TMI Blog2012 (6) TMI 705X X X X Extracts X X X X X X X X Extracts X X X X ..... In favor of assessee. The provisions of s. 40(a)(ia) of the Act in any case do not apply, the assessee having not claimed any deduction for any expenses on account of payment to Vikram Electric Equipment (P) Ltd., either in its P and L a/c or in the computation of taxable income filed. - ITA No. 2361/Del/2011, ITA No. 1953/Del/2011 - - - Dated:- 5-10-2011 - A. D. Jain And Shamim Yahya, JJ. Krishna for the Revenue Pradeep Dinodia and R. K. Kapoor for the Assessee ORDER A. D. Jain, Judicial Member:- ITA No. 2361/Del/2011:- 1. This is Department's appeal for the asst. yr. 2007-08, taking the following grounds:- 1. On the facts and in the circumstances of the case and in law, the order of the CIT(A) is wrong and against the provisions of law which is liable to be set aside. 2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting addition of ₹ 58,03,59,600 made on account of accrued income on grant of development rights ignoring that:- (a) the said addition of ₹ 58.03 crores was strictly made in accordance with the development agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had received a substantial part of the consideration under the guise of interest-free deposit though the income accruing to it was the consideration ₹ 2.25 crores per acre of the property acquired by. (g) the AO has aptly cited the decisions in the cases of CIT vs. Syndicate Bank (1986) 52 CTR (Kar) 117 : (1986) 159 ITR 464 (Kar), Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 (SC), Francis Joseph vs. ITO (1998) 60 TTJ (Chennai) 706 : (1998) 64 ITD 456 (Chennai), R.V. Pandit vs. Asstt. CIT (1999) 64 TTJ (Mumbai) 529 : (1999) 70 ITD 1 (Mumbai), Lakshmi Narayana Films vs. CIT (2000) 161 CTR (Mad) 416 : (2000) 244 ITR 344 (Mad) while making the said addition on accrual basis. 2. Ground No. 1 is general. 3. Apropos ground No. 2, the facts are that the assessee firm was formed in 1984-85. Since then, it was engaged in the business of development of real estate. The assessee filed return of income for the year, showing loss of ₹ 12,375. The AO assessed the income of ₹ 58,03,39,900 making an addition of ₹ 58,03,59,600, holding it as accrued income from sale of development rights by the assessee to M/s DLF Commercial Project Corporation (the Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusive and irrevocable grant of development rights of the assessee from the developer for a consideration of ₹ 2.25 crores per acre of the property on the date on which such property is acquired by the assessee and the other terms to be completed after the agreement comes into force were not material in adjusting (sic- adjudicating) the issue regarding acquisition of the assessee under the development agreement; that therefore, the consideration of ₹ 2.25 crores per acre of the property had accrued to the assessee during the year under consideration, as the property was acquired, during the year itself; that since the property acquired by the assessee during the year amounted to 25,79,376 acres, a total consideration of ₹ 58,03,59,600 had accrued to the assessee during the year under consideration. The AO, as such, treated this amount as the assessee's income on account of transfer of development rights in the land. 6. By virtue of the impugned order, the learned CIT(A) deleted the aforesaid addition made by the AO. 7. Aggrieved, the Department is in appeal. 8. Challenging the impugned order, the learned Departmental Representative has contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elop the property, no right to develop the property comes into existence and that being so, no development right being in existence on the effective date, there cannot be any question of transferring the same; that therefore, mere act of entering into the development agreement does not give the assessee the right to receive the sale consideration for the transfer of any development right and that the right under the development agreement is merely a contingent right which might or might not fructify into an absolute right. The learned Authorised Representative has contended that none of the case laws relied on by the Department are applicable, since the facts therein were altogether different. 11. We have heard the parties and have perused the material on record. The learned CIT(A), while deciding the issue in favour of the assessee has observed as follows:- 4. Finding on Ground of Appeal Nos. 1.1 to 1.5:- The issues to be decided with reference to the above grounds of appeal can be identified as under:- (a) Whether income for ₹ 58,03,59,600 has accrued to the assessee on entering into the impugned agreement with the developer and from the effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram Industries and Cotton Mills Ltd. vs. CWT (1966) 59 ITR 767 (SC), the apex Court observed as follows:- 'A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened.' In CIT vs. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC), the Supreme Court observed that the words 'accrue' and 'arise' are used to contradistinguish the word 'receive'. Income is said to be received when it actually reaches the assessee's hands, but short of receipt, when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. If income accrues or arises, it may become liable to tax. It is, therefore, manifest that if an assessee acquires a right to receive income, the income can be said to accrue to him, though it may be received later on. In the case of Lakshmi Narayana Films vs. CIT (2000) 161 CTR (Mad) 416 : (2000) 244 ITR 344 (Mod), the Madras High Court has following the order of Supreme Court in case of CIT vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in the agreement, which would be the initial step taken on part of the assessee in order to vesting of the right to receive the income. In order to decide this matter in the light of aforesaid settled legal principles, the clauses in the agreement dt. 15th Sept., 2006 have to be carefully analyzed which to my mind are absolutely necessary. Article 1 of the said agreement has been categorized as definitions and interpretation which defines, amongst others, approvals, buildings, effective date, encumbrances, power of attorney, sanctioned plan and scheduled property. Two of the definitions which have a bearing to decide this issue are being produced hereunder:- 'Effective date' means date of the completion of the purchase of the scheduled property including mutation thereof in favour of FEDPL in revenue records and the vesting of the right, title and interest in the scheduled property in favour of FEDPL, which shall be communicated in writing to the developer by FEDPL. 'Scheduled property' means all that piece and parcel of agricultural land fit for development situated in District Gurgaon, State of Haryana. 'POA' means t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation to sell the scheduled property to the developer and or its affiliate or nominees. 2.7 In the event the developer elects not to exercise its option to purchase the scheduled property within the specified time, assessee company shall have the right, but not the obligation, to terminate this agreement forthwith in the manner stipulated under art. 8. 2.8 In case the developer fails to obtain the township licence due to reasons attributable to assessee company the time period of 2 years shall automatically stand extended by further period of 1 year. Article 3 clarifies as to who will bear the cost and expenses in relation to insuring the absolute marketable title of schedule property and the cost of development/construction on the schedule property and as to which of the parties is required to obtain approvals and bear the necessary expenses upon such approvals. Article 4 pertains to the interest-free performance deposit; to be given by the developer to FEDPL as a security for the performance of developer obligation under this agreement. Article 5 states that in consideration of FEDPL transferring their exclusive development rights over the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by the developer. Rather it can be said that without the licence/approval it is not yet decided as to what exact development the appellant is authorized to make on the raw land purchased by it. For such purpose a lot many legal requirements are still to be complied with before the appellant is granted the right to develop the property for commercial use. Possibility also exists that such licence may even be denied to the land owner or its power of attorney holder. Therefore, uptill the time the licence to develop the property is not granted by the Director, Town and Country Planning there can be no question of the existence of the right to develop the property by either the land owner or by any other party by whom such development right have been sold. Since on the effective date there is no development right attached with this land therefore holding that the development right have also been sold/transferred on the same date would be against the general legal proposition that one can only transfer a right/property which is in existence on such date and which is also owned by the transferor. Consequently, the right to receive the sale consideration on account of transfer of such n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es alive the moment the development rights are granted by DTCP in favour of the appellant through DCPC. Further the right to receive the consideration would also instantly arise in favour of the appellant who now becomes legally vested with the right to receive the consideration. In this connection reliance is placed on the propositions emerging from the decisions referred to above in this para, the crux of which is that income is said to accrue only when the right to receive the income gets vested in the assessee. It is noted that the AO has in his order made an observation that the amount of ₹ 58.69 crores received during the year from the developer represents substantial part of the consideration in the guise of 'interest-free performance deposit', though the income accruing was the consideration @ ₹ 2.25 crores per acre of property. On this issue it has been submitted by the appellant that the said interest-free performance deposit is a refundable amount and would be refunded to developer on receipt of the consideration for sale of development rights to DCPC (refer to arts. 4.1, 5.1 and 5.2 of the agreement) that this amount in terms of art. 4.1 repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sibility of the developer to do so. It is only when the sanctioned plan and the approvals are obtained, that the developer can commence the development on the scheduled property. Moreover, this is on record by way of the assessee's P and L a/c and balance sheet as on 31st March, 2007 and for the three subsequent years, that no development work was undertaken in the said years. The necessary approvals/licence for development have also not been shown to have been granted either to the assessee or the developer during the year. Sans these approvals/licence obviously, no development could have been carried out. Without these approvals/licence , it cannot be said that any development rights came into existence at all. The contingent right under the agreement has not been established to have been fructified into a vested right. 13. Apropos the interest-free performance deposit, this has not been shown to be representing part of sale consideration for the development rights. It cannot be so, since, as observed, no such development rights came into existence during the year. 14. All the above facts have correctly been taken into consideration in the right perspective by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 4,20,15,681, whereas the actual amount involved and paid/payable to Vikram Electric Equipment (P) Ltd. as consolidator charges during the year, was of ₹ 1,24,33,376; that the learned CIT(A) has erred in observing that it is not correct that the excess amount of ₹ 124.33 lakhs paid by the assessee to Vikram Electric Equipment (P) Ltd. is not in the nature of remuneration which will be paid as may be mutually agreed after promoting the entire 27 acre as per MoU; that the learned CIT(A) has gone wrong in stating that the remuneration is a fixed percentage of cost of land in each case of land transfer and that the transaction is not on principal to principal basis but on the basis of principal and agent, for which the agent is to receive payment and which payment has actually been made; that the learned CIT(A) has erred in observing that the amount of ₹ 124.33 lakhs constitutes brokerage or commission or fee for professional services, subject to deduction of TDS under s. 194H of the Act and that since no TDS has been deducted thereon, this amount is not deductible as expenditure as per the provisions of s. 40(a)(ia) of the Act; that it cannot be doubted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, there being no merit therein, the appeal of the assessee be dismissed while maintaining the order passed by the learned CIT(A). 23. We have heard the parties and have perused the material on record. The AO observed that the assessee had shown purchases and closing stock of land at ₹ 60,23,16,022. This included a sum of ₹ 4,20,15,681 paid by the assessee to M/s Vikram Electric Equipment (P) Ltd. M/s Vikram Electric Equipment (P) Ltd. had been appointed by the assessee as a consolidator to acquire and consolidate the land holding. It was observed by the AO that as per the MoU with Vikram Electric Equipment (P) Ltd., payments were to accrue to Vikram Electric Equipment (P) Ltd. only on acquisition of a minimum of 27 acres of land. Observing that the consolidator, i.e. , Vikram Electric Equipment (P) Ltd. had not consolidated the requisite minimum 27 acres of land during the year, the AO disallowed the amount out of purchases. Accordingly, he also reduced the closing stock by a similar amount. The closing stock was thus determined at ₹ 54,03,00,341. 24. Before the learned CIT(A), the assessee contended that the amount involved was not of ₹ 4,20,15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is as such that it has been claimed that no disallowance under s. 40(a)(ia) of the Act is called for, much less any consequential action under s. 201 of the Act. It has been contended that Vikram Electric Equipment (P) Ltd. had an important role to play as a consolidator, since the assessee required contiguous land holdings in order to develop a colony. In case any land which was agreed to be acquired by Vikram Electric Equipment (P) Ltd. was not found to be suitable, it was Vikram Electric Equipment (P) Ltd. which would have to bear the consequences, indicating that Vikram Electric Equipment (P) Ltd. was not acting as an agent on behalf of the assessee, but was working on a principal to principal basis, independently. 26. The stand of the Department, on the other hand, has been that MoU signed by the assessee and Vikram Electric Equipment (P) Ltd. lays down that Vikram Electric Equipment (P) Ltd. was acting as an agent of the assessee, rendering services, for which, the provisions of s. 194H of the Act are applicable and it is correctly applied by the learned CIT(A). 27. In this regard, it is seen that cl. 3.2 of the MoU between the assessee and Vikram Electric Equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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