TMI Blog2012 (6) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... any during the year related to the projects under construction - Revenue apportioned indirect expenditure to to Work-in-progress - Held that:- Non allocation of the indirect expenses to the work-in-progress truly affects correct reflection of the profit and loss of the assessee-company. Being so, AO is justified in reallocating the indirect expenses to the capital project of the assessee. Depreciation of centring material - dis-allowance - Held that:- The assessee claimed all this depreciation is relating to the project under construction. The project under construction being the capital asset, depreciation cannot be allowed - Decided in favor of Revenue - IT APPEAL NOS. 985 & 1030 (HYD.) OF 2010 - - - Dated:- 30-4-2012 - CHANDRA POOJARI, SMT. ASHA VIJAYARAGHAVAN, JJ. Y. Ratnakar for the Appellant. V. Srinivas for the Respondent. ORDER Chandra Poojari, Accountant Member These are cross appeals directed against the order of the CIT(A)-V, Hyderabad dated 14.5.2010 for assessment year 2006-07. The assessee also filed a stay petition seeking the stay of outstanding demand of tax at Rs. 43,69,007. 2. Brief facts of the case are that the assessee is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culating the profits of the company. Further, it was held that the assessee was carrying on business of real estate and as such the claim for long term capital gains cannot be allowed. 2.2 During the course of assessment proceedings, the Assessing Officer noticed that the 5 acres of land in question were sold for Rs. 12.5 Crores to M/s. Prakruthi Infrastructure Development Co. Ltd., who had paid cash of Rs. 4 Crores. MOU was entered into with M/s Prakruthi Infrastructure Development Co. Ltd., with respect to the sale of the aforementioned land. As per this MOU, it was clearly mentioned that the assessee was an assignee with respect to the landlord and it got the rights to develop the property, to settle disputes and claims and also to sell the same, realizing the sale amounts with itself. The assessee company stated that it has wrongly claimed long term capital gains. In actuality, it never had any rights over the land sold and had offered long term capital gains in a mistaken belief. The assessee claimed that actually nothing was taxable in its hands. Considering all the facts of the case, the Assessing Officer made an addition of Rs. 5 crores on this issue by reducing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery of possession, upon completion of sale transaction and the intending purchaser viz. Prakruthi Infrastructure Development Company Ltd. being put in the possession of the property agreed to be sold. Only after obtaining all clearances and encumbrances and acquiring free and clear marketable title by the assessee in a span of 3 months period. Failure to do so, the money has to be refunded. During the previous year relevant to the assessment year 2006-07, none of the above events have taken place and what was received continued to remain as advance. Prakruthi Infrastructure Development Company Ltd. subsequently addressed the letters dated 10.11.2008, 15.1.2009 and 14.10.2009 to the assessee as the transaction remained incomplete. These letters will demonstrate that the purchaser has cancelled the agreement, withdrew the memorandum of understanding and required payment of advance with 18% as interest. The above letters will also demonstrate what was paid was an advance and the said amount did not partake the character of income in the hands of the assessee. For this proposition the assessee relied on the following decisions: a. CIT v. Hindustan Housing Land Developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the agreement on its proper and true interpretation. For the above reasons, he submitted that no part of the sum of Rs. 4 crores received as advance is liable to tax for the assessment year 2006-07. The amount received has to be considered as merely an advance which has not become the income in the hands of the assessee during the year. 4.5 With regard to taxing the amount under the head 'Business Income', the learned AR submitted the learned CIT(A) has not rebutted the same nor adverted to the submissions filed by the assessee. Even if any income is liable to tax, it is only as capital gain and not business income. 4.6 The learned AR submitted that the written submissions filed before the CIT(A) but the CIT(A) disposed of the entire appeal without any reference to any of the submissions filed before him. The reasons for not referring to these submissions are not within the knowledge of the assessee. However, the assessee states that the learned CIT(A) has not gone into the detailed arguments filed on 10.2.2010. The assessee submits that these arguments appear to have been forwarded and a remand report was called from the Assessing Officer and the Assessing Officer se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... morandum of understanding entered with the purchaser speaks of transfer of land and delivery of possession. If this agreement is not for the sale of land, then for what other purpose the memorandum of understanding entered into is not known. The learned CIT(A) has completely misunderstood the scope of agreement. The agreement is for buying 25 acres of land and the remaining land should be utilized for clearing other disputes and excess money is to be returned to the owner. The appellant is not entitled to any profit or income other than any surplus which it may earn on the 25 acres of land to which it is entitled to. The learned Commissioner of Income tax (Appeals) appear to have mixed up the issues while arriving at the conclusion. 4.9 With regard to the decision of Bombay High Court in Estate Investment Co. Ltd. ( supra ), the AR submitted that the facts herein are totally different. In the instant case, the land was held for the purpose of business. The assessee has done everything, delivered possession, complied with all its obligations and received the price. The only activity remaining is the execution of sale deed as the entire price is received and the possession is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and facilitating settling of disputes relating to the land in question. The assessee was dealing in land with a motive to earn profit. It is not the gain made by the assessee by mere enhancement of value by realising the investment and in the present case it is the gain made by the assessee is through operation of business with an intention of making profit. In other words, if a person buys and sells land or investments as a business to make profit and, by dealing in such investment as a business, makes a gain, that is not a case of mere realisation of assets or conversion of one form of asset into another but will clearly fall within the meaning of business activity of the assessee. In the present case, originally in this case MOU was entered by Shri Rajkumar Malpani, Managing Director of the assessee-company in his individual capacity has entered into on 5.4.2002 with Shri Mohd. Khazim Ali Khan, partner of M/s. Sridevi Colonizers wherein he received the right of development of land from the landlord and also undertaken to settle the disputes involved in this land. Thereafter, a limited company, i.e., assessee, came into existence for the purpose of acting as a builder and dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses and the remaining extent of 75 acres will be sold and the sale proceeds will be passed on the First Party after settling the claims of third parties out of 75 acres of land with the consent of the First Party. 3. It is mutually and specifically agreed that the Second Party will pay to the First Party for an area of 25 acres at the rate of Rs. 1,50,00,000 (Rupees one crore fifty lakhs only) per acre to the First Party and the rate fixed will be payable by the Second Party to the First Party by way of developing the property and adjusting the rate value at cost price as on today and part of the sum in cash, which will be worked out mutually by both the parties. However, the First Party may opt for any part of the built up area in the projects of the Second Party at Hyderabad and the Second Party has agreed to provide built up area to the First Party, as desired, within one month on his name or his nominee. 4. The Second Party has paid token advance of Rs. 1,01,00,000 (Rupees one crore one lakh only) to the First Party under the this MOU the receipt of which the First Party hereby expressly admits and acknowledges and the Second Party shall pay further amounts of Rs. Two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of trade as evident from the MOU reproduced herein below: "This memorandum of Understanding is made and executed on this the 23rd day of February 2006. BY AND BETWEEN 1. M/s. Maheshwari Megaventures Limited, represented by its Managing Director, Sri Raj Kumar Malpani S/o. Sri Jagdish Prasad Malpani, aged 53 years, r/o 73, Gaffar Khan Colony, Road No. 10, Banjara Hills, Hyderabad 2. Sri Raj Kumar Malpani S/o Sri. Jagdish Prasad Malpani, aged 53 years, r/o. 73, Gaffar Khan Colony, Road No. 10, Banjara Hills, Hyderabad, AND M/s. Prakruthi Infrastructure and Development Company Limited having its registered office at No. 4-1, Tumkur Road, Yeshwantpur Bangalore-22, represented by its Director Mr. Manjunath, hereinafter called as the "Second Party" Whereas the First Party is the Assignee Agreement Holder from Sri Mohd. Khazim Ali Khan, S/o Late Jaffer AIi Khan, aged about 55 years, r/o H. No.8-3- 323, Yellareddyguda, Ameerpet, Hyderabad in respect lands in Survey No. 1 007, Kukatpally Village, R R District evidenced by means to two separate MOU's date, the first party herein has got the rights not only to develop the property but also to settle disputes an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in which the disputes are to be settled. There is a stipulation that if the disputes are not settled and the land cannot be conveyed, then the original amount can be refunded. However, the facts are that the disputes are continuing and are placed in the Hon'ble Supreme Court and the amount of Rs. 4 Crores has not been refunded. The MOU dated 23.2.2006 is not yet cancelled and it is still in force. It is valid and enforceable by law. If there is any dispute it could be settled mutually or before a court of law. There is also a clause in the MOU that an additional period of 3 months to complete the transaction. It is also be noted that the MOU was entered on 23rd February, 2006. By 31st March, 2006 i.e., during the financial year relevant to assessment year 2006-07 nothing has been brought on record to show that the MOU has become invalid or cancelled or advance money has been refunded by the assessee to the purchaser. 11. We will refer to the law laid down in a few cases by various Court on similar circumstances. In Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC), the assessee as an auctioneer effected sales of furniture and realised from the buyers in add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal amounts taken were an integral part of the commercial transaction of the sale of liquor and bottles and when they were realised they were the moneys of the assessee and remained thereafter the moneys of the assessee. They were the assessee's trading receipts and, therefore, the balance of these additional sums left in the hands of the assessee after the refunds were assessable to tax. This court further held that it did not make any difference that the additional amount was entered in a separate ledger under the head "Empty bottles return deposit account" as the assessee's style of writing up the account books in a particular manner could not alter the real nature of the receipts. 14. In Jonnalla Narasimharao Co. v. CIT [1993] 200 ITR 588/68 Taxman 340 (SC), the assessee, a commission agent, collected in the assessment year 1968-69 certain amounts by way of sales tax under the name "rusum" inasmuch as it disputed its liability to pay sales tax by filing various legal proceedings. The accounts were maintained on the mercantile system. In 1970, there was a retrospective amendment in the relevant sales tax law as a result of which the assessee's liability was upheld by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing decided in its favour. This court found that the entire amount was in dispute in the appeal filed by the State Government; that the dispute was "real and substantial"; and that the amount deposited by the State Government was permitted to be withdrawn by the assessee subject to a security bond for refunding the amount in the event of the appeal being allowed. On these facts, Supreme Court held that there was no absolute right to receive the enhanced amount at that stage and if the appeal was allowed and in its entirety, the right to payment of enhanced amount would have fallen altogether. The principle of law laid down by this court in the case of Hindustan Housing Land Development Trust Ltd. ( supra ) is to be read in the light of the facts of that case. Thus none of the decisions relied on by learned senior counsel for the assessee is of any assistance to him. 17. In our, opinion, the impugned transaction will have to be brought to tax as trading receipt in this assessment year under consideration and if and when the assessee pays the said impugned amount back to the concerned party, it would be entitled to claim deduction for the assessment year during which the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to work in progress has been transferred in the books. Detailed arguments against the disallowance are filed by the assessee before the CIT(A). The submissions in brief are that the Assessing Officer erroneously presumed that the Hotel City Park, Chirag Ali Lane, Abids, Hyderabad is also under construction. The 84% adopted for disallowance is erroneous. The entire expenditure under Schedule J, K E are all expenses are incurred in respect of revenue items. The allocation of expenses to various revenue heads depending on its nature and relevance is shown in a tabular form filed before the CIT(A). The brief submissions of the assessee on the disallowance of expenses are made before the CIT(A) and the same are once again reiterated. The learned Commissioner of Income tax has referred to the initial submissions made, but did not verify the detailed submissions filed before him in support of the assessee's plea that the disallowance of the above expenditure is erroneous. The CIT(A) without going into the full factual position has erroneously confirmed the disallowance. 22. The DR submitted that what is important is that the method of accounting should consistently provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruly affects correct reflection of the profit and loss of the assessee-company. Being so, in our opinion, the Assessing Officer is justified in reallocating the indirect expenses claimed by the to the capital project of the assessee. This ground is dismissed. 24. The next issue is with regard to disallowance of depreciation of centring material. 25. Brief facts of the issue are that the Assessing Officer stated that the material was used in the projects under construction as such was to be considered under work-in-progress. During appeal proceedings, the assessee stated that the centring material was used both for carrying contract work and for project under implementation. However, no evidence was provided regarding its claim. In the absence of any evidence of details regarding the centring material, the disallowance made by the Assessing Officer was confirmed by the CIT(A). 26. The learned counsel for the assessee submitted that the amount of depreciation disallowed is Rs. 3,72,074. The centring material is used for construction of Hotel City Park and also for contract works whose income is taxed as revenue income. The centring material is used for sundry items of rep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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