2025 (3) TMI 1493 - AT - Income Tax

Taxability of non-refundable nonadjustable amounts received by the assessee - unexplained cash - HELD THAT - It appears from the records that the assessee spent development charges expenditure. Though permission was obtained by the land owner it was agreed upon between the land owners and the assessee before us that the project is to be developed or get it developed by Root Developers which is why bank guarantee was also given for payment of external development charges which proves that assessee is not other than a developer. In fact being the balance sheet as on the date on 31.3.2010 is clearly depicted that the assessee incurred cost as the cost of the project. Initially the agreement was made between the assessee and the land owners but subsequently construction was admittedly done by the CHD Developers. Page 92 of the Paper Book-1 evidencing that Rs. 25 cr is included in Rs. 115 cr. as the total sale proceeds. The assessee s claim that the same has already disclosed. Under these facts and circumstances of the case we are directing the AO to verify this particular aspect of the matter as to whether Rs. 25 crore received by the assessee as security deposit is included in Rs. 115 cr. If it is found then assessee be given relief accordingly. Otherwise orders be passed in accordance with law. Accordingly these two appeals preferred by the assessee are allowed for statistical purposes.

Summary

The core legal questions considered in this case revolve around the taxability and characterization of amounts received by the assessee from collaboration agreements relating to real estate development projects. Specifically, the issues include:

1. Whether the amounts received by the assessee from M/s CHD Developers Ltd., including non-refundable, non-adjustable sums, constitute business income taxable on the Percentage of Completion Method (POCM) basis or are capital gains arising from transfer of land rights.

2. Determination of the taxability of income in the hands of the land owners versus the assessee, particularly regarding the division of consideration under the collaboration agreements.

3. The validity and existence of the partnership or collaboration agreements, especially the agreement dated 17/07/2006, and their impact on the assessment of income.

4. The correct year of assessment for capital gains arising from the conversion of land into stock-in-trade.

5. The treatment of development charges, external development charges (EDC), and interest during construction (IDC) expenses incurred by the assessee.

6. Whether the non-refundable, non-adjustable amounts received by the assessee should be treated as security deposits or taxable income.

Issue-wise Detailed Analysis

1. Taxability and Characterization of Amounts Received from Collaboration Agreements

The legal framework involves provisions of the Income Tax Act, 1961, particularly sections 45(2) relating to capital gains on conversion of capital assets into stock-in-trade, and principles governing business income recognition, including the Percentage of Completion Method (POCM) for real estate developers.

The Court examined the collaboration agreements dated 17/07/2006 and 13/02/2010. The agreement of 13/02/2010 between M/s CHD Developers Ltd., the land owners, and M/s Roots Developers Pvt. Ltd. stipulated that the land owners and M/s Roots Developers Pvt. Ltd. were entitled to 34.5% of the saleable area, with M/s CHD Developers Ltd. agreeing to pay Rs. 25 crores as a non-refundable, non-adjustable amount to M/s Roots Developers Pvt. Ltd.

The Assessing Officer (AO) and Addl. Commissioner of Income Tax (Addl. CIT) found that the land owners had a marketable title and that the land was converted into stock-in-trade upon signing the collaboration agreement in 2010. Capital gains were held to arise at that point, and subsequent income was treated as business income.

The AO computed capital gains based on fair market value obtained from the Tehsildar, applying Rs. 85 lakhs per acre as the valuation.

The assessee contended that the amounts received, including Rs. 13 crores and Rs. 12 crores in AYs 2010-11 and 2011-12 respectively, were business income recognized on POCM basis, as the assessee was a developer. The AO and CIT(A) disagreed, holding that the assessee was not the developer but merely facilitated the collaboration agreement.

The CIT(A) further held that the Rs. 25 crores received by M/s Roots Developers Pvt. Ltd. was revenue in nature, taxable in the year of receipt, relying on the Supreme Court decision in G.S. Homes & Hotels (P) Ltd. v. CIT, which held that maintenance deposits are taxable.

Application of Law to Facts: The Court noted the absence of evidence supporting the existence of M/s Roots Developers Pvt. Ltd. as a partnership firm during the relevant period and discrepancies in the collaboration agreements seized during survey and those submitted by the parties. This led to the conclusion that the agreement dated 17/07/2006 lacked validity for tax purposes.

The Court accepted the view that capital gains arose in the hands of the land owners upon conversion of land into stock-in-trade on 13/02/2010, and income over and above Rs. 75 crores (the amount payable to land owners) received by M/s Roots Developers Pvt. Ltd. constituted business income.

Treatment of Competing Arguments: The assessee argued that it was a developer and that income should be recognized on POCM basis to avoid double taxation. The revenue contended that the assessee was not the developer and that the amounts received were taxable as revenue receipts when received, not on POCM basis.

Conclusion: The Tribunal upheld the view that capital gains are taxable in the hands of the land owners in AY 2010-11, while the excess amounts received by M/s Roots Developers Pvt. Ltd. are taxable as business income but not on POCM basis. However, the Tribunal directed the AO to verify whether the Rs. 25 crores non-refundable amount was included in the total sale proceeds of Rs. 115 crores and to grant relief accordingly.

2. Taxability of Income in Hands of Land Owners Versus Assessee

The Court analyzed the internal arrangement between the land owners and M/s Roots Developers Pvt. Ltd., noting that although no written agreement existed, an understanding existed that the land owners were entitled to Rs. 75 crores as consideration for their land rights. The balance amount was treated as business income of M/s Roots Developers Pvt. Ltd.

The CIT(A) held that capital gains on Rs. 75 crores are taxable in the hands of the land owners in AY 2010-11, while income over and above that amount received by M/s Roots Developers Pvt. Ltd. is business income.

The Court found that the land owners had not claimed any business income or income under any other head for the share in sale proceeds beyond Rs. 75 crores, and M/s Roots Developers Pvt. Ltd. had claimed business income on POCM basis for the balance.

Application of Law to Facts: The Court applied principles of income recognition and capital gains taxation to determine the correct assessee for tax purposes. The absence of written agreements did not preclude recognition of the internal arrangement based on conduct and evidence.

Conclusion: The taxable capital gains are rightly assessed in the hands of the land owners, while the business income is assessable in the hands of M/s Roots Developers Pvt. Ltd.

3. Validity and Existence of Partnership/Collaboration Agreements

The Addl. CIT found that the assessee failed to produce original partnership deed, balance sheets, cash books, or other supporting evidence to prove the existence of M/s Roots Developers Pvt. Ltd. as a partnership firm at the relevant time. The seized collaboration agreement dated 17/07/2006 differed materially from the copy submitted by the assessee.

The Court noted these discrepancies and held that the existence of the partnership firm and the validity of the 17/07/2006 agreement were not proved, rendering the agreement dated 13/02/2010 the only material document for determining the nature of the transaction.

Conclusion: The agreement dated 17/07/2006 was not accepted as valid, and the assessment was made based on the 13/02/2010 agreement.

4. Year of Assessment for Capital Gains

The Court referred to section 45(2) of the Income Tax Act and held that capital gains arise at the time of conversion of capital asset into stock-in-trade, which in this case was the date of signing the collaboration agreement dated 13/02/2010 (FY 2009-10, AY 2010-11).

The CIT(A) directed that income assessed in subsequent years on account of the collaboration agreement be reassessed in AY 2010-11 as per section 150(1) read with Explanation 2 to section 153.

Conclusion: Capital gains are taxable in AY 2010-11, the year of transfer/conversion.

5. Treatment of Development Charges and Expenses

The assessee incurred Interest During Construction (IDC) and External Development Charges (EDC) in AY 2008-09, which were reflected in the balance sheet as on 31/03/2010. The Court noted these expenses and the fact that revenue had disclosed income under POCM for AY 2013-14.

The additions made by the AO for AYs 2013-14 and 2014-15 were deleted, recognizing the expenses and revenue disclosures made by the assessee.

Conclusion: The expenses and income disclosures related to development charges were accepted, and related additions were deleted.

6. Nature of Non-Refundable, Non-Adjustable Amounts (Rs. 25 Crores)

The assessee contended that the Rs. 25 crores received was a security deposit and not income. The AO and CIT(A) rejected this, holding that the amount was a non-refundable, non-adjustable sum paid in consideration for permitting development and was thus revenue in nature.

The Court directed the AO to verify whether this amount was included in the total sale proceeds of Rs. 115 crores and to grant relief if found so, otherwise to pass orders in accordance with law.

Conclusion: The Rs. 25 crores is treated as business income unless proven to be part of the total sale proceeds, in which case appropriate relief may be granted.

Significant Holdings

"The capital gains are taxable in the hands of the land owners in the year of transfer i.e. the year in which the collaboration agreement dated 13.02.2010 was signed (F.Y. 2009-10) i.e. AY 2010-11."

"The payments received by M/s Roots Developers Pvt. Ltd. as non-refundable, non-adjustable amount are revenue in nature and such receipt is taxable in the year of receipt."

"The contention of the assessee that the profits arising in the hands of M/s Roots Developers Pvt. Ltd. are to be taxed on POCM basis is not legally sustainable."

"Although there is no written agreement available on record between M/s Roots Developers Pvt. Ltd. and the land owners regarding the transfer of rights in land, there was an internal arrangement between the landowners and M/s Roots Developers Pvt. Ltd., written or unwritten, that M/s Roots Developers Pvt. Ltd. was to pay the land owners an amount of Rs. 75 crores in lieu of transfer of their rights in land."

"The Addl. CIT held that the land was in possession of the land owners and the land owners had got the land converted for the development for group housing residential colony. At this stage the land holding was converted into stock in trade."

"The assessee failed to produce original partnership deed, balance sheet, books of accounts and other supporting evidence. The existence of partnership firm, M/s Root Developers Company, and the agreement dated 17/07/2006 was not proved."

The Court allowed the appeals for statistical purposes with directions to verify the inclusion of Rs. 25 crores in total sale proceeds and to pass orders accordingly.