TMI Blog2013 (11) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct of other business, there would still be strong indication that the two business construed the same business. However, this aspect has not be examined either by the Assessing Officer or by the Commissioner (Appeals) at all - decision in the case of CIT v/s Prithvi Insurance Co. Ltd. [1966 (10) TMI 49 - SUPREME Court] followed - matter remanded back for reconsideration. Disallowance of value of stock-in-trade - conversion of land into stock-in-trade - joint development agreement - The assessee had received a sum of ₹ 32 crores for assigning the development rights on the said land - Held that:- Ideally, once the assessee has received a sum of ₹ 32 crores from Piramal Holdings Ltd., the assessee has as developer should have adjusted the amount against the cost and should have taken the amount to the Balance Sheet as reduced work-in-progress rather than showing it as business income. In any case, this claim of deduction has to be allowed on the peculiar facts of the assessee’s case. The findings and the conclusion drawn by the learned Commissioner (Appeals) as well as the Assessing Officer cannot be upheld for this reason alone. In fact, this is merely an arith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the action of the Assessing Officer in not reducing 22% of the rental receipt amounting to ₹ 2,47,19,200/- while computing the rental income under the head Income from House Property as the same belonged to and declared by M/s. Peninsula Land Ltd. 4. The learned Commissioner of Income Tax (Appeals) further erred in not deciding and holding that even the net rent income is taxable in the hands of the appellant company after deducting 22% of the rent belongs to and assessed in the hands of M/s. Peninsula Land Ltd; the appellant is entitled to full credit of the TDS deducted from the total rent. 5. The learned Commissioner of Income Tax (Appeals) further erred in confirming the addition of ₹ 2,25,00,00,000/- being alleged reduction from the sale consideration of Tower A at Kurla. 2. At the outset, the learned Counsel for the assessee submitted before us that he did not wish to press ground no.1. Consequently, this ground is dismissed as not pressed . 3. The issues arising out of the other grounds are as under:- (i) Addition of ₹ 225 crores, on account of deduction claimed by the assessee on the sale consideration of Tower-A, at Kurla; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subject matter of the decree by the High Court on the same date i.e., 29th April 2004 in continuance with the earlier decree order. In the meanwhile, the assessee has converted its land which was its fixed assets into stock-in-trade in the year 2002 and necessary entries were made in the books of account and in the audited balance sheet for the year ending 31st March 2002. In order to develop the stock-in-trade i.e., land, the assessee had entered into a development agreement with Piramal Holdings Ltd. vide agreement dated 31st March 2004, for development and construction of commercial and residential building on the land at Kurla and Sewree. Under the said development agreement, the area was earmarked for PGFICL which was termed as committed area and the developer was entitled to 22% of the total constructed area. This share of 22% was sans the committed area of 1,62,000 sq.ft. which was to be given to the PGFICL in terms of decree the of the Hon ble Bombay High Court. The assessee, along with the developer had constructed two towers i.e., Tower-A and Tower-B at Kurla and, thereafter, made an offer to PGFICL to accept one time payment of ₹ 225 crores in lieu of construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and it does not relate to real estate business of the company. The loan was taken for textile manufacturing business which, for all practical purposes, is no longer in existence as no manufacture has taken place during the year and only small scale of trading of textile goods has been carried out from where some income has been shown. He further observed that such a claim of the assessee does not even come within the realm of diversion of income by overriding title . After referring to the principles laid down by the Hon'ble Supreme Court in CIT v/s Sitaldas Tirathdas, [1961] 41 ITR 367 (SC), he held that it is not the case of diversion of income by overriding title but an application of income. The reason for such a conclusion arrived by him was that the loan taken from PGFICL does not relate to the construction of Tower and the loan was taken for textile business long ago in the year 1997 and it was assessee s obligation to discharge this loan. This re-payment of loan is application of sale proceeds and not diversion of overriding title. In support of his reasoning, he referred to the ratio of the judgment of Hon'ble Supreme Court in CIT v/s Attili N. Rao, [2001] 252 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of ₹ 225 crores which was received on sale of Tower-A, and only ₹ 31 crores was declared by the assessee in its return of income. The Tower-A which had the constructed area of little more than 1,62,000 sq.ft. was assigned and earmarked to PGFICL as per the consent terms approved by the Jurisdictional High Court on 7th July 1997 and, thereafter, the said amount cannot be said to have accrued to the assessee. Hence, there was no question of crediting the amount of ₹ 225 crores in the Profit Loss Account on one hand and thereafter, debiting ₹ 225 crores payable to PGFICL on the other hand. Alternatively, it was submitted that if the value of constructed area given to PGFICL is considered to be satisfaction of mortgage of Kurla land which cannot be allowed as deduction, then income tax in the hands of the assessee should be taxed at the market value of the constructed area of 1,62,000 sq.ft. as on 7th July 1997 i.e., the date on which consent decree was passed. Since the sale had taken place on 8th August 2008, and the entire liability was discharged in this assessment year, therefore, it does not mean that the current value of the property should be taken. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding title. From the decree order and the subsequent supplementary consent terms, the assessee was required to provide 1,62,000 sq.ft. area with all the rights, title and interest to PGFICL, therefore, the amount on sale of such an area cannot be taxed as Income From Business . Regarding the case laws relied upon by the Commissioner (Appeals) as well as by the Assessing Officer, he submitted that all these judgments relate to the computation of capital gains and none of the case relate to the business income, therefore, the case laws relied upon by the Commissioner (Appeals) would not be applicable to the facts of the present case. 11. The learned Counsel also reiterated its alternate contentions which were raised before the Commissioner (Appeals) that market value as on 7th July 1997 i.e., the date of High Court decree has to be taken towards the satisfaction of the mortgage whereby the value of the constructed area of 1,62,000 sq.ft. was around ₹ 12 crores and odd. In support of this, he submitted that the approved valuer s report was also submitted before the Commissioner (Appeals). Thus, the current market value of ₹ 225 crores cannot be added as income when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich aggregated to ₹ 47,71,22,000 as on 31st March 1995, for the purpose of its business. The assessee, at the time of taking the loan was engaged in the business of manufacturing of textile items and was also having business income from trading of textile products, leasing and warehousing. Since the loan could not be repaid within the stipulated time, the assessee had entered into some kind of negotiation for settlement of its loan liability along with the interest thereon with PGFICL after developing the property and handing it over to them. However, failing such negotiations, PGFICL filed a suit for recovery before the Bombay High Court and as per the consent decree dated 7th July 1997, by the High Court, the assessee was required to handover the constructed area admeasuring 1,50,000 sq.ft. to the PGFICL. Thus, as per the order of the High Court, the assessee has to alienate 1,50,000 sq.ft. of constructed area which was to be built up at the plot available at Kurla with all the rights, title and interest in favour of PGFICL in lieu of a loan as well as the accrued interest. This was a kind of compensation, as there was no proper quantification interest of amount and instead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the judgments pertain to the issue of computation of capital gain and none of the case laws are relevant for deduction under the head Business or profession . However, we are in agreement with the reasoning of the Assessing Officer and the Commissioner (Appeals) that the repayment of the loan amount is nothing but application of income because loan is on capital account and discharging of loan liability out of the income is merely application of income. As per the balance sheet filed the loan amount reflected was ₹ 44,71,22,000 and we were informed that assessee has not provided with interest in the books and this amount was principal only. Therefore, to the extent of the loan amount taken by the assessee for sums aggregating to ₹ 44,71,22,000, it is a clear cut case of application of income and not diversion of income by any overriding title. Accordingly, we hold that the loan amount of ₹ 44,71,22,000, subject to verification of actual amount, can neither be claimed as deduction while computing profits and gains from business nor can be allowed as revenue expenditure. 18. Now, whatever is the balance amount i.e., excess of loan amount, the issue is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 56,488 from such business. From the assessment year 1954-55, the assessee started the business of exporting of cotton textile instead importing wooden fabrics which business has ceased to exist. The assessee claimed that loss of ₹ 56,488 incurred by it on the import of sale of articles should to be set-off against the profits made during the assessment years 1954-55, 1955-56 and 1956-57 from the new export business. The ITO AAC rejected the assessee s claim on the ground that business of importing and selling of goods was distinct and separate from the business of exporting goods and since import business which the assessee was doing, did not constitute as same business and, therefore, the loss cannot be set-off. In this background, the Hon'ble Supreme Court, after applying the test laid down by Rowlatt J. in Scales v/s Jeorge Thompson Co. Ltd., [1927] 13 Tax Cases 83, viz. whether there is any inter-connection, inter-lacing, inter- dependence, any unity at all embracing those two business and also the judgment of the Hon'ble Supreme Court in CIT v/s Prithvi Insurance Co. Ltd., [1961] 63 ITR 632 and host of other judgments, observed and held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constitute the same business. 14. For these reasons, we set aside the orders passed by the CIT and hold that the appellant is entitled to set off the unabsorbed loss of the asst. yr. 1953-54 against the profits of the asst. yrs. 1954-55, 1955-56 and 1956-57. The appellant will get its costs of the appeals in one set from the respondent. 21. Similarly, in Veecumsees v/s CIT, [1996] 220 ITR 185, the Hon'ble Supreme Court while dealing with the issue of allowability of interest on the capital borrowed had applied the aforesaid test. In this case, before the Hon'ble Supreme Court, the assessee was doing the business of jewellery. Later on, it had also commenced the business of exhibition cinematographic films for which it had obtained loan for building of cinema theater in the year 1961. The said theater was built in the year 1962 and was run by the assessee until 31st July 1965. For the years, the assessee claimed the interest paid on loan obtained for constructing the cinema theater. Later on, the cinema business was no longer in existence and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the fact that the loans had, when obtained, been for the purpose of the assessee's business. The test of same business appropriate for set off of carry forward losses is not appropriate here. 22. The aforesaid principles laid down by the Hon'ble Supreme Court has to be taken into consideration while considering the fact whether the same business has been continued and any business expenditure or liability or business deduction pertaining to the earlier years of any one business can be discharged in subsequent year from the other business or not, this has to be examined. The aforesaid vital principle of law has not been examined by the Assessing Officer or by the Commissioner (Appeals). Because in this case, the Assessing Officer and the Commissioner (Appeals) have mainly proceeded on the basis of ratio laid down by the various High Courts and Hon'ble Supreme Court which were rendered in the context of computation of capital gain, wherein the issues involved were, whether the loan which has been taken on mortgage of land and if such loan liability has been discharged, amounts to application of income or diversion of income by overriding title. In this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount, as per record, the same can not be allowed as deduction. While examining the issue of allowability of deduction, the Assessing Officer will provide due and effective opportunity of hearing to the assessee. Consequently, we set aside the impugned orders passed by the Assessing Officer / Commissioner (Appeals) and treat the ground raised by the assessee as partly allowed for statistical purposes. 25. The second issue arising out of ground no.1, is disallowance of ₹ 8,20,25,000 on account of deduction in value of stock-in-trade. 26. The relevant facts, apropos adjudication of this issue, are that the assessee had converted all its land at Kurla and Sewree which was held by it as fixed asset into stock-in-trade in the assessment year 2002-03. After the said conversion of asset into stock-in-trade, the assessee had entered into a development agreement dated 31st March 2004 with Piramal Holdings Ltd. for the development of the properties. As per the terms of the agreement, the Piramal Holdings Ltd. was obliged to develop and construct super- structure for residential and commercial purposes along with the assessee. Out of the total consideration, 22% of the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction from the valuation of the closing stock. In a way, the double addition was confirmed. In this year, the assessee, while filing its return of income, claimed the proportionate amount of ₹ 8,20,25,000, after making the following narrations in the computation of income:- Offered in the original return of income, as business income (by way of disallowance) in A.Y. 2004-05 and assessed with corresponding reduction in stock valuation in closing stock, stock reduction in books. 28. The Assessing Officer noted that no such expenditure was claimed in the audited Profit Loss account and, accordingly, he required the assessee to justify this reduction from the total income. The assessee reiterating the facts as mentioned above, submitted that since the amount of ₹ 32.81 crores being reduction in the value of stock by the assessee was not allowed in the assessment year 2004-05, as it was wrongly added back in the original return of income, the stock value of the assessee must, therefore, be enhanced to that extent for the purpose of calculation of income tax on the business profit as and when the stock-in-trade is subsequently sold. Accordingly, an apportionme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs on the issue of reduction of value of stock-in-trade and double addition. The submissions which were made before the Assessing Officer were reiterated which has been incorporated by the learned Commissioner (Appeals) in his order at Para-3.1/Pages-5 to 7 of the appellate order. The learned Commissioner (Appeals) too rejected the assessee s contentions though on a slightly different footing. The relevant finding of the learned Commissioner (Appeals), for the sake of ready reference, is reproduced below:- I have carefully considered the facts of the case. The appellant was holding land as fixed assets which were converted into stock in trade. Such conversion from fixed assets into stock in trade took place in A.Y 2002-03. The appellant entered into an agreement with M/s Piramal Holdings Ltd. for alleged development of the said land. The appellant has claimed that on entering into a development agreement dated 31.3.2004 with Piramal Hpldings Ltd. for the development of all the three properties, receipt of ₹ 32 crores as consideration for the same, on the entering into the said development agreement and assignments of certain rights in the various properties (stock-intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Holdings and not in the value (cost price) of stock on the date of conversion of same into stock in trade. The market value of land as on 31-03-2004 or on 31-03-2009 was much more than value (cost price) on which land was converted into stock in trade. Therefore, on this count also, the appellant s claim fails. 31. The learned Counsel, before us, submitted that the assessee has converted its land into stock-in-trade in the year 2002 and when it had entered into agreement with Piramal Holdings Ltd. The assessee had received a sum of ₹ 32 crores for assigning the development rights on the said land. The said sum of ₹ 32 crores were offered as business income in the Profit Loss account and at the same time, it reduced the value of stock by ₹ 32.80 crores as it was a kind of work-in-progress. However, in the original return of income, this amount was disallowed and added back to the computation. The assessee immediately thereafter filed a revised return of income rectifying its mistake that the amount of ₹ 32 crores has already been shown as income and was again added back in the computation. In the revised return of income, the reduction of value in stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the value of stock. In the original return of income, this reduction in the value of stock was disallowed by the assessee itself and added back to the income which was later on claimed that same was due to mistake as it had led to double addition of income. The relevant entries in the Profit Loss account have already been discussed above. However, the assessee s claim for reduction was disallowed which has also attained finality in the assessment year 2004-05. In this year, the assessee is claiming the proportionate deduction of ₹ 8,20,25,000, on the ground that in this year, the assessee had actually sold some of its stock-in-trade, therefore, the enhanced value coming from the earlier years from the value of stock-in-trade should be reduced. 34. In the assessment year 2004-05, the assessee had not sold its stock of land but has received money for assigning of development rights to Piramal Holdings Ltd. i.e., the developer. The entry made by the assessee in the Profit Loss account by way of reduction in value of stock-in-trade was not the correct way of claiming such deduction because there was actually no reduction in stock. In this case, the assessee perpetua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts so as to disclose the correct profit from the sale of stock, otherwise either the income offered and assessed in the assessment year 2004-05 is incorrect or the claim for reduction in the stock of ₹ 8,20,25,000 is incorrect. Both cannot be held to be incorrect simultaneously because it will leading to a double jeopardy to the assessee. Consequently, we accept the contentions raised by the learned Counsel and set aside the impugned order passed by the learned Commissioner (Appeals) and allow the ground raised by the assessee. 36. The last issue relates to addition of ₹ 2,47,19,200, while computing the rental income under the head Income From House Property . 37. The assessee, in the present case, had declared a rental income of ₹ 8,82,28,800 and offered the same under the head Income From House Property . Majority of the rental income had been received from letting out of two commercial complexes tower viz. A and B . This property has been developed by the assessee along with Piramal Holdings Ltd. which later on was known as Peninsula Land Ltd . This property was let out to Essar Information Tech Ltd. In all, the assessee during the year had rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income in its hand and the same has actually been taxed there. They had also not claimed TDS deducted on the said amount equivalent to 22% of the total TDS deducted. Distinction was also made on the judgment of Jurisdictional High Court as relied upon by the Assessing Officer. 39. The learned Commissioner (Appeals) rejected the assessee s contentions completely and held that from the reading of various terms and conditions of the development agreement, it would be seen that the entire project was to be constructed by the assessee and every liability was upon the assessee. Even the cost of construction of the project was to be incurred by the assessee. This sharing of 22% was only a financial agreement for getting a finance / loan of ₹ 32 crores from Piramal Holdings Ltd. so that the assessee can fulfill certain liabilities. The assessee alone was responsible for the entire cost of construction and development of the said property and to bear all the expenses, hence, there cannot be any question of overriding title. But share of 22% in the rental income is a kind of repayment of loan taken for ₹ 32 crores from the said developers. Thus, he confirmed the action of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, perused the orders of the authorities below and the material placed on record. Insofar the facts as have been narrated upon, they are not in dispute. The only issue is that whether the rental income to the extent of 22% which has been diverted to the developer Peninsula Land Ltd., can be held to be income in the hands of the assessee to be taxed under the head Income From House Property . On a perusal of clause 7 of the development agreement dated 31st March 2004, which starts with the heading Developers Entitlement , reads as under:- 7. DEVELOPERS ENTITLEMENT A. The Developers shall be entitled to a gross revenue share corresponding to 22% of the total area constructed (saleable Are) on the said properties. For the purpose of this clause, the total area constructed (selable area) shall not include the committed Area. It is also agreed that for the purposes of this clause, the saleable area shall include the areas sold, licensed, leased, car parks and commercial exploitation of premises on the said properties. However, the revenue share for the Developers in respect of the areas licensed / leased shall be net of Municipal Taxes. It is evident from the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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