TMI Blog2011 (10) TMI 491X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and the power of attorney do not bring into existence any tangible asset that could be transferred between the parties. Hence, no transfer of capital asset took place and addition made towards long-term capital gains is directed to be deleted. Expectations and contemplations incorporated in the agreements are the business propositions made by the concerned parties, which have been deduced into enforceable agreements. Even though the agreements are enforceable, they themselves do not take the character of immovable properties. Lease rent received form Hotel - Business income or Income from other sources - Held that:- Since there is vacuum in the assessment order in this respect. Hence, matter should go back to the Assessing Officer for deciding the issue afresh in accordance with law - Decided partly in favor of assessee. - IT APPEAL NO. 1093 (MDS.) OF 2010 - - - Dated:- 25-10-2011 - DR. O.K. NARAYANAN, U.B.S. BEDI, HARI OM MARATHA, ABRAHAM P. GEORGE, JJ. T. Banusekar, B. Ramakrishnan and Padamchand Khincha for the Appellant. Shaji P. Jacob for the Respondent. ORDER U.B.S. Bedi, Judicial Member - This appeal of the assessee is directed against the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to 50% of the shares in the appellant company. 11. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the entitlement of the other party to 50% of shares also arose only on payment of the full amount of Rs. 115 crores and not earlier. 12. Consequently the Commissioner of Income Tax (Appeals) failed to appreciate that in the financial year relevant to the year under appeal there is no transaction giving rise to taxable capital gains in the hands of the appellant. 13. For that the Commissioner of Income Tax (Appeals) failed to appreciate that if at all there were any capital gains, this would only arise in the hands of the existing shareholders and that to in the event of any of them transferring his/her shares to the other party to the agreement in future. 14. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the moneys received from the other party to the development agreement were in the nature of advance paid for allotment of shares in the appellant company. 15. For that the Commissioner of Income Tax (Appeals) failed to appreciate that allotment of its shares by a company to investors does not result in transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the sum of Rs. 2,28,52,741/- is chargeable under the head profits and gains of business or profession. 25. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the Assessing Officer erred in assessing the sum of Rs. 2,28.52,471/- as income under the head income from other sources. 26. For these grounds and such other grounds that may be urged before or during the hearing of the appeal it is most humbly prayed that Your Honours may be pleased to- a. Quash the order of assessment b. Delete the addition of Rs. 231,99,11,568 c. Allow depreciation as claimed by the appellant. d. Treat the sum of Rs. 2,28,52,471/- as income under the head profits and gains of business or profession e. pass such other orders as Your Honours may deem fit. 2. The assessee has filed concise grounds of appeal, which are reproduced as under: (1) For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play. (2) For that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng has not pressed this ground and endorsement to this effect has been made by the ld. Counsel for the assessee in the first page of concised grounds of appeal. Therefore, the same is dismissed as not pressed. 3. As regards other concised grounds, facts indicate that the assessee is a private limited company in the business of studio hire, mandapam hire, leasing business sharing, rental, etc. It is assessed to tax for the assessment year 2007-08 and return declaring income of Rs. 2,81,41,258/- was filed on 13.10.2007, which came to be processed on 20.03.2009 under section 143(1). The intimation was subsequently rectified under section 154 to allow credit for TDS. The case was selected for scrutiny, notices were issued under sections 143(2) and 142(1) on 22.10.2009 and the Assessing Officer completed the assessment on 29.12.2009 assessing the total income of the assessee at Rs. 234,81,72,680/-, thereby raising a demand of Rs. 69,22,38,178/- by making following additions/disallowances: i. Rs. 231,99,11,568/- as income from capital gains. ii. Treating business income of Rs. 2,28,52,471/- as income from other sources. iii. Disallowance of depreciation of Rs. 1,19,850 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chitectural designs, sanction drawings by appointing an Architect of its choice and both the parties shall mutually finalize these plans and designs to achieve the aforesaid built-up area. " ( b ) Pursuant to the above, the Second Party shall also be entitled to apply and secure all approvals and sanctions as are necessary to commence and complete the development. ( c ) The second party shall also be entitled to select, appoint, contractors, consultants, engineers and other agencies as may be necessary to construct the buildings as per the plans mutually approved and sanctioned by the Statutory Authorities. ( d ) The First Party shall execute irrevocably Power of Attorney, in favour of the Second Party empowering the Second Party to liaison with all the Statutory Authorities and the Agencies, for the purpose of securing plan sanctions, approvals, permits, licenses." Investment by the second party: ( a ) The Second Party, through the First Party, shall invest in all a sum of Rs. 115 crores as its contribution to the Joint Venture. The said sum of Rs. 115 crores include all direct and indirect expenses which the Second Party incur in the process of implementation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty that: ( vi ) it shall, without any cost to the Second Party, demolish all the old structures standing on the portion of Schedule Property earmarked for the construction of the office building and shopping mall, within one month from the date of receipt of all sanctions and approvals for constructions ... ( vii ) it shall evict at its own cost and expenses, the occupants of the portions of the Schedule property which are required for the development of the office building and shopping mall within one month from the date of receipt of all sanctions and approvals for construction. ( viii ) it shall not increase its issued and paid up capital by issuing additional shares to the existing shareholders detailed in the Annexure 4 or to any others without the written consent of the Second Party. ( ix ) it shall allot such number of shares of the face value Rs. 10/- at a premium to the second party upon completion of its investments of Rs. 115 crores in terms of clause 4(c) above so as to make the second party 50% equity shareholder. ( x ) It shall not mortgage or create any charge on the Scheduled Property from the date of this agreement till such time both the parties decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Krishna Reddy, A. Indira Priyadarshini, G.V. Prasad, G. Anuradha, G.V. Sanjana, G. Mallika, G. Sarathchandra Reddy, G. Saba Nayagam (referred to collectively as the First Party) and PEPL (referred to as second party). The first party collectively own about 99.89% issued and paid-up equity shares of assessee company. Remaining 0.11% of issued and paid up equity shares of the assessee company is held by S/Shri Nagi Reddy B, Naresh Reddy B. V. Prasad B.L.N. Prasad B.L.N (HUF), Satish Reddy.B.V. "Whereas the Vijaya Productions Private Limited has entered into a joint development agreement dt. 26.05.06 with the second party for developments of property detailed in the said agreement situated in Chennai City in terms contained therein." "Whereas one of the terms and conditions of the said agreement is that upon the Second party completing an investment of Rs. 115 crores in the project, the Second Party becomes entitled to seek an allotment of such number of shares thereby converting the same into a special purpose vehicle for further implementation of the said project." "4. The members of the First Party jointly and severally covenant with the Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 5.2 There are 17 shareholders as per Annexure 1 to the shareholders agreement dated 26.05.2006 and 5 shareholders as per Annexure 2 to the shareholders agreement dated 26.05.2006. Relevant portion of the statement of Shri G. Harishchandra Reddy, Chairman and Managing Director, M/s. Vijaya Productions Pvt. Ltd. is as under: "Q. no. 3. In the note on Annual Accounts furnished along with the return of income of M/s Vijaya Productions Pvt. Ltd. for AY 07-08, it was stated that the company has entered into an agreement with M/s Prestige Estates Productions Pvt. Ltd. Please furnish details of the agreement Ans. no. 3. I have furnished a copy of the agreement of M/s Vijaya Productions Pvt. Ltd. (hereinafter referred to as VPPL with M/s Prestige Estate Products Pvt. Ltd. dt 26.5.2006 for the development of 6.29 acres at 183, NSK Salai, Vadapalani, Chennai - 26 into an office building and shopping mall of not less 9,80,000 sft for which M/s Prestige Estates Projects Pvt. Ltd. (hereinafter referred to as PEPL) is required to bring in Rs. 115 cr. towards the share capital of the company. We have also entered into a separate shareholders' agreement dt. 26.5.2006, copy of which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account of VPPL in the FY 06-07 relevant to AY 07-08. Ans. no. 8 This land at 183, NSK Salai was treated in the books of account of VPPL in the FY 05-06 relevant to AY 07-08 as fixed asset. Q. no. 9. What is the revenue model of development of this 9,80,000 sft.? Ans. no. 9. It is proposed to lease out the shopping mall and multiplex. Q. no. 10. What would be the revenue sharing with PEPL? Ans. no. 10. The revenue would accrue to VPPL and the shareholders of which PEPL is one, would be entitled for dividend, if any. Q. no. 11. Is any sale proposed by VPPL in the said properly? Ans. no. 11. As on date, there is no proposal of sale by VPPL in the said property. Q. no. 12. Please refer to pp 5 of the agreement. What is meant by share premium? Ans. no. 12. At present the paid up capital of VPPL is Rs. 6 cr. (60,00,000 no. of shares @ face value of Rs. 10/-). When PEPL brings in Rs. 115 cr the share capital shall be increased by another Rs. 6 cr 60,00,000 no. of shares @ face value of Rs. 10) and the difference of Rs. 115 cr. and Rs. 6 cr. i.e. 109 cr shall be treated share premium in the books of account of VPPL. Q. no. 13. How does PEPL earn its return on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.41 of the assessment order) and resultant consideration for the transfer was in kind by way of 50% of the undivided share in the same land transferred along with 50% of 9,80,000 sq.ft. of built up area and the same was equated in the uniform monetary value viz. @ Rs. 4,000/- per sq.ft. for land and building. The cost of acquisition for 274472 sq.ft. was determined by the Assessing Officer by adopting the fair market value as on 1.4.1981 at Rs. 132.70 per sq.ft. which amounted to Rs. 18,90,32,432/- after considering the benefit of indexation for the capital assets. 6. In appeal here, the assessee submitted that there should be 5 ingredients for charging capital gains namely (a) transferor, (b) transferee, (c) asset transferred, (d) consideration for transfer, and (e) date of transfer. In the instant case, the assessee submits that there is no transfer as the capital asset still remains the property of the assessee and the agreement dated 26.05.2006 is only an agreement for subscription to the share capital of the assessee company and no asset was transferred as is evident from the narration of sequence of events that took place prior to the commencement of assessment proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th to avoid and evade taxes. In another judgment in the case of Nathulal v. Phoolchand AIR 1970 SC 546 has been relied upon to support the point that the conditions for the assessee making out the differences of part performance to an action in agreement of owner or with the transferee so in action of furtherance of the contract and that the transferee has performed or is willing to perform his part of the contract. In another decision in the case of Anand Citi Centre v. ITO , the 'C' Bench of the Tribunal in [IT Appeal No. 1100 (Mds) of 2010 order dated 22.10.2010 has been relied upon in support of the contention raised and finally, it was argued that the applicant has not made any transfer liable to capital gain tax and had entered into an agreement only for development of property. Further the other party to the agreement was only entitled to 50% of the shares in the appellant company by way of fresh allotment of shares by the appellant company. In this connection, further the assessee has submitted that neither the Assessing Officer nor the ld. CIT(A) is justified in determining a sum of Rs. 231,99,11,568/- as income from capital gain, which should be set aside and addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is accepted, it would amount that contractors executing the work in a contractee's premises will be trusted with ownership is not the intention of the parties. M/s. PEPL was only executing the work as a contractor and not in any other capacity. So, the plea of the Assessing Officer that 4,90,000 sq.ft. of built-up area should be taken as consideration for the transfer of the asset is not factually correct. The agreement for allotment of shares and treating the share capital is an act subsequent to the transfer and investment of funds. So, it was argued by the ld. DR that during the year under consideration only the act of transfer for joint venture development has taken place wherein both the assessee and PEPL clearly share and possession had been parted for development of the property. So the plea of the Assessing Officer that the agreement between the assessee and PEPL are similar to the contractor and contractee is not a valid plea. There is no such stipulation in the joint venture agreement or shareholders agreement. He strongly contended that the PEPL had undertaken the development of the activities by taking possession of schedule property during the year ended on 31.03.2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over, after the agreement with PEPL on 26.05.2006, there has been reduction in the shareholding pattern to the extent of 50% and it would receive 50% of the built-up area etc. as mentioned before. Thus, it is clear from the said agreement between the assessee and the PEPL that the intention of both parties was to undertake development of 6.29 acres land into a office building and shopping mall as a joint venture by virtue of which, the assessee would bring the land of 6.29 acres as its contribution and PEPL would bring in its experience, expertise and funds for the development of the property. Thereafter both the parties would share the building 50% each. The assessee has transferred the land of 6.29 acres being capital asset for a consideration of 50% of the built-up area along with 50% of all other benefits. The assessee has also executed irrevocable power of attorney to perform all functions required for the development of the property by taking possession of the property from the date of agreement dated 26.05.2006. Thus in our view, there has been a transfer as per provision of section 2(47) of the Act, where the assessee had relinquished 50% of its right over the assets i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , contributions of both parties for the joint venture, getting the old building vacated and demolished, squaring up the accounts with other parties except the land of 6.29 acres, execution of power of attorney in favour of the representative of PEPL and host of other activities are all clearly indicated and spelt out in the main agreement dated 26.05.2006. A plain reading of the said agreement would make it amply clear that right in the existing capital asset i.e. land of 6.29 acres was transferred making it a clear case of levy of capital gains. It was not a share allotment agreement as was made out by the assessee and on the other hand, if it is treated as reduction in share capital, the same would also be liable to capital gains as per discussions held in earlier part of his order. Therefore, on the basis and reasoning, and facts, circumstances and material on record, we concurred with the finding of the ld. CIT(A) and dismiss the plea raised on this score also. 10. As regards treatment of business income of Rs. 2,28,52,471/- as income under the head "income from other sources" in respect of lease rent received from Diana Hotels by the assessee, the assessee had not explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and pleaded that since the assessee has not been able to make out a case for treating such income as business income. Since the assessee has received rent which could be treated as income from other sources only, so the plea of the assessee in this regard may be dismissed by confirming the order of the ld. CIT(A). 11.2 We have heard both the sides, considered the material on record and find that as regards 2nd issue raised in the appeal, the assessee has not been able to point out as to why lease rent in this case should be treated as business income and otherwise also, there appears to be no flaw or infirmity in the impugned order, as such, we uphold the order of the ld. CIT(A) in this regard and our view is fortified by the Hon'ble Madras High Court's decision in the case of Orient Hospital Ltd. v. Dy. CIT [2009] 315 ITR 422/185 Taxman 83 in which rental income even from lease of hospital building with equipment and machinery has been held to be income from other sources while concurring with the finding of the Tribunal as under: "Held, dismissing the appeal, that income derived out of the lease of property and furniture as in this case could not be treated as inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever I find it necessary to reproduce the agreement upto para 8 thereof verbatim for better understanding its substance. This is reproduced hereunder: Agreement This agreement made and executed on this 26th day of May, 2006 at Bangalore between: Vijaya Productions Private Limited, a Company incorporated in India, under the Companies Act, and having its registered office at 183, NSK Salai, Chennai, represented herein by its Chairman, Mr. G. Harishchandra Reddy, hereinafter referred to as the First Party, which shall mean and include all its Directors, successors in office and interest of the one part. And Prestige Estates Projects Private Limited, a Company incorporated under the Companies Act, 1956, having its registered office at "The Falcon House", No. l, Main Guard Cross Road, Bangalore - 560 001 represented herein by its Managing Director, Mr. Irfan Razack, hereinafter referred to as the "Second Party" (which expression shall wherever and whenever the context so demands shall mean and include its successors-in-office and interest and assigns) of the Other Part; Whereas the First Party herein is the absolute owner in peaceful possession and enjoyment of immovable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nture wherein the First Party brings in the Schedule Property as its contribution and the Second Party brings in its experience, expertise and funds to do the development of the Schedule Property and both the parties share land and the buildings to be developed thereon in equal shares i.e. 50:50 and enjoy the usufructs thereof in the same ratio. Whereas, both the parties hereto have mutually discussed, negotiated and agreed upon the development of the Schedule Property in the manner detailed, agreed and set forth hereinafter. Now this agreement witnesseth as follows: The First Party and the Second Party hereby agree to jointly undertake the development of the Schedule Property into an Office Building and a Shopping Mall, as is permissible by the concerned statutory authorities and in the manner detailed hereinafter. 1. Value of the Schedule Property: The First Party has valued the Schedule Property at Rs. 1,15,00,00,000/- (Rupees one hundred fifteen crores only) and shall be treated as its contribution to the joint venture and in consideration thereof, the First Party shall be entitled to 50% of the total built-up area along with 50% of all other benefits such as car park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultants fees, the plan sanctioning charges and all other related expenses and costs incurred for the purpose of construction of the buildings and the development of the Schedule Property. The investment by the Second Party shall also include one time project management fee of Rs. 10 crores to be charged by the Second Party basically for concept creation, implementation and supervision, tenancy mix, fixation and tenancy programming of the building/s to be built on the Schedule Property. This Management fee of Rs.10 crores will be paid/adjusted in instalment over the period of implementation of the project. ( b ) For the purpose of facilitating investment by the Second Party the aforesaid amount, the First Party shall open a separate Bank Account in the name of the First Party, to be operated by the Second Party and its Authorised Signatories up till the investment by the Second Party reaches Rs. 115 Crores. The Second Party shall bring in its own funds for the purpose of implementation of the project to the extent of the investment to be made by the Second Party, into this account and is fully authorized to payout and discharge all the expenses and costs incurred on the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctions shall be the part of the overall investment to be brought in by the Second Party into the joint venture. ( b ) Within 60 days from the date of approval, the Second Party shall prepare a project implementation Schedule along with the projected funding required at every stage and submit the same to the First Party for information and monitoring the progress of the project. ( c ) Specifications, Commencement Completion of Construction: ( i ) In construction of the Office building and the Shopping Mall, the Second Party shall use the best construction materials and the specifications of construction is attached to this agreement as Annexure-3. It is however agreed that not withstanding the details of Specifications mentioned in Annexure-3, the Second Party shall be entitled to select and use the best available construction materials to build Buildings of higher standard as is expected of the Second Party. ( ii ) On receipt of all the approvals and sanctions, the development would be done thru a tendering process and such process would be administered by Second Party. The First Party would nominate a representative to participate and be a part of this process. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construction of the Office Building and Shopping Mall, within one month from the date of receipt of all sanctions and approvals for construction. ( vii ) it shall evict at its own cost and expenses, the occupants of the portions of the Schedule Property which are required for the development of the Office Building and Shopping Mall within one month from the date of receipt of all sanctions and approvals for construction. ( viii ) it shall not increase its issued and paid up capital by issuing additional shares to the existing shareholders detailed in the Annexure-4 or to any others without the written consent of the Second Party. ( ix ) it shall allot such number of shares of the face value of Rs. 10/- at a premium to the Second Party upon completion of its investments of Rs. 115 Crores in terms of clause 4(c) above so as to make the Second Party 50% equity shareholder. ( x ) it shall not mortgage or create any charge on the Schedule Property from the date of this agreement till such time both the parties decide to borrow funds for investing/completing the project. ( xi ) shall not entertain the transfer applications of the shares held by the present shareholders detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, permits, licenses and no objection certificates for commencing construction within 12 months from the date parties mutually accepting the concept drawings, which does not include time taken for securing approvals/no objection certificate from Ministry of Environment and Forests, Government of India. ( iii ) Not commencing construction within 45 days of receipt of all approvals and sanctions for commencement of construction. ( iv ) Not being able to invest Rs. 115 crores in to the project. ( v ) In the absence of conditions of force meajure, restrictions, court orders, prohibitions and such other conditions which are not under control of Second Party and all other conditions being normal, not being able to complete the project within 36 months from the date of commencement of construction with a grace period of 3 months. (B) Rights/Remedies Available To The First Party: ( i ) In the event of breach by the Second Party as above, the First Party shall be entitled to call upon Second Party, by issuing a written notice, to perform its obligation within 15 more days from the date of receipt of such notice, failing which terminate the agreement by issuing one more notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities, Tamil Nadu Electricity Board, Chennai Water Supply and Sewerage Board, Chennai Telephones, Police Department, Airport Authorities Fire Force Authorities and in all other offices and apply for and obtain orders for change of land use or for grant of any plans, licences, sanctions, orders etc. for the purpose of putting up construction of buildings with built-up area not exceeding 9,50,000 sft, in the Schedule Property and for the said and other purposes incidental thereto, to sign and execute necessary petitions, applications, forms, affidavits, declarations, undertakings, indemnities and other deeds containing such covenants as may be required for securing the aforesaid and to take all steps necessary to secure plans, licenses and other permission for construction and other purposes in the Schedule Property and also apply for renewal thereof and pay necessary charges and levies and sums there for. 2. To apply for and obtain Commencement Certificates and/or Occupation Certificates and/or Completion Certificates in respect of the Building/Buildings to be constructed and completed on the Schedule Property from the concerned authorities. 3. To deal and correspond with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to adjust, settle all accounts, to refer to arbitration all disputes and differences, to compromise cases, to withdraw the same, to be non-suited and to receive delivery of documents or payments of any money or monies from any Court, office or opposite party either in execution of decree or order or otherwise as they shall think fit and proper and to do allowed deeds and things, that maybe necessary or requisite in connection therewith. And generally to do all such acts, deeds and things in connection with the above matters as our attorneys shall think fit and proper as fully and effectually as we could do ourselves notwithstanding no express power or authority in that behalf is herein provided. Right over the Schedule property is not transferable under this Power of Attorney. And we, the undersigned do hereby and at all times and hereafter shall ratify and confirm all and whatever other lawful act or acts our said attorneys shall lawfully do or cause to be done by virtue of these presents. Relevant part of the contemporaneous shareholders agreement has been reproduced by Hon. JM at para 5.1 of his order, and hence not repeated. 3. Now comes the test of Section 2(47) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of development and in lieu there is nothing received except a promise to develop and to subscribe to equity shares as mentioned at clause 4(c) of the agreement. By allowing subscription to it's equity shares, assessee being a company, would only suffer a detriment, by way of dilution to it's equity structure and nothing more. Transfer of the developed structures, if it all it happens, will take place only in a future point of time and hence at the point of entering into the agreement there was no exchange of any asset whatsoever. The third limb is 'relinquishment'. Through the agreement can we say assessee has relinquished any asset? The asset in question was still there very much a part of assessee's Balance Sheet as on 31.03.2007 as well as on 31.03.2008. This is clear from the answers to question no. 8 given by its Managing Director, when he was examined, and which is reproduced by the Ld. JM at para 5.2 of his order. A bare-reading of the agreement would show that it is somewhat inchoate and indefinite. At one place viz. the preamble, it is stated that both parties shall be entitled to enjoy the usufructs and share the land and building to be developed, after development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . To summarize, as per the above referred Agreement, we are entitled to only, 50% equity share capital, equal representation on the Board of Vijaya Production Pvt. Ltd. and a Project Management Fee of Rs. 10.00 Cr. 6. Our intention to enter into Agreement with Vijaya Productions Pvt. Ltd., is to develop a state of the art Shopping Mail in the name of Forum Vijaya Mall to be owned by Vijaya Productions Pvt. Ltd. with equal shareholding and equal representation on the Board of the company. 7. By entering into Agreement with Vijaya Productions Pvt. Ltd., we have not taken over the possession of the property, nor we have purchased any land, either 3.145 acres or 6.29 acres and we confirm that we have no right or title over the said lands by way of purchase, or lease or Power of Attorney. 8. Further, we hereby confirm that the agreement entered into between the Vijaya Production Pvt. Ltd., never gave 50% right on the land. 9. Further we wish to confirm that we have not entered into any Agreement so as to constitute an AOP, such that the land is transferred to the said AOP so as to develop and re-transfer any land/built up area back to Vijaya Productions Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its' rights on the property. By agreeing to issue equity shares to M/s PEPL, at a later point of time, there was no extinguishment of any of the rights that the assessee had over its' property. The property remained very much in the balance-sheet of the assessee company itself. That it was in possession and control is clear since a consortium of bankers had on the security of the said property lent money to the assessee in a later year. Records relevant to that appear at pages 20 to 76 of paper book Vol. III produced by the assessee, on direction from the Bench. Hon'ble jurisdictional High Court in an order dated 17th September, 2010 passed on a demerger petition filed by the assessee (Comp. Petn. 209 to 211/2010) (PB Vol. III pages 51 to 121 had considered a scheme of arrangement under Sec. 391 to 394 of Companies Act, 1956 wherein Schedule I property mentioned therein, which inter alia was the subject property here, continued to be vested with the assessee company. No doubt development right, is definitely a part of the bundle of rights associated with ownership, but can we say that such right stood extinguished through the agreement? The agreement was always in substance for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dealing with the property in any manner except obtaining various approvals and permits required for the construction. Thus there was no part performance satisfying requirement of Section 53A of the TP Act. 8. This leaves us with the last clause (v) of Section 2(47). The agreement specifies that M/s PEPL is to be issued shares in assessee company once former's investment reached Rs. 115 crores. But on the date of the agreement nor in the relevant previous year any shares were issued to M/s PEPL by the assessee company. As already mentioned at para-5 above, the money though in an account of assessee company, remained in the control of M/s PEPL. The question whether there was any eventual issue of shares, enabling enjoyment of immovable property, would therefore, not arise at all, at least in the relevant previous year. In any case, admittedly there was no issue of any shares by assessee to PEPL during the relevant previous year. 9. Now coming to the conclusions reached by ld. JM at para 8.2 of his order, first finding is that assessee had agreed to reduce its shareholding to 50% of total share capital. In the first place assessee is a limited company, and the said company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the construction, on behalf of the assessee and nothing more. Last finding is that possession was handed over on 26-05-2006. As already mentioned by me at para-5 above, M/s PEPL always denied having taken any possession, and various clauses in the agreement read alongwith dates on which various approvals were obtained went to show that possession would not have been given. 10. Thus in my opinion the agreement nor the contemporaneous shareholders agreement, nor the power of attorney would result in a transfer within the meaning of Section 2(47) of the Act Ld. AO as well as ld. CIT(A) fell in error in concluding that there was a transfer. When there was no transfer in the relevant previous year, there was no question of any capital gains being computed at all. 11. Even if we consider there was a transfer, the benefit uiltimately that could be coming to the assessee, can at the best be considered as the net present value of the cost of construction of 490000 sq.ft. of building. For that is what it would get in the 3.145 acres of land with it, presuming the other half to be that of M/s PEPL. The working in this regard given by the AO and confirmed by the ld. CIT(A) is as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts on account of a Revenue sharing lease and license agreement dated 06-06-2005 and was therefore rightly considered under the head of business. According to the assessee, there was a mortgage of the property with the bankers and hence a risk associated with the transaction making it an adventure in the nature of trade. But the ld. CIT(A) simply confirmed the order of the AO with a cryptic comment that no satisfactory explanation was given by the assessee for treating lease rentals as business income. Ld. AR argued before us, referring to P.B. Vol. II pages 1 to 3, which is a copy of its' agreement with M/s Diana Ltd., that it was a purely commercial arrangement for sharing profits. I do not find any discussion in the order of the A.O. in this regard. In the absence of discussion by the AO, argument of the assessee that it was never put on notice regarding A.O.'s proposal to shift the head, thereby denying it an opportunity to present its explanation appears to be credible. Ld. CIT(A) also did not give any reason for rejecting the relevance of the leave and licence agreement with M/s Diana Ltd. and as to why the explanation given by assessee was not considered satisfactory. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -. The return was initially processed under section 143(1). Thereafter the assessment was completed under section 143(3). In completing the assessment, the assessing authority has made certain additions and adjustments in determining the taxable income of the assessee at Rs. 234,81,72,680/. 3. The assessee company had entered into an agreement with a Bangalore based company by name M/s. Prestige Estates Projects Pvt. Ltd. to develop a modern commercial complex consisting of office units and shopping mall in the landed property owned by the assessee company. Interpreting the terms and conditions of that development agreement, which according to the assessee was only a joint venture proposition, the assessing authority assumed a transfer of property from the assessee company to the Bangalore company and on that proposition, worked out long term capital gains liable for taxation. This resulted in an addition of Rs. 231,99,11,568/-. The assessing authority has then treated a sum of Rs. 2,28,52,471/- as income from other sources against the assessee returning it as business income. The assessing authority has further made a disallowance of depreciation of Rs. 1,19,850/-. 4. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Accountant Member on two issues arising out of the appeal filed by the assessee company before the Tribunal. 11. In the above context, a reference was made to the Hon'ble President of the Tribunal, under section 255(4) of the Income-tax Act, 1961 to refer the following questions to a third Member:- "1. In view of the facts, circumstances and material on record, whether the addition of Rs. 231,99,11,568/- made by the Assessing Officer and confirmed by the ld. CIT(A) as income from capital gain could be upheld or deleted? 2. Whether in view of the facts, circumstances and material on record, the action of the ld. CIT(A) in confirming the order of the Assessing Officer in treating a sum of Rs. 2,28,52,471/- as income from other sources against declared as business income could be upheld or matter in this regard could be set aside to the file of the Assessing Officer for reconsideration of the issue afresh?" 12. The Hon'ble President has nominated me as the Third Member. 13. In the meantime, the assessee has filed an application before the Hon'ble President to reframe the questions to be considered by the Third Member through its petition dated 29-6-2011. The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PEPL). The agreement was entered into on 26-5-2006. This agreement may be called development agreement. 18.2 As per the agreement, the assessee, VPPL, is the absolute owner of 6.29 acres of land and old buildings at the studio complex in Vadapalani. The said property, subject matter of the development agreement, has been mentioned in the agreement as scheduled property. A portion of the schedule property has already been developed into a hotel. A large part of the schedule property still remained undeveloped with old dilapidated buildings, which were no longer required by the assessee company for its business. The parties agreed to develop the schedule property into a modern commercial complex consisting of office buildings and shopping malls. The Bangalore-based company, PEPL, is already in the business of real estate development, construction, managing and leasing office buildings and shopping malls and do have considerable expertise in the above fields. 18.3 The parties having agreed to associate in a Joint Venture Project (JV), the value of schedule property was determined at Rs. 115 crores. As the assessee VPPL is committing the schedule property for the development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res as its contribution of 50% to the JV. In consideration thereof M/s. PEPL is entitled for 50% of the total built up area alongwith 50% of all other benefits such as car park, terrace, etc. and also entitled to use FSI of the entire schedule property wherever possible and permitted by the concerned authorities. Again, to repeat, for the purpose of clarity, the terms of the development agreement are that the assessee VPPL shall provide its land and in return it will get 50% of the built up area, whereas PEPL shall bring Rs. 115 crores as the funds required for the development and in return PEPL also will have 50% of the right over the built up area alongwith a further right to utilize the FSI of the entire schedule property. 18.6 The parties have further entered into an agreement known as 'shareholders agreement' on 26-5-2006, on the same date when the development agreement was agreed into. This agreement was necessitated in terms of the covenants included in the joint development agreement. It has been agreed by the parties to the joint development agreement that the assessee company VPPL shall allot such number of shares to PEPL, whereby the proprietary interest of PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any on the first part shall co-operate with the allotment of shares to M/s. PEFL so as to make M/s. PEPL an equal stakeholder in the equity share capital of the assessee company. Other supporting and incidental terms and conditions also have been stipulated in the shareholders agreement. 18.7 In short, the assessee company has entered into a JV for the purpose of property development with PEPL and for that matter the parties have entered into a development agreement, whereby the assessee company contributes its land measuring 6.29 acres, which is valued at Rs. 115 crores, which has to be treated as the contribution of the assessee company to the JV project. The development agreement further stipulates that the assessee company VPPL shall be entitled for 50% of the built up area (9,80,000 sft. divided by 2) with 50% right in the other incidental facilities. The other company, PEPL is to contribute 115 crores towards the project, upon which PEPL shall be allotted 50% equity shareholding of the assessee company VPPL and thereby both the parties to the agreement shall become equal stakeholders in the assessee company and so also M/s. PEPL shall be in return entitled for one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,80,000 sft. Accordingly, the Assessing Officer held that the assessee company is liable for long term capital gains taxation. 22. In computing the long term capital gains taxation, the assessing authority computed the total extent of area available to the assessee company from the JV at 6,27,236 sft. comprising of 1,37,236 sft. pertaining to 50% of 6.29 acres of land and 4,90,000 sft. being 50% of the built up area of 9,80,000 sft., thus totalling to 6,27,236 sft. The same has been valued by the assessing authority at Rs. 250,89,44,000/- by adopting a rate of Rs. 4,000/- per sft., pertaining to the developed project. Thus the sale consideration was worked out at Rs. 25,89,44,000/-. 23. The cost of acquisition was computed by the assessing authority at fair market value plus indexation. The property transferred by the assessee was the land of 6.29 acres measuring to 2,74,472 sft. The Assessing Officer adopted a fair market value of Rs. 132.70 per sft. as on 1-4-1981. This comes to Rs. 3,64,22,434/-. This cost was indexed to Rs. 18,90,32,432/-. This cost of Rs. 18,90,32,432/- was deducted from the computed sale consideration of Rs. 25,89,44,000/-. The differential amount has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company in favour of PEPL do not result in a transfer within the meaning of section 2( 47 ) of the Act. He held that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) erred in law to conclude that there was a transfer of capital asset. When there was no transfer in the relevant previous year, he held that there was no question of any capital gains being computed at all. He allowed the grounds raised by the assessee on the question of long term capital gains. 29. On the question of treating business income as income from other sources, the learned Accountant Member found that the assessing authority has not discussed anything on this point and the assessee also was not given any notice before taking a view against the assessee. He found that the Commissioner of Income-tax (Appeals) also has not discussed the facts relating to the issue. He, therefore, held that there was violation of the principles of natural justice and the matter was decided at the back of the assessee company. Accordingly, he set aside the issue to the file of the assessing authority with a direction to reconsider the matter afresh after giving the assessee an effective opport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. 37. Let me examine the first condition as to whether there was a sale, exchange or relinquishment of the asset. The assessee has entered into a joint development agreement with PEPL on 26-5-2006, falling in the previous year relevant to the assessment year under appeal, for promoting a joint venture with PEPL as a special purpose vehicle to construct a modern commercial complex consisting of office buildings and shopping malls. The contribution of the assessee company is the land of 6.29 acres owned by it at Vadapalani, valued at Rs. 115 crores. In return the assessee company is getting 50% of the total built up area and 50% of the undivided right in the land. In pursuance of the above agreement, the assessee company has executed a power of attorney in favour of PEPL to initiate the development of the project by applying for the necessary permissions and approvals of the Government and local authorities and to do all necessary things to bring the project into reality. 38. This joint venture project as far as the impugned previous year is concerned, was only in a nascent stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the newly formulated JV is nothing but an extension of the existing company. There cannot be a sale to oneself. Nothing is exchanged in the previous year relevant to the assessment year under appeal. No right is relinquished by the assessee in the impugned previous year. It only proposes to redefine the rights. There is no extinguishment of any rights therein. 40. The consideration for the contribution made by the assessee company VPPL is not by way of sale consideration. As the assessee company is providing its land for the development of the JV, the assessee company is getting 50% rights in the developed property. The extinguishment of its 50% right over the land is compensated by its 50% right in the built up area. Even if it is considered as a proposed exchange, nothing has been culminated in the impugned previous year. All those things are to happen in the future. The joint venture has not started the construction in the impugned previous year. The commercial complex was yet a proposed project. As already stated, a transfer is contemplated only in the case of an existing property. In the present case the property is only in the nature of mutual rights. The project a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreements. Only at that point of time, the question really arises as to whether there was any transfer within the meaning of section 2( 47 ) of the Income-tax Act, 1961. That too, again, the question will be further enlarged to know that if at all there is a transfer, whether it is between the assessee company VPPL and PEPL or between the dominant shareholders of the assessee company and the Bangalore company, PEPL. All these issues have to be demystified at that point of time. 44. Next it is to consider whether this arrangement can be treated as a transfer within the meaning of section 53A of the Transfer of Property Act. In the present case, PEPL is not a transferee; PEPL has not taken possession of the property. The money consideration has not been discharged. In fact there cannot be a question of handing over possession of the property to anybody. The assessee company itself is contemplating a joint venture for the development of the commercial complex. The joint venture is not a new legal entity. It is an extension of the assessee company itself. In those circumstances, there cannot be a case of transfer at all. The power of attorney was executed in favour of PEPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerating long-term capital gains in the hands of the assessee. As the issue of capital gains itself is decided in favour of assessee by the Third Member agreeing with the view of the learned Accountant Member, in fact, this issue of computing long-term capital gains becomes academic. I do not think it necessary to discuss the matter at this juncture. But as a matter of fact, I find that the assessing authority has grossly erred in computing the long-term capital gains on the basis of the present market value of a future asset. The Assessing Officer has applied the current market value to a non existing property. The method adopted by the assessing authority is erroneous. 50. The learned Accountant Member proposes discounting the probable construction cost of the project to net present value (NPV). When no property is existing, there is no question of estimating the probable cost of construction and discounting to NPV, for the statutory purpose of computing capital gains. No commercial complex is available at the particular point of time. That basic vacuum is apparent. It is something to come within a period of three to four years in future. The exercise suggested by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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