Rule of Consistency cannot be ignored."